England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(LANDS CHAMBER)
LRX642011

		Royal Courts of Justice Strand, London, WC2A 2LL
		03/05/2013

Master of the Rolls:

1. Mr Burr has been registered as the leasehold owner of a flat known as 9 Cambridge Square, Royal Earlswood Park, Redhill, Surrey since 5 October 2006. The flat forms part of a development which was constructed in about 2000. The development includes a communal leisure centre with a swimming pool which has its own gas supply.
2. The respondent ("OMP") is a management company which is party to Mr Burr's lease. It started managing the development in April 2001. At that time it was told by the developer that the gas supply to the swimming pool was supplied by EDF Energy ("EDF"). For several years, the respondent read the meter and sent the readings to EDF who generated invoices which the respondent paid. The charges were paid from the payments made by the tenants.
3. In November 2007, OMP received notification from Total Gas and Power Limited ("Total") that it, rather than EDF, had been supplying the gas to the swimming pool. Total demanded £135,337.28 for the period December 2000 to November 2007.
4. Following negotiations between OMP and Total, Total agreed to reduce its charges and EDF reimbursed the monies that had been wrongly paid to it. In the result, the total amount charged to the leaseholders for gas in the service charge accounts for the year ended 30 April 2008 was £100,289.28. OMP demanded Mr Burr's proportion from him in October 2008. Although he challenged OMP's right to make this demand, he paid £194.49 (under protest), which was the amount which he calculated to be his share of the additional sum claimed for the gas. He issued proceedings in the county court alleging negligence against OMP. His case was that, but for OMP's negligence, most of the additional charge for gas would have been paid by the previous leaseholder of his flat. OMP denied negligence and the proceedings were transferred to the Leasehold Valuation Tribunal ("LVT").
5. Before I come to the LVT decision I need to refer to the material provisions of the Landlord and Tenant Act 1985 ("the 1985 Act").

The material provisions of the 1985 Act

"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.

19.— Limitation of service charges: reasonableness.

(1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period—

(a) only to the extent that they are reasonably incurred, and

(b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard;

and the amount payable shall be limited accordingly.

(2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.

...

(5) If a person takes any proceedings in the High Court in pursuance of any of the provisions of this Act relating to service charges and he could have taken those proceedings in the county court, he shall not be entitled to recover any costs.

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 LVT decision

6. The LVT held that:

(i) it had no power to determine the allegations of negligence;

(ii) the amounts of the gas charges were reasonable;

(iii) the real issue was whether the respondent was prevented from recovering the charges by virtue of section 20B of the 1985 Act;

(iv) Total had been supplying gas to the swimming pool between December 2000 and April 2008;

(v) Total did not raise any invoice for the gas supplied until November 2007; and

(vi) the costs had been "incurred" for the purposes of section 20B of the 1985 Act when the gas was supplied.

Decision of the Upper Tribunal (Lands Chamber)

7. OMP appealed to the Upper Tribunal (Lands Chamber), contending that costs were not "incurred" for the purposes of section 20B until OMP actually paid the costs or at least until it was obliged to pay the costs on receipt of an invoice. Accordingly, the LVT was wrong to hold that OMP had incurred the costs when the gas was supplied.
8. The Upper Tribunal (HH Judge Mole QC) allowed the appeal. Its reasoning and conclusions are to be found in the final section of its Decision:

"20. In the current case I do not think that it is necessary or desirable to try and determine whether costs are incurred when an invoice or certificate is served or when payment is made. (I am not necessarily equating an invoice and a certificate; different considerations may well apply to them.) I do not get much help from dictionary definitions of 'incurred'. It is of greater assistance to recall that the statute declares that it is 'costs' that are 'incurred' which are relevant. In the present case it is sufficient to say that the costs were not incurred when the gas was used. I appreciate that the liability to pay somebody something may have been incurred at that point, but the use of the word 'costs' is significant. As the President pointed out, it is the cost that must be incurred. A liability does not become a cost until it is made concrete, either by being met or paid or possibly by being set down in an invoice or certificate under a building contract.

21. I do not see that there is any tension between the decisions of the President in Hyams v Wilfred and Jean-Paul v LB Southwark. Each was decided on its own facts. In neither case was it necessary to distinguish between the issue of a certificate or invoice under a works contract and payment of it, nor was it suggested there was any gap between demand and payment that was of significance. The crucial and helpful point was the drawing by the President of the distinction between incurring a liability and incurring a cost. I am happy to adopt the formulation of HHJ Baker QC in Capital & Counties Trust that costs will be incurred when they are 'expended ' or 'become payable.' The submissions recorded in LB Brent v Shulem, which seem to have earned at least the tacit approval of Morgan J, are consistent with that.

22. I have not been shown any authority that suggests that the 'cost' is incurred when the 'liability' is incurred. A cost and a liability are separate things and Parliament chose to use the word 'cost' in section 20B. If the intention of Parliament is clear from the words it used, considerations of the policy Parliament may have had in mind must take a back seat. But in any event the judge's comments in Gilje were not made about a situation where the landlord (or management company) could not warn the tenant to set aside provision because the landlord did not appreciate that the costs were likely to be incurred. The landlord can only give "sufficient warning" or "adequate prior notice" of something of which he is aware. I cannot read Etherton J's words as giving any support for the proposition that the 18 months limit is an absolute cut-off point that operates regardless of any fault on the landlord's behalf.

23. In my judgement the true answer is that as a matter of the interpretation of section 20B 'costs' are 'incurred' on the presentation of an invoice or on payment; but whether a particular cost is incurred on the presentation of an invoice or on payment may depend upon the facts of the particular case. It is possible to foresee that where, for example, payment on an invoice has been long delayed, the decision as to when the cost was actually occurred might be different depending on the circumstances; it might be relevant to decide whether the payment was delayed because there was a justified dispute over the amount of the invoice or whether the delay was a mere evasion or device of some sort. In the former case the tribunal of fact might find that the costs were not incurred until a genuine dispute was settled and the bill paid. In the latter case the tribunal might be very reluctant to allow deliberate prevarication to postpone the running of the time limit imposed by section 20B. That is the sort of factual matter that the LVT is well placed to decide.

24. In this case, however, such a point did not arise. The LVT erred in law. The cost of the gas was not 'incurred' at least until Total presented the bill in November 2007. It was included in the service charge demanded in April 2008, well within the time limit set by section 20B. The appeal is allowed. "

9. The reference to the decision of Etherton J in Gilje v Charlgrove Securities [2004] 1 All ER 91 needs to be explained, since it is much relied on by Mr Burr. That was a case where the tenant had made a payment on account of service charges in advance on the basis of the landlord's estimated annual expenditure. The main issue was whether section 20B of the 1985 Act applied to payments on account. Etherton J decided that it did not apply where the actual expenditure did not exceed the payments on account. At paragraph 27 of his judgment, he said:

"27. Finally, I agree with Ms Eilledge that, so far as discernible, the policy behind section 20B of the Act is that the tenant should not be faced with a bill for expenditure, of which he or she was not sufficiently warned to set aside provision. It is not directed at preventing the lessor from recovering any expenditure on matters, and to the extent, of which there was adequate prior notice. This does not leave the tenant without a remedy for the failure of the lessor to prepare a final account. In the event of wrongful delay by the lessor, the tenant can apply to the court for the taking of an account and, if the lessor's delay is culpable, the lessor will have to pay the costs."

Mr Burr's case in outline

10. In summary, Mr Burr submits that the effect of the Upper Tribunal's decision in the present case is to undermine and indeed defeat the legislative aim of protecting tenants from demands for expenditure of which they are not sufficiently warned to set aside provision. If the decision is allowed to stand, he submits, there is no limit to the time that may elapse between the date when services are provided (or supplies are made) to a landlord/management company and the date when a tenant may be called upon to pay by way of service charge under a lease. A supplier or service provider may delay years before requiring payment by a landlord or management company. It was clearly not the intention of Parliament that tenants should face stale demands for payment of service charges in this way. The very reason why section 20B was enacted was to protect tenants by preventing this kind of thing. The phrase "costs incurred" must, therefore, be construed so as to promote the protection of tenants from stale demands. For that reason, costs are incurred when services are provided (or supplies made), and not when the landlord (or management company) receives an invoice or pays for them.

Discussion

11. I am in no doubt that the Upper Tribunal reached the right decision. First, as a matter of ordinary language, there is an obvious difference between a liability to pay and the incurring of costs. I accept the submission of Mr Arden QC that, as a matter of ordinary language, a liability must crystallise before it becomes a cost.
12. Secondly, the difference between a liability to pay and the incurring of costs is recognised by the draftsman in section 20B(1) itself. Where he wishes to refer to a liability, he does so: note the words "the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred." It is significant that the phrase "relevant costs" is defined in section 18(2) as "the costs or estimated costs incurred or to be incurred". It is not defined as "the liability or estimated liability for costs. Similarly, section 20B(1) does not say "if any liability for any of the relevant costs is 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 that liability so incurred."
13. Thirdly, section 19(2) provides strong support for the view that costs are incurred only when they are paid (or when an invoice or other demand for payment is submitted by the supplier or service provider) and not when services are provided or supplies are made. The subsection draws a distinction between (i) what is to happen before the relevant costs are incurred and (ii) what is to happen after they have been incurred. Section 20B deals with (ii). The significance of section 19(2) in relation to relevant costs that have been incurred is that it provides in relation to such costs that any necessary adjustment to the service charge shall be made by "repayment, reduction or subsequent charges or otherwise". Such an adjustment of the service charge to reflect the costs that have been incurred can only be made after the amount of the costs has been ascertained (usually by the submission of an invoice or other demand for payment). In other words, the incurring of costs entails the existence of an ascertained or ascertainable sum which is capable of being adjusted by repayment, reduction etc. The mere provision of services or supplies does not without more entail anything which is capable of being adjusted in this way.
14. On the other hand, as section 19(2) makes clear, there is a different regime in relation to estimated costs before they are incurred. The landlord or management company is entitled to reflect reasonable estimated costs in the service charge and the statute makes no provision for adjustment of estimated costs.
15. In my view, therefore, costs are not "incurred" within the meaning of section 18, 19 and 20B on the mere provision of services or supplies to the landlord or management company. Like the Upper Tribunal, I do not find it necessary to decide whether costs are incurred on the presentation of an invoice (or other demand for payment) or on payment. This interpretation accords with the natural and ordinary meaning of the words and is strongly supported by section 19(2).
16. I am not persuaded that the policy reasons advanced by Mr Burr compel or support a different meaning. I agree that section 20B was enacted in order to protect tenants from stale claims. But this merely prompts the question: what is the extent of that protection? On the conclusion that I have reached, the tenant enjoys the protection that, subject to section 20B(2), he is not liable to pay so much of a service charge as reflects costs incurred more than 18 months after an invoice is presented or payment is made by the landlord/management company. It is true that this provides less protection than if the tenant is not liable to pay so much of a service charge as reflects costs incurred more than 18 months after the service is provided or supply made. Merely to assert the obvious fact section 20B(1) is intended to protect tenants from stale claims does not answer the critical question that arises on this appeal. The only way to determine the extent of the protection afforded by section 20B(1) is to decide what "costs incurred" means.
17. One question that was raised during argument was why section 20B(2) was necessary if costs are only incurred when an invoice is rendered or payment made. Since on this interpretation costs must be ascertained before they are incurred, why should Parliament have made provision to disapply section 20B(1) where the tenant is notified that the costs have been incurred? Once the costs are ascertained, why should the lessor/management company wish to notify the tenant that the costs have been ascertained and that he will subsequently be required to contribute to them by payment of a service charge? Mr Arden suggested as an explanation for section 20B(2) that it caters for situations such as, for example, where there are problems of allocating costs as between tenants or where an invoice is disputed. I find this persuasive. At all events, any uncertainty that there may be as to the rationale for section 20B(2) is not sufficient to cause me to doubt the conclusion that I have reached as to the correct interpretation of "costs incurred".
18. We were referred to a number of authorities. Some of them were mentioned by the Upper Tribunal in the passages which I have quoted at para 8 above. None of them is binding on this court. None of them decided the precise issue which we have to decide. In these circumstances, I do not find it necessary to refer to them.

Conclusion

19. It should be noted that most modern leases give the landlord/management company the right to require the tenant to pay a service charge in respect of estimated costs to be incurred. It follows that the practical relevance of section 20B may be somewhat limited. But for the reasons that I have given, the Upper Tribunal reached the right decision and I would dismiss this appeal.

Lord Justice Elias:

20. I agree.

Lord Justice Patten:

21. I also agree.