England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice The Strand London WC2A 2LL
		13th May 2003

MR JUSTICE ETHERTON:

Introduction

1. The claimants in these proceedings are tenants of flats at 27 Lennox Gardens, London, SW1 ("the Building"). The first defendant is the landlord, and the second defendant is the first defendant's agent with responsibility for demanding and receiving service charge contributions from the tenants.
2. This is an appeal from an order of Master Price of 12th December 2002 on a preliminary issue by which he declared that:

"Section 20B of the Landlord and Tenant Act 1985 does not prevent the defendants from charging expenditure by way of service charges in the years of account ended 25th March 1998 and 25th March 1999 notwithstanding that this expenditure was incurred more than 18 months prior to the final preparation of the final accounts and demands in respect of those years of account but only insofar as such expenditure was covered by amounts collected by the defendants by way of advance service charges pursuant to the Claimants' leases."

Background facts

3. The Building comprises six flats, of which five are let on long leases ("the leases"), the sixth being retained for use by a resident caretaker. The leases are in similar form.
4. Each of the leases requires the lessee to contribute towards the cost of providing certain services, as follows. Each lessee's contribution is expressed as a percentage of the service charge expenditure. The contribution is to be made in two ways, that is to say by payments on account of service charges during the relevant financial year and by a balancing payment at the end of each financial year.
5. The claimants, between them, hold four of the five long leases and contribute 78.5% of the total service charge expenditure, the balance being payable by the lessee of the fifth flat.
6. The defendants, as I have said, are the claimants' landlord, the first defendant, and Mr Richard Newman, the second defendant, who, as the first defendant's agent, corresponds with the claimants in respect of the provision of services and service charges, demands service charge contributions from the lessees of the flats within the building and accepts those contributions.
7. There has been previous litigation between the claimants and the first defendant in relation to service charges.
8. The present dispute between the parties turns on four matters: the making of an allegedly inappropriate demand for payment on account of service charges for the year of account ending in 2002; adjusting the account between the parties so as to reflect the consequences of decisions in the Leasehold Valuation Tribunal, the Central London County Court and the Court of Appeal; an issue arising under section 20B of the Landlord and Tenant Act 1985 ("the Act"); and a disagreement on the pleadings as to the amount the claimants have paid to the defendants on account of service charges.

The issue

9. The issue before me concerns the third disputed matter which I have mentioned above. It arises in the following way. Each of the claimants' leases contains covenants by the tenant:

"4…(2) To pay to the Lessor in each year a sum equal to [a specified percentage] of

(i) all monies expended by the Lessor in carrying out all or any of the works and providing the services and management administration called for under clause 5.4 hereof [that is, the Lessor's covenant to maintain, repair and decorate]

(ii) the insurance premium for the insurance policy covering the Building in accordance with the Lessor's covenant herein contained and

(iii) such a sum as the Lessor shall reasonably require for the purpose of setting up an adequate reserve fund to pay for any intended substantial works which are not annually required to be done The liability of the Lessee shall be discharged in the following manner that is to say:

(a) By the payment on account in each year of such a reasonable sum as the Lessor shall require such sum to be paid in advance by quarterly payments on the days herein before provided for the payment of rent the first payment to be made at the time hereinbefore provided for the first payment of rent and to be a proportionate calculated from the date hereof

(b) In the event of the moneys expended by the Lessor as aforesaid in any year exceeding the aforesaid payment on account the balance shall be paid by the Lessee within twenty-one days after receiving a demand for the same The Lessor will procure that the Lessor's managing agents shall within three months at the end of each year issue a certificate and account as to the amount expended by the Lessor in such year as herein before provided and such certificate shall be conclusive and binding on the Lessor and the Lessee".

10. In respect of the accounting periods ending on 25th March 1999 and 25th March 2000, the first defendant gave notice requiring payments on account in respect of those years based on anticipated expenditure for the period in question. Projected budgets for those years were supplied to the claimants on about 17th March 1998 and 10th March 1999 respectively. Accounts for the years ending 1999 and 2000 were not supplied until the beginning of October 2001.
11. Those accounts showed that the amounts expended by the first defendant for the two years in question and claimed by way of service charge were less than the interim quarterly service charge demands for those years.
12. The claimants claim that by virtue of section 20B of the Act the first defendant is not entitled to recover by way of service charge any expenditure in those accounts, such expenditure having been incurred more than 18 months previously.

The statutory provisions

13. The relevant statutory provisions in the Act are as follows: "Meaning of "service charge" and "relevant costs"

18. (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 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.

…

Limitation of service charge : reasonableness

19. (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.

Limitation on service charges : time limit on making demands

20B. (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 tenants 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."

Master Price's judgment

14. Master Price concluded in his judgment on 12th December 2002 that:

"…section 20B has nothing to do with payments on account which fall to be dealt with under Section 19(2), by way of subsequent adjustment by repayment, reduction or further charges. Section 20B only comes into play if the landlord spends more than he has demanded on account, in which case he must raise a further demand within the 18 month period."

15. It is common ground between the parties that Master Price's judgment contained an error, which was carried through into his order, in referring to one of the relevant years of account as ending on 25th March 1998. As I have said, the two relevant years of account are those ending on 25th March 1999 and 25th March 2000.

The claimants' case

16. Mr Timothy Dutton, counsel, who appeared for the claimants on the appeal before me, put their case in the following way. He submitted, first, that the quarterly interim payments made by the claimants under their respective leases are no more and no less than payments on account of the service charge. The leases contain express provision for a final account to be taken of the lessor's expenditure in respect of each year, and, he submitted, it is only when such a final account is prepared that the payment on account is converted into a payment for the actual service charge. He emphasised, as part of this analysis, that the quarterly payments on account are not, when made, formally appropriated to any particular expenditure, in the sense that the lessor is restricted to applying the payments on account only for the specified expenditure in the budget. The lessor is entitled to apply such payments on any item of expenditure within clause 5(4) of the leases, whether or not it was envisaged and specified in the budget.
17. There are, in effect, he submitted, two service charges for the year: first, the interim service charge, and then the actual service charge once the actual expenditure has been incurred. Section 19(1) of the Act concerns the actual service charge, that is to say related to the actual expenditure incurred by the lessor. That sub-section permits the tenant to challenge the whole of the lessor's account of his expenditure. Section 20B, Mr Dutton submitted, is looking at that same process, that is to say the account of the lessor's actual expenditure for the relevant accounting period.
18. He submitted that the issue and supply to the claimants, under clause 4.2 of the leases, of the account and certificate for the relevant year constitutes the "demand for payment of the service charge" within section 20B(1).

Analysis

19. Notwithstanding Mr Dutton's eloquence and persuasiveness, the conclusion of Master Price was, in my judgment, plainly right.
20. I accept the primary submission of Ms Amanda Eilledge, counsel for the defendants, that section 20B of the Act has no application where (a) payments on account are made to the lessor in respect of service charges, and (b) the actual expenditure of the lessor does not exceed the payments on account, and (c) no request by the lessor for any further payment by the tenant needs to be or is in fact made.
21. In the first place, it is quite clear that section 20B(1) operates only where the relevant costs were incurred more than 18 months before a "demand for payment." Mr Dutton's interpretation requires the supply of the accounts and certificates under clause 4(2) of the leases to be treated as a "demand for payment." They were not, however, in substance or form, a demand for payment. There was nothing to demand from the claimants since the interim sums paid under the leases exceeded the actual expenditure in the two years in question.
22. Further, I do not accept Mr Dutton's submission that there was no actual payment of the service charge until the final accounts and certificates were issued under clause 4(2) of the leases. For the purposes of section 20B of the Act, section 18 of the Act defines the meaning of "service charge". It is "an amount" payable in respect of the matters specified in section 18(1). The quarterly payments on account were payable in respect of such matters, and were, therefore, undoubtedly payments of "a[ny] service charge" within Section 20B. There was no metamorphosis of those payments once the final accounts and certificates were prepared.
23. As Miss Eilledge pointed out, the terms of clause 4(2) of the leases, which I have already quoted, expressly provide that:

"The liability of the Lessee [to pay for the expenditure of the Lessor] shall be discharged…

(a) By the payment on account…"

Only if the expenditure of the lessor exceeds that amount is the tenant obliged to pay the balance, in which case:

"b) …the balance shall be paid by the Lessee within twenty-one days after receiving a demand for the same."

24. The account and certificate under clause 4(2) of the leases are required by clause 4(2), and are in practice drawn up so as to relate to the lessor's expenditure as a whole and not to the liability of any particular lessee. As clause 4(2) expressly envisages, if, but only if, the certificate and account disclose that the actual expenditure of the lessor exceeds the payment on account, then a demand will be made of a particular tenant to pay a specific balance outstanding. The issue of the certificate and account themselves are neither expressly nor implicitly a demand for the payment of any sum by any particular tenant.
25. Further, if Mr Dutton's interpretation of section 20B is correct, I would have expected the draftsman of the Landlord and Tenant Act 1987 (which inserted section 20B into the Act) to have added what Mr Dutton claims is the substance of this section to section 19(1) of the Act which deals with the challenge to service charges after expenditure has been incurred. In this connection, it is to be borne in mind that the legislation expressly contemplates the payment of service charges on account, and provides an express mechanism in section 19(2) for challenging such payment on account if and insofar as the demand for such payment is unreasonable. Against that background, the failure to insert the 18 month limitation as an extra qualification under section 19(1) is extremely poor drafting if it was intended that the limitation is to apply to all costs falling within section 19(1) even where the payments on account, subject to the provisions of section 19(2), exceed the final expenditure of the lessor.
26. Further, I agree with Ms Eilledge that the provisions of section 20B fit extremely uncomfortably with the application of that section to payments on account. Such payments must necessarily, by virtue of section 19(2) of the Act, be related to particular contemplated costs of which the tenant is notified in advance. While Mr Dutton is, strictly speaking, correct that the lessor is not restricted to expenditure of the interim payments only on those anticipated items of expenditure, the fact that the draftsman appears to make no allowance in section 20B(2) for the situation (expressly anticipated in section 19(2)) where the expenditure has been notified in advance and payments on account have been made, indicates that he did not have such a situation in mind as falling within the ambit of section 20B(1).
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.

Decision

28. For all these reasons, I dismiss this appeal.