This interview was conducted by Lucy Trevelyan at LexisNexis. The views expressed by the interviewees are not necessarily those of the proprietor.

Property Analysis: A recent Court of Appeal decision on the payment of service charges, while correct in principal, was wrong on the facts, according to Peter Petts, barrister at Hardwicke Chambers.

Original News

Skelton and others v DBS Homes (Kings Hill) Ltd [2017] EWCA Civ 1139, All ER (D) 196 (Jul)

Skelton clarifies the position regarding on-account demands and the 18-month rule for residential service charges—where a tenant can withhold payment if the demand was not made within 18 months of the relevant costs being incurred (section 20B of the Landlord and Tenant Act 1985 (LTA 1985)).

What was the background to this case?

The tenants (T) sought determinations from the First-tier Tribunal (FTT) that the service charge was not payable for the years 1 April–31 March 2010/2011, 2011/2012, 2012/2013 and 2013/2014, on the basis that it had not been demanded in accordance with the lease. The FTT, Upper Tribunal (UT) and Court of Appeal all came to different, flawed conclusions.

The lease was not drafted clearly, particularly the provisions in respect of the service charge. In essence, at the beginning of each service charge year, the landlord (L) was required to produce an estimate for that coming year, which it was to serve on T with a statement showing the service charge payable by T, in two equal, six-monthly instalments, on account of that year’s expenditure. At any time during the same service charge year, L could demand further payments, if necessary. However, there was no mechanism to collect any balancing or other payments, once the service charge year was over.

The FTT found, as a matter of fact, L had served statements showing what was payable, at the beginning of the relevant service charge years, but they were not accompanied by estimates. An estimate (which was the same for each year, being for cyclical maintenance) was finally served during the proceedings, sometime between April and September 2014.

What were the decisions of the tribunals and Court of Appeal?

The FTT dealt with L’s failure to serve estimates in the context of a condition precedent—it found it was not, and determined the service charge was, therefore, payable.

On appeal, the UT disagreed, finding the failure to serve estimates invalidated the demands, but they became payable, once the estimates were served, in 2014. Further, they did not have to be served within 18 months of the expenditure being incurred (LTA 1985,s 20B(1)), because they were on account demands.

On appeal to the Court of Appeal, the UT’s finding that the invalid demands were validated by the later service of the estimates was not challenged. But it was successfully argued that LTA 1985, s 20B did apply and none of the service charges demanded were, therefore, payable.

As recognised by the UT, the FTT was wrong. It was not a matter of fulfilling a condition precedent, what was in issue was whether or not a valid demand had been served. If a demand is contractually required to comprise two documents and only one is served, it is not a valid demand.

However, the UT held the originally invalid demand ‘became payable’ by T on service of the estimates, in 2014. As the Court of Appeal noted, the statutory concept of service charge or rent demands not being payable for failure to provide certain information (LTA 1985, s 47), then becoming payable upon the subsequent provision of that information, is not the same as belatedly complying with contractual obligations. Valid demands could, therefore, only be said to have been made in 2014, once T was in possession of both the service charge statements and the estimates, and not from the date of the original demand.

That being the case, none of the demands were served until after the relevant service charge years had expired. However, as time was not of the essence for the service of the on account demands, the UT held that they were validly served, albeit after the costs had been incurred and the time for payment had passed.

The UT went on to hold, applying Gilje v Charlegrove Securities Ltd [2004] 1 All ER 91, that LTA 1985, s 20B had no relevance to on account demands made before the costs were incurred. The Court of Appeal decided the UT was wrong and that LTA 1985, s 20B applies to service charges in respect of costs to be incurred as much as costs that have been incurred – this was clear from definition of 'service charge' in LTA 1985, s 18. The important distinction was that in Gilje, valid demands had been made before the costs had been incurred, with no further demands thereafter; whereas, in the current case, no valid demand was made until after the costs had been incurred.

It held, therefore, that none of the service charge demanded was recoverable.

Although correct in principal, this is wrong on the facts. The UT’s finding that the demands were validly served between April and September 2014 was not challenged. None of the expenditure for the service charge year 2013/2014 can, therefore, have been incurred more than 18 months before its demand, and some of the expenditure for the 2012/2013 may well have been incurred within 18 months of its demand. Although LTA 1985, s 20B(1) did bite, it did not do so in respect of all four years in issue.

What are the practical implications of the judgment? What should practitioners be mindful of when advising in this area? How helpful is this judgment in clarifying the law in this area? Are there any remaining grey areas?

Although the Court of Appeal’s decision on the facts is wrong, it is unlikely to reach the Supreme Court, as it is not a point of general public importance and L is in liquidation. However, practitioners should not 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 LTA, s 20B. One still needs to determine when the costs were incurred and if the demand was validly served within 18 months of the same.

Any argument to the contrary, relying on Skelton being binding Court of Appeal authority, can be met by distinguishing it on either the peculiar terms of the lease or the Court of Appeal having given no consideration to when the costs were actually incurred.

The case does, however, clarify the decision in Gilje which turned on the fact that no demand for a balancing charge had been made so there was nothing for LTA 1985, s 20B to bite on.