Q&A: Timely guidance on service charges

Question

I am a leaseholder of a residential block of flats. My landlord carried out works to replace the roof (which was found to be defective) after a consultation process and has informed me that it is exploring recovery of some of the costs under an insurance policy. So far, I have not received a service charge demand in relation to the costs of the works. Does this mean that I won’t be charged, or can my landlord recover the costs of the works from leaseholders at a later date?

Answer

Possibly. If more than 18 months has passed since the costs were incurred, the landlord will be prevented from recovering them from leaseholders, unless it served notices in accordance with section 20B(2) of the Landlord and Tenant Act 1985.

Explanation

Section 20B(1) of the 1985 Act imposes a time limit for recovering service charges after costs have been incurred. If more than 18 months has passed since the costs were incurred and there has been no demand for payment, then the tenant will not be liable to pay those costs unless the landlord can show that it served a notice under section 20B(2) of the Act within the same 18-month period.

If the landlord is seeking to recover the costs of works from third parties, but wishes to preserve its position to recover from the leaseholders, it must serve a notice in accordance with section 20B(2) within 18 months of the costs being incurred.

Crucially, a “demand for payment” under section 20B(1) must be contractually valid. This issue was considered by the Court of Appeal in No 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2021] EWCA Civ 1119; [2021] EGLR 37.

Here, the appellant landlord was the owner of a large mixed-use development. Under the terms of the long leases, it was entitled to recover the costs of providing electricity and, as a separate covenant, to recover costs incurred in providing services to the building as a service charge.

The Upper Tribunal had previously held that the standing charge costs were only recoverable as a service charge. The leaseholder contended that demands for those sums were contractually invalid because they had not been charged via the service charge. As there had been no contractually valid demand, the leaseholder argued that the landlord was not entitled to recover those sums because the costs had been incurred more than 18 months previously. It was common ground that there had not been a section 20B(2) notice.

The Court of Appeal held that to comply with section 20B(1), a landlord had to make a contractually valid demand within 18 months of incurring the costs.

Question

I am a landlord of a residential building and recently carried out works to the common parts, which are recoverable through the service charge. After service charge demands were sent to leaseholders, one tenant brought an application in the First-tier Tribunal challenging the costs and inviting the tribunal to determine the charges that are payable. I was wholly successful in defeating the application but incurred legal costs that I now wish to recover directly from the leaseholder under a forfeiture costs recovery clause in the lease. Can I do this?

Answer

Probably not, unless the wording of the provision in the lease is exceptionally wide and the landlord indicated that it was contemplating forfeiture at the time when the costs were incurred.

Explanation

In many modern residential leases, one will find a costs recovery clause allowing the landlord to recover costs “incurred in or in contemplation of proceedings under Section 146 or 147 of the Law of Property Act 1925, including any notice served thereunder” (or similar wording). This can enable landlords to recover substantial legal costs in circumstances where leaseholders default on their obligations.

In No 1 West India Quay, the landlord argued that it was entitled to recover legal costs of the tribunal proceedings brought by the leaseholder under a clause similar to this one because the proceedings had determined the sums that were payable by the tenant, which was a necessary step prior to pursuing forfeiture of the lease. The landlord relied on Freeholders of 69 Marina, St Leonards-on-Sea v Oram [2011] EWCA Civ 1258; [2011] PLSCS 263 to assert that by necessary implication a determination of the payability of service charges was a precursor to forfeiture (under section 81 of the Housing Act 1996) and fell within the clause regardless of the landlord’s subjective intention in relation to forfeiture.

The court rejected the landlord’s arguments. The clause afforded it a right to costs “in contemplation” of forfeiture, but to satisfy the clause there had to be an investigation into the landlord’s state of mind at the time when the costs were incurred. The landlord had not manifested any intention to forfeit the lease, so the costs recovery clause was not engaged. The case was factually different from Freeholders of 69 Marina, in which proceedings were brought by the landlord. In the present case, the application had been brought by the leaseholder, which made it less likely that the landlord would fall within the provision.

This case offers a reminder to landlords looking to recover legal costs under a similar provision that they need to indicate from an early stage that costs are being incurred in contemplation of forfeiture.

A version of this article was published in Estates Gazette 6 October 2021. For more information on the above please contact Emma Preece or your usual Charles Russell Speechlys contact.