Section 20B LTA 1985 – 18 Mth rule, anticipated service charge & unrecoverable amnts

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    Section 20B LTA 1985 – 18 Mth rule, anticipated service charge & unrecoverable amnts

    Hi All,

    We receive anticipated service charge demands with the breakdown by cost type at the beginning of the account year and we pay in quarterly instalments. At the end of the year the balance is settled.
    Our final service charge accounts however were not delivered within the 18 months required by law and were 16 months late.

    Section 20B states that:

    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.]

    Can you please help with the questions below?

    1) Is it correct to assume that after 18 months if any individual cost item (as opposed to the total service charge) has cost more than the anticipated expenditure then the excess is not recoverable by the landlord?

    2) Considering that we receive anticipated demands does it mean that Subsection (2) supersedes Subsection (1) making question 1 irrelevant even if some of the costs are higher than the anticipated amounts?

    3) What happens if items have been accrued for more than 18 months but final invoice was never received by the landlord? Does the landlord have to refund leaseholders if they cannot substantiate the accrual?

    Thank you for clarifying!

    #2
    Whilst those are good questions, I'm not convinced you will get reliable answers. I suspect not even the FTTs are consistent in how they interpret the rules.

    My feeling is that the legislators didn't ask themselves this sort of question, and were just trying to quantify a principle that people should not get sudden surprises;

    Comment


      #3
      1. That would very likely depend on the tribunal members who are asked to make a decision (and it may be that they can be swayed either way, depending on the way that each side argues their position). If the overall total estimate is not exceeded, it may be difficult to argue that individual items were over.
      Also, by arguing this, you might find that all future estimates are intentionally increased.

      2. I believe that any amounts paid in advance, based on estimated expenditure, aren't covered by s20B (although it can apply if costs exceed the estimates).
      Subsection (2) requires notification of the actual costs incurred, there is case law that says that estimates of costs do not meet the requirements - if the sums are not payable in advance.

      3. For the purpose of s20B, the landlord has 18 months from the date on which he first receives an invoice.
      If your lease requires payments in advance, it is unlikely that any funds will have to be returned unless the lease specifically says so. The landlord will still require the money to pay for work that has been, or will be, done even if an invoice has not been presented at the time that the accounts are produced (although the accounts should show that funds have been received and not spent).

      This is my opinion, based on my understanding - don't assume that it is reliable (as leaseholder64 says!).

      Comment


        #4
        You are being notified within the budget that costs are being incurred and that you will be required to contribute towards those costs. So an overspend of known expenditure is unlikely to be disallowed by a Tribunal. Landlords should advise leaseholders if there is likely to be a deficit and the reasons. The problem is often identifying a service charge demand because expenditure is offset by surpluses elsewhere.

        All accruals should be substantiated otherwise you can argue that the expenditure is unreasonable. It is not uncommon to leave accruals for 6 years on the basis that an invoice could be raised within that time frame.

        Comment


          #5
          Originally posted by Macromia View Post
          1.
          3. For the purpose of s20B, the landlord has 18 months from the date on which he first receives an invoice.
          If your lease requires payments in advance, it is unlikely that any funds will have to be returned unless the lease specifically says so. The landlord will still require the money to pay for work that has been, or will be, done even if an invoice has not been presented at the time that the accounts are produced (although the accounts should show that funds have been received and not spent).

          The time limit is based on when the expenditure was incurred (ie when the contract was entered into), not when an invoice is received. Under the accruals concept, the service charge accounts should include expenditure when a liability becomes due, again regardless of whether or not an invoice has been received.

          Comment


            #6
            If you wish to argue this in a service charge dispute, you will need to be prepared to take the case at least to the Court of Appeal - and you will then have to give the judges good reason to disagree with previous Court of Appeal precedent.

            In any lower court (such as FTT & UT) the landlord, or their solicitor, only needs to point to the EWCA decision in OM Property Ltd versus Burr (2013), where it was decided that, for the purposes of section 20B, costs are not incurred until either an invoice is received by the landlord or a payment is made by them (presumably whichever comes first, although this wasn't specifically decided).

            The decision distinguishes between a liability to pay arising and the cost actually being incurred.

            Comment


              #7
              Macromia,

              Thanks for raising that case. The conclusion is not kidding “the practical relevance of section 20B may be somewhat limited”

              If “incurred” means either receipt of an invoice or payment, which one is it, there can be considerable delay between one and the other.

              A leaseholder normally has no way of knowing either when an invoice is received or when payment is made.

              Comment


                #8
                So returning to the original questions

                Relevant costs means costs incurred or to be incurred

                Costs incurred means invoices have been received by the landlord or payments have been made by the landlord (the court has not decided which)

                Costs to be incurred means invoices have not been received by the landlord or payments have not been made by the landlord (ie estimates and accruals)

                1 No, it is not as simple as that. First of all, there needs to be an actual demand and then the leaseholder would need to demonstrate that the demand included an invoice or a payment which was more than 18 months prior to the date of the demand.

                2 No. It refers to costs which had been incurred, so the landlord must have received an invoice or made a payment before informing the leaseholders that he intends to issue a service charge demand. If the landlord does not intend to issue a service charge demand, he has no need to inform the leaseholders.

                3 Accruals fall under the definition of costs to be incurred, so are outside the scope of s20b. Accruals may be included within the service charges for as long as the landlord can justify that invoices may be received and the cost is reasonable.

                Comment


                  #9
                  Originally posted by eagle2 View Post
                  Thanks for raising that case. The conclusion is not kidding “the practical relevance of section 20B may be somewhat limited”
                  It does somewhat limit the protection that leaseholders would like to have from costs that arose in the past.
                  Although I suppose it can be considered reasonable for freeholders to be able to recover costs that they had no reasonable way of knowing were due.

                  I would think that it could be argued that the decision of the OM Property Management versus Burr case should not apply if the costs involved were something that the freeholder cannot justifiable claim they did not know would become due.
                  For instance, if a freeholder (or their managing agent) arranges for a new roof, they cannot claim that the cost comes as a surprise if the invoice is not provided until 5 years later! The circumstances would be very different from those in the Burr case, and it could be argued that the freeholder should have been aware of the expenditure and should have ensured that they had at least informed the leaseholders of what the cost would be.


                  Originally posted by eagle2 View Post
                  If “incurred” means either receipt of an invoice or payment, which one is it, there can be considerable delay between one and the other.
                  If this eventually becomes the subject of a court case that will set precedent, I would expect it to be difficult for a freeholder to argue that it wasn't whichever came first (which would almost always mean the invoice).
                  Once a freeholder has received confirmation of the costs involved, I can see no good reason for them not to at least inform the leaseholders of the exact amount within 18 months (even if, for whatever reason, they don't demand payment from the leaseholders until a later date).

                  Comment


                    #10
                    Macromia,

                    The case is helpful because it defines certain terms, it is a pity though that they ducked the issue of the date of the invoice or the date of the payment. No doubt that will arise in a future case.


                    I agree that it means that a leaseholder can receive a late demand if the freeholder was unaware of the charge. So the general idea that the leaseholder should not receive sudden surprises does not apply.

                    I also agree that if the freeholder is aware of costs which have not been invoiced or paid, he would have a duty to notify the leaseholders. Proving that the freeholder was aware or ought to have been aware of costs may not be a simple matter though.

                    Practically it makes it extremely difficult for a leaseholder to make a claim under s20b. First of all, he has to identify an actual demand. There would be no demand if estimated costs exceed the actual costs. The actual demand could be less than the item of expenditure. If the leaseholder does manage to identify an actual demand, he then has to try to obtain the date when the invoice was received by the freeholder and the date of the payment by the freeholder. That information is not routinely supplied to a leaseholder, so he would need to inspect the receipts, accounting records and the bank statements. The date appearing on an invoice is not the date when it is received by the landlord, it is an indication but the landlord could argue that he did not receive it at the time. The date of payment should be a matter of fact. As for the freeholder, the message is clear, avoid demands for actual expenditure if you can avoid it.

                    Comment

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