England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
UPPER TRIBUNAL (LANDS CHAMBER)
HIS HONOUR JUDGE HUSKINSON
[2015] UKUT 379 (LC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		27/07/2017

LADY JUSTICE ARDEN :

1. This appeal is brought by Mr Mark Skelton from the order of the Upper Tribunal (Lands Chamber) (HHJ Huskinson) dated 6 July 2015. Mr Skelton holds a long lease ("the lease") at Flat 4, Burton Pynsent House, West Common Road, Hayes, Kent BR2 7BY. The lease is dated 4 February 2011 and is for a term of 125 years from 29 September 2008. Mr Skelton contends that the Upper Tribunal erred in holding him liable to pay service charges in the events described below and that by virtue of section 20B of the Landlord and Tenant Act 1985 ("the 1985 Act") (sometimes called "the 18 months' rule") he has no such liability. Mr Skelton is represented by Ms Amanda Gourlay. The respondent is now in liquidation and does not appear. Accordingly, Ms Gourlay has had to draw to our attention any relevant legislation or authority which supports the respondent's case and is or may be inconsistent with her submissions.

The lease

2. Clause 5 of the lease requires the lessee to pay ground rent and service charges. Clause 6 sets out the landlord's covenants with the lessee, including covenants to insure and provide services. Schedule 6 contains provisions relating to the service charge. Critically, the machinery for payment involves service of a demand and an "estimate". Schedule 6, paragraph 2 defines "estimate" as an estimate prepared under the provisions of paragraph 3.1 of this schedule.
3. Under Schedule 6, paragraph 3, the lessee's liability to pay does not arise until the landlord has fulfilled the obligations described in that paragraph to prepare estimates containing a summary of the estimated costs and to serve them on the tenant, together with a statement showing the service charge payable by the tenant on account of those service costs. The exact terms of paragraph 3 are as follows:-

3.1 On or before (or, if that shall be impractical, then as soon as practicable after) each Accounting Date the Landlord shall prepare an Estimate in writing of the Service Costs which it expects to incur or charge during or in respect of the Accounting Period commencing immediately after that Accounting Date.

3.2 The Estimate shall contain a summary of those estimated Service Costs.

3.3 Within 14 days after preparation, a copy of each Estimate shall be served by the Landlord on the Tenant together with a statement showing the Service Charge payable by the Tenant on account of those estimated Service Costs.

4. Schedule 6, paragraph 4.1 provides:

The Service Charge for each Accounting Period (together with VAT, if payable) shall be paid by the Tenant by two equal instalments on the Payment Days during that Accounting Period.

5. Schedule 6, paragraph 4.2 allows the landlord to raise the demand for a "Supplemental Charge" if in the course of a service charge year the on account provisions are insufficient to discharge all of the landlord's service provisions liabilities.
6. Schedule 6, paragraph 5, provides that the landlord must reconcile the accounts as soon as practicable after the end of the service charge year and prepare a certificate and serve that certificate on the lessee.
7. Schedule 6 contains no provision enabling the landlord to recover balancing charges if the cost he incurs in any year exceeds the amount of the estimated costs for that year.

Background

8. On 30 March 2011, the landlord served a service charge notice for the first of two equal on-account payments in respect of the 2011-2012 service charge. No estimate was enclosed. The demand for the on-account payments for the 2012-2013 year was dated 1 April 2012. The demand for the on-account payment for the 2013-2014 year was dated 1 April 2013. None of these demands were served with an estimate. The estimate for all of the relevant years was finally provided in April 2014. No balancing charge was raised for any of the three years. Nor did Mr Skelton make any application to the First-tier Tribunal ("the FTT") for an account.
9. Mr Skelton applied to the FTT under section 27A of the 1985 Act for a determination of his liability to pay service charges for 2010-2011 and the three succeeding years. The FTT rejected Mr Skelton's argument that he was not liable to pay any service charges for those years on the ground that the landlord had not complied with the terms of the lease and his liability to pay was not therefore engaged. The Upper Tribunal also rejected Mr Skelton's argument on further appeal to it.

Application of sections 18 to 27 of the 1985 Act

10. The relevant provisions of the 1985 Act, which concern service charges, apply to most residential premises held on a long tenancy, and the lease falls within its provisions.
11. A "service charge" includes an amount which the tenant agrees to pay in addition to rent for costs incurred, or to be incurred, by the landlord (see section 18 of the 1985 Act).

Section 20B of the 1985 Act ("the 18 months' rule")

12. This section provides:

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.

Reasonableness test

13. For leases to which the relevant provisions of the 1985 Act apply, the landlord may only include costs in the service charge to the extent that they are reasonable (section 19(1)). This means that the costs must have been reasonably incurred and that any works or services to which they relate must be of a reasonable standard.
14. The requirement of reasonableness applies to advance payments. Where, as in this case, the lease permits the landlord to demand interim service charge payments, the amount of any advance payment must be reasonable (section 19(2)).

Decision of the Upper Tribunal

15. HHJ Huskinson gave a long and careful analysis of the terms of the lease, and he concluded that the demand for payment of the service charge was valid from the date on which the estimate was served. The demand did not, however, have to be served with the estimate (Decision, [37]). There is no appeal on these points. Even though more than eighteen months had passed between the incurring of the costs and the demand being both served and becoming effective, section 20B of the 1985 Act did not apply because section 20B did not, in the judgment of the judge, apply to a demand for payment of estimated service charges on account of costs to be incurred in the future (referred to below as an "on-account demand"). This was said to follow from the decision of Etherton J in Gilje v Charlegrove Securities [2004] 1 All ER 91 (Decision, [41]).

Submissions

16. Ms Gourlay submits that the date on which the demand was served for section 20B purposes must be taken to be the date when the demand became fully valid. The purpose of section 20B is that the tenant should have a proper demand for the service charge within 18 months of the relevant costs being incurred. This did not happen. Section 20B applies to an on-account demand because the definition of "service charge" encompasses costs to be incurred as well as costs that have been incurred. Gilje is distinguishable because there was a prior valid demand. It would be contrary to the manifest intention of Parliament in enacting section 20B if a landlord could make a demand and then delay sending out the estimate in a case such as this so that a tenant did not have a fully valid demand within the 18 month period. In this case, the judge accepted that the demand was not valid until the estimate was served. Moreover, in the present case, the landlord was too late to raise a Supplemental Charge because that had to be raised in the same accounting period as that to which the estimate relates.

Discussion

17. In my judgment, it is clear from the definition of "service charge" in section 18 that section 20B applies to service charges in respect of costs to be incurred as much as costs that have been incurred. In my judgment, the judge was wrong to hold otherwise on the basis of Gilje. In Gilje the landlord served demands for 1999 and 2000 before incurring any costs. The landlord had spent less than the amounts demanded, and there was no balancing charge. The argument was that none of the on-account payments was payable. Etherton J held that there was no "metamorphosis" from an on-account demand and a demand for actual costs once costs had been incurred. Section 20B did not apply where the tenants made on-account payments of their service charges, the landlord's actual expenditure did not exceed the estimated amount on which the service charges were based and the landlord did not serve any further demand on the tenant. There was then no "demand for payment" after the incurring of costs to which section 20B could apply. But that reasoning does not assist in this case because the demand was only validly served after the costs were incurred.
18. Further, in my judgment, it is not enough under section 20B that the tenant has received the information that his landlord proposes to make a demand. As Morgan J held in London Borough of Brent v Shulem B Association Ltd [2011] EWHC 1663, [53], there must be a valid demand for payment of the service charge. In that case, the landlord had served several different demands for payment but they were all invalid because they did not comply with the terms of the parties' contract. The content of the alleged demand did not comply with the service charge provisions of the lease. So there was no valid demand for the purposes of section 20B(1) of the 1985 Act.
19. Ms Gourlay draws our attention to the fact that it follows from her submissions that, if, having received the demand but not the estimate, Mr Skelton had assigned his leasehold interest to a purchaser, the purchaser would become liable for the service charge when the estimate was served, subject to section 20B. Purchasers of leases will need to be mindful of this possibility, but, even if it is correct, it is not, in my judgment, a reason for holding that her interpretation of section 20B is wrong.
20. Ms Gourlay also draws to our attention that retrospective correction of a demand is possible in certain situations. Thus, in Johnson v County Bideford [2012] UKUT 457 (Lands Chamber), the landlord had failed to comply with the requirement in section 47(1) of the 1985 Act to provide his name and address. The Upper Tribunal held that, by serving fresh demands, the landlord had provided the information required by section 47(2) to validate the original demands. Section 47(2) allows for this possibility. Ms Gourlay submits that Johnson v County is about statutory validity not contractual validity. I agree. We have not been shown any authority for the proposition that as a matter of contract law the delivery of the estimate validated the demands in this case as of the date of the demand.
21. If in the situation in this case, the tenant receives a windfall, that is the result of the landlord not having complied with the terms of the lease for service of a valid demand.
22. For these reasons, I would allow this appeal. I am grateful to Ms Amanda Gourlay for her able submissions.

LORD JUSTICE RICHARDS

23. I agree.