Landlord and Tenant Act 1985 section 20B – The 18 month rule

May 23, 2016

 

The Landlord and Tenant Acts 1985 and 1987 (as amended) contain several provisions for the regulation of service charge notices in relation to ‘dwellings’. This lecture concerns one of them: the 18 month time limit on service charge demands contained in s.20B Landlord and Tenant Act 1985.

 

The Statute

 

‘18.— Meaning of “service charge” and “relevant costs”.

(1) In the following provisions of this Act “service charge” means an amount payable by a tenant of a dwelling as part of or in addition to the rent—

(a) which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord's costs of management, and

(b) the whole or part of which varies or may vary according to the relevant costs.

 

(2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable.

 

(3) For this purpose—

(a) “costs”includes overheads, and

(b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period.’

 

‘20B.— Limitation of service charges: time limit on making demands.

(1) If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge is served on the tenant, then (subject to subsection (2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.

 

(2) Subsection (1) shall not apply if, within the period of 18 months beginning with the date when the relevant costs in question were incurred, the tenant was notified in writing that those costs had been incurred and that he would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge.’

 

The basic effect

 

Where the service charge takes relevant costs into account,[1] the demand must be served within 18 months of the date on which the costs were incurred. If the demand is served after this time, the service charge payable will be reduced to the extent that the service charge reflects those costs. The effect of this provision is subject to the ability of a landlord to stop the clock by serving a notice complying with s.20B(2).

 

 

Issues

 

When does the clock start?

  • The costs are not ‘incurred’ within the meaning of the statute when the underlying works are provided. They are incurred either when they are paid or when an invoice or demand for payment is submitted by the supplier/contractor to the landlord (Burr v OM Property Management Ltd [2013] HLR 29 (CA)).

 

Faulty demands

  • Failure to comply with provisions in the lease. The demand is void and time continues to run (Brent LBC v Shulem Association [2011] 1 WLR 3014 (Ch) at [53]).

  • Failure to comply with s.47 LTA 1987 (name and address of landlord). A correcting demand has been held to contain a retrospective s.47 notice (Johnson v County Bideford [2012] UKUT 457 (LC)). However, this case turned on s.47(2) which envisaged that a demand could be subsequently validated by provision of the information, and it should not be treated as applying to statutory formalities which do not have a similar provision. Statutory formalities will need to be considered on their own terms to determine whether a correcting demand, information, or notice can served out of time.

  • Claim for the wrong amount – a subsequent corrective demand for an increased amount (if out of time) is not retrospective (Paddington Walk Management v Peabody Trust [2010] L & TR 6).

 

Formalities for the s.20B(2) notice

  • The notice must be in writing.

  • The notice must state that the costs have been incurred and state the amount (if this is done, a subsequent demand for a lesser amount will still be valid). If the costs are unknown, use the minimum figure you are happy to receive (i.e. the maximum foreseeable costs) (Brent LBC v Shulem at [58]). Prospective estimates of costs to be incurred are not sufficient (Paddington Walk Management at [30]).

  • The notice must inform the tenant that he will subsequently be required under their lease to contribute to those costs by payment of a service charge. It is not necessary to tell him the proportion of the costs which will actually be passed on to him, or what the resulting service charge will be.

 

Pro-rating

  • Where a service charge reflects some costs which are in time and some costs which are not, only the out-of-time costs are statute barred (Holding & Management (Solitaire) v Sherwin [2010] UKUT 412 (LC)). This may involve an accounting exercise, the rules for which have yet to be established. Careful records should be kept.

  • It is unclear whether the accounting exercise would factor in money actually spent or only money reasonably spent within s.19 LTA 1985. There is a suggestion in Sherwin (at [28]) that it is only money reasonably spent, which would mean that less expenditure could be attributed to the balancing payment.

 

 

Tips

  • Make sure that you are aware of when a demand will need to be served if it is going to come within the 18 month rule, bearing in mind the provisions for service in the lease.

  • Particularly if close to the deadline, care should be taken to comply with requirements in the lease and in the statute.

  • Make sure that demands are demands, not merely letters providing information, as they may not count for the purposes of s.20B (see e.g. Paddington Walk Management at [26]. For more detail on the meaning of ‘demand’, see Brent LBC v Shulem at [45]-[52]).

  • The relevance of s.20B can be considerably reduced by drafting the lease to include a right to advanced payment of estimated costs on account (see, confirming the effectiveness of this method, Skelton v DBS Homes (Kings Hill) Ltd [2015] UKUT 0379 (LC)).[2] Note however that demands for payment of balancing charges still come within the section.

  • The issue can be avoided if a flat rate is used, though this risks incurring liabilities with no indemnity.

  • Close attention must be given to the formalities in s.20B(2) notices.

  • Keep careful records in case an accounting exercise is necessary.

  • Once a demand is made, be alive to the provisions of the Limitation Act 1980.

 

 

 

[1] Relevant costs being defined in s.18 LTA 1985, referred to above.

 

[2] There is an appeal to the Court of Appeal outstanding in Skelton so the position must be monitored

 

 

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