When does an intermediate landlord incur residential service charge?
Author: Lucy Barry and Lucy Shepherd
Applies to: England and Wales
The Upper Tribunal has held that the date on which a relevant service cost is incurred by an intermediate landlord is the date on which it receives a demand for payment from its own landlord.
This article concerns the case of Westmark (Lettings) Limited v Elizabeth Peddle & Others (2017), heard in the Upper Tribunal (Lands Chamber), having been appealed from the First Tier Tribunal (Property Chamber).
Section 20B(1) of the Landlord and Tenant Act 1985 provides that a tenant of residential premises is not liable for service costs incurred more than 18 months before a demand for payment is served.
In this case, the service costs were incurred by a superior landlord and passed down a chain of intermediate landlords. The question to be decided was whether the 18 month time limit applied to each successive demand in the chain, or if a single 18 month time limit applied from the date the service costs were first incurred by the superior landlord.
The property comprised 29 long leasehold flats on five upper floors with commercial units below. The ownership structure looked like this:
- Freehold owned by Bristol City Council;
- Lease of whole to Epic (obliged to insure the development, keep it in good and substantial repair and condition and manage it);
- Underlease of residential units and associated common parts to Westmark;
- Sub-underlease of residential units and associated common parts to management company (obliged to manage those common parts);
- Sub-sub underleases of individual residential units to occupational tenants.
Under the terms of the various leases, Epic was able to pass on the costs it incurred in fulfilling its obligations through a service charge demanded from Westmark. In turn, most of those costs were payable by the management company and, subsequently, by the occupational tenants through further service charges.
The mismanagement of the service charges demanded from the occupational tenants led to the proceedings in this case. Between 2009 and 2011, they paid an estimated service charge to the management company. However, during this period there was no reconciliation between that and the costs actually incurred by the various landlords in providing the services. From 2011, no demands were made by the management company for any service charges and so no payments were made either. In 2015, the management company issued five invoices to the occupational tenants for the entire period since 2008, demanding payment for 'Epic service charges total liability'. No further breakdown was given. It is not clear whether this was because Epic had not billed its costs, or because the management company had done nothing with bills it had received.
The occupational tenants issued proceedings in the First Tier Tribunal for a determination of the extent of their liability for service charges. They argued that the 18 month time limit under section 20B(1) had started to run when the relevant costs were first incurred by Epic, and not when the management company became liable to pay Westmark. This would mean that the occupational tenants would not be liable for any costs incurred by Epic before 31 May 2014.
The First Tier Tribunal found in favour of the occupational tenants. But the Upper Tribunal overturned this and found against them for the following reasons:
- The Court of Appeal had previously ruled (in OM Property Management v Burr  EWCA Civ 479) that costs are incurred when the landlord providing the services receives a bill from its supplier or contractor;
- The proper approach is to focus on the natural and ordinary meaning of the relevant law. The relevant sections of the 1985 Act were clearly drafted with an awareness that there may be a chain of ownership between the person providing services and the person ultimately paying for them;
- At each stage in the chain of leases, further costs were added according to the differing obligations and services provided. In each case, liability was owed to a different person and was payable at a different time and in different amounts;
- The relevant costs making up the service charge payable by the occupational tenants were the costs incurred by the management company. If Epic had incurred costs but failed to bill Westmark, or if Westmark had paid Epic but failed to demand payment from the management company, the management company would not have incurred any costs and would not have been able to make any demands of the occupational tenants in respect of charges incurred by Epic;
- If a single period of 18 months was intended, it was surprising that no flexibility was allowed for seeking payment. The fact that the 1985 Act contains no flexibility indicates that Parliament did not intend that intermediate landlords should be time-barred from making demands after 18 months if their own landlords were late in making demands.
The Upper Tribunal concluded that for the purpose of section 20(B)(1), a relevant cost is incurred when an intermediate landlord receives a demand for payment from its own landlord for services provided by it or a superior landlord, and not on the earlier date on which the superior landlord incurs its own cost in providing those services.
This decision is of general importance to residential tenants who are liable to pay their immediate landlord a charge for services provided by a superior landlord.
The Upper Tribunal recognised that there is a risk of residential tenants receiving demands for payment concerning work that was carried out years earlier by a superior landlord. However, it felt that this result was less harsh than if an intermediate landlord were to be time-barred against seeking reimbursement for costs because of delays outside of its control. As it said, in either case, the impact can be mitigated if payments on account are collected, as is usually the case.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.