This Court of Appeal decision is a cautionary tale for landlords and property managers who are responsible for collecting service charges. It is clear from this decision that not only does the service charge demand need to be validly served in accordance with the terms of the lease, it must also comply with the "18 month rule" under section 20B Landlord and Tenant Act 1985 ("the Act").
Mr Skelton held a long lease of a flat which required him to pay service charges. Under the terms of the lease, the service charges only became payable once the landlord had prepared and served on the tenant (1) an estimate in writing of the service costs which it expected to incur during or in respect of that service charge year and (2) a demand showing the service charge payable by the tenant on account of those estimated service charges.
For each of the service charge years 2011 to 2012, 2012 to 2013 and 2013 to 2014, the landlord served demands in accordance with (2) above, but failed to serve an estimate. The landlord attempted to correct this by serving estimates for all three years in April 2014. The tenant claimed that he was not liable to pay the service charges as he did not become liable until both the estimate and demand had been served and that service had not been validly effected within the 18 month period provided for under section 20B of the Act.
Section 20B(1) provides that "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. Subsection 2 provides that this will not apply if the tenant was notified in writing that costs had been incurred and he would subsequently be required to pay them by way of service charge.
The Court of Appeal held that the Upper Tribunal was wrong to hold that the section 20B had no relevance to "on account" demands made before the costs were incurred. It was also clear from the definition of service charge in section 18 of the Act that service charge also applies to costs to be incurred as much as to costs that have been incurred. As the landlord did not validly serve a demand in accordance with the terms of the lease within 18 months of the same being incurred, Mr Skelton and the other tenants were not liable to pay the service charges for the years in question. It did not matter that the tenant had received information that the landlord proposed to make a demand.
This resulted in a windfall for the tenants in this matter. It is unlikely that there will be an appeal of this decision as DBS Homes was in liquidation at the time the appeal was heard and were unrepresented. However, this case turns on the peculiar terms of the lease in question. Property managers and landlords should therefore be mindful, when costs are incurred, to ensure that service charge demands are validly served in accordance with the terms of the lease and within 18 months of the costs in question being incurred.