Opinion

Residential 'On Account' service charges - reasons for tenants not having to pay

16th January 2018

Residential 'On Account' service charges - reasons for tenants not having to pay

The Court of Appeal recently clarified the position regarding ‘on account’ service charge demands in relation to the 18 month rule – where a tenant can lawfully refuse to pay if the demand is not made within 18 months of the relevant costs being incurred.  

The case involved challenges by tenants, who claimed that they were not liable to pay service charges for 2010-14 - the basis being that it had not been demanded in accordance with the lease.  

Facts  

At the beginning of each service charge year, a landlord is required to produce an estimate for that coming year, and serve on the tenant a statement showing the service charge payable by the tenant in two equal 6 monthly instalments on account of that year's expenditure.  At any time during the service charge year the landlord may demand further payments if necessary. 

There was no mechanism to collect a balancing payment once the service charge year was over.  

At first instance the Tribunal found that this particular landlord had served a statement to tenants showing what was payable at the beginning of each year, but the statement was not accompanied by estimates. The tenants were seeking to avoid payment by arguing that the landlord had been required to serve estimates as a condition precedent of the amounts being payable, but the Court did not agree with the tenants.  

On appeal, the decision was reversed and the Upper Tribunal held that the failure to serve estimates invalidated the demands - but that they did became payable once estimates had been served in 2014. 

In effect, this meant that the landlord always has the opportunity to put things right, so provided they serve the estimates at some point, the tenant still has to pay.

Crucially the Court also held that the estimates do not have to be served within 18 months of the expenditure being incurred which is the normal rule for residential service charges.   

The matter was then appealed again and ended up at the Court of Appeal where it was decided that the 18 month rule, as set out in section 20B of the Landlord and Tenant Act 1985, did apply and therefore none of the service charges demanded were payable.  The Court of Appeal considered that if no valid demand had been served, then there was no liability to pay.   

The Court of Appeal decided that the rule about demand having to be made of the tenants within 18 months of service charge having been incurred, applied as much to ‘on account’ service charges that were going to be incurred as to costs that had been incurred.   

Nyree Applegarth, a Partner in the Dispute Resolution team at Higgs & Sons said: “This is a controversial decision and one that has been heavily criticised. Although it is widely thought that the Court of Appeal's decision on the facts is wrong, it is unlikely to be appealed further as it is not a point of general public importance and the landlord company is now in liquidation.   

“However it is not wise to treat the case as authority for the proposition that ‘on account’ demands which are served after the costs have been incurred all fall foul of section 20B.  A well advised landlord should still determine when the costs were incurred and ensure any demands are validly served within 18 months.”  

 

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