Service charges and Section 20B Notices: a “procedural obstacle course” for residential landlords?

In No.1 West India Quay (Residential) Limited v. East Tower Apartments Limited [2020], the Upper Tribunal (Lands Chamber) (“UT”) considered an appeal by a landlord, No.1 West India Quay (Residential) Limited (“WIQR”), as to whether it was prevented by Section 20B(1) of the Landlord and Tenant Act 1985 from recovering through the service charge certain costs relating to the reading of meters and preparing of energy bills. The UT found that it was bound by an earlier Court of Appeal decision in Skelton v. DBS Homes (Kings Hill) Limited [2017] (where the landlord was in liquidation and not professionally represented) and dismissed the landlord’s appeal on grounds that a service charge demand complying with the terms of the lease must be made under Section 20B(1) within 18 months of costs being incurred.

Section 20(B)

Section 20B(1) imposes a limitation period in respect of the recovery of service charges from long leaseholders of residential premises, so that costs are not recoverable if they were incurred more than 18 months before they are demanded.  However, that restriction does not apply if the tenant was informed, in writing, within 18 months of the costs being incurred, that those costs have been incurred and are recoverable from the tenant (“a Section 20B(2) Notice”).

No.1 West India Quay (Residential) Limited v. East Tower Apartments Limited [2020]

WIQR was the owner of a mixed use building which comprised a hotel and residential flats. East Tower Apartments Limited (“ETAL”), held leases of 42 of the residential flats. Under the terms of the leases, WIQR was entitled to recover the costs of providing electricity.

The set-up of the building was complex and required specialist contractors to read the meters and produce individual bills for each tenant, which WIQR then recharged to each tenant. From 2008 to 2012, WIQR charged the costs of the contractors as a surcharge on the electricity costs, a practice which at first instance in 2015, the First-tier Tribunal upheld (“the 2015 Decision”). However, on appeal in 2016, the UT found that the costs were only recoverable as a service charge, not as a surcharge on the electricity (“the 2016 Decision”).

On second appeal to the UT by WIQR, ETAL claimed that the consequence of the 2016 Decision was that any earlier demands were contractually invalid as there had not been a valid demand made for payment for the purposes of Section 20B(1), which complied with the terms of the leases. More than 18 months had passed since the costs had been incurred and therefore, WIQR were time barred from recovering those costs from ETAL. It was agreed by both parties that a Section 20B(2) Notice had never been served.

WIQR’s position was that the law had taken a wrong turn in in the 2011 decision of Brent London Borough Council v Shulem B Association Ltd.

The case of Shulem involved a local authority landlord seeking to recover the costs of extensive works to five blocks of flats through a service charge. There was a delay in calculating the final cost of the works and the landlord issued a demand for payment based on an estimate with a warning that a final demand would be made once the final cost was known. However, by the time the liability of each tenant was calculated and demanded, more than 18 months had passed since the costs were incurred. On appeal, the landlord’s claim was struck out on the basis that the initial letter was not a sufficient demand for the purpose of Section 20B(1). The letter did not demand the lessee’s share of the costs incurred by the landlord, but instead demanded a contribution towards the estimated costs, which was not what the lease provided for. The Shulem decision is not binding itself, however, the position was confirmed by the Court of Appeal in Skelton.

Counsel for WIQR submitted that the interpretation of Section 20B(1) in Shulem was wrong as a condition of contractual validity was not required by the wording of the statute. The Shulem interpretation turned Section 20(B) into “a procedural obstacle course for landlords” rather than a protection for tenants.

The UT’s comments in the decision are of interest to residential landlords and managing agents as he acknowledged that the logic in Shulem: “goes further than the apparent policy requires and is liable to produce injustice in cases such as this”. The Deputy Chamber President offered that a “more forgiving” interpretation of Section 20B(1) would be to “treat any demand for payment as sufficient to stop time running in relation to the sum demanded”.

The UT was bound by the decision of the Court of Appeal in Skelton and therefore dismissed WIQR’s appeal and found in favour of the tenant.

It is not yet known whether WIQR will pursue the matter to the Court of Appeal, but it is clear that landlords and managing agents should ensure that they issue service charge demands which comply with the terms of the lease within 18 months of sums being incurred or, where they are prevented from doing so, they serve a Section 20B(2) Notice on the tenants.

Please do not hesitate to contact Laura Bushaway, Molly Moseley or any member of the Real Estate Disputes team if you have any queries. This insight is not a substitute for legal advice on the specific circumstances of the case.