To be incurred or not to be incurred?

Those with good memories will remember that a year or so ago the Upper Tribunal gave judgment in a case called Om Property Management Ltd v Burr (our note here) in which the issue was at what point in time does a cost became incurred for the purposes of s.20B, Landlord and Tenant Act 1985. It decided that costs became incurred on the presentation of an invoice or on payment.

Mr Burr appealed against that decision and the Court of Appeal recently gave its judgment on the subject (judgment here).

The facts, for those too lazy to click the link above, were that in November 2007, through no fault of its own, Om found itself with a gas bill in the region of £100,000. This arose because it had mistakenly been paying EDF Energy for the gas it was using, when EDF were not responsible for the supply of gas to the block (this was unsurprising as the developer had told Om that EDF supplied the gas). Moreover, EDF had been under charging. Even when EDF paid Total Energy (i.e. the company who had been supplying the gas) what it had received there still remained a shortfall of £100,000. Om subsequently put the sum through the service charge and demanded it from its leaseholders.

Before the LVT Mr Burr argued that these costs were irrecoverable because they had been incurred more than 18 months before the service charge demand was sent. He said that the cost of supplying the gas was incurred when it was supplied. Mr Burr won in the LVT but lost in the Upper Tribunal.

The Court of Appeal dismissed his appeal. The Upper Tribunal was right; a cost becomes incurred on the presentation of an invoice or when it is paid.

Posted in FLW case note, Housing law - All, Leasehold and shared ownership. RSS feed for this post and comments.

About

S is a barrister, based in London, who practices predominantly in housing and local government law.

5 Comments

  1. Mick Beirne
    Posted 10/05/2013 at 4:00 pm | link to comment

    What I don’t understand about this judgement is how it fits in with the Landlord and Tenant Act 1985, section 21(5)(a).

    We now know a service charge cost is incurred only when a liability has been crystalised, and crystalisation happens either when the landlord receives an invoice, or upon payment by the landlord to the supplier of the service.

    Despite threats of exinction over the last 15 years, under section 21 a lessee can still request a summary of service charge costs incured in the last service charge year.

    Section 21(5) (a) requires the landlord to identify in the summary those costs that were incurred within the particular year in question, but were not subject to either a demand for payment nor payment itself within that year. So, in apparent contradiction to the judgement in Om Property Management Ltd v Burr, section 21 assumes that a cost can be incurred without invoice or payment.

    I’m confused.

    • JAC
      Posted 14/05/2013 at 11:43 am | link to comment

      s.20B provides a constraint on landlord recovery of costs incurred, the tenant’s request for summary of costs is to provide the tenant with some reliable information about accounts. They do different things.

      In principle, there is no good reason for preventing the landlord from recovering his costs in respect of items for which he has only received invoices a few months earlier even if the knowledge that there would be costs to be paid arose more than 18 months before and such knowledge was then passed on to the tenant at that time.

      • Mick Beirne
        Posted 14/05/2013 at 3:52 pm | link to comment

        I agree that sections 20B and 21 do different things.

        But surely the point is sections 18-30A assume that a cost is incurred at a discrete point – for secion 20B it is necessary because the 18 month clock starts ticking at the point the cost is incurred. For section 21, costs incurred before the start of the year or after the end of the year are excluded from the summary.

        What I don’t understand is that in Om Property Management Ltd v Burr a cost is incurred only when it is demanded or paid. However section 21 sets out that the date a cost is incurred can be before either of these events. They can’t both be right.

        • JAC
          Posted 17/05/2013 at 11:47 am | link to comment

          Suppose work is done in 2013 and a figure for the work is suggested by the contractor that the freeholder pushed by the tenant considers is not justified and argument ensues for 6 years until 2019. The information the freeholder and would have about costs being possible would be disclosable in 2013 on notice from a tenant. It could get close to the s.20B limitation period in 2015 without the invoice having been served on the basis of the dispute raised by the freeholder (on the prompting from the tenant). During that period of time the freeholder may not have had justification for charging the possible debt to the tenant through the service charge because of issues raised by the tenant about the work done. But for the interpretation accepted in this case, the freeholder would then be in the insidious position at that time of either demanding the monies from the tenant before the s.20B period expires or being forced to litigate the dispute with the contractor without the prospect of being able to recover any sum that the court finds due under the service charge.

          With the different information provided under s.20B and s.21 and the decision in this case, teh tenant’s have the right to get the relevant information and the freeholder is not unfairly prejudiced.

  2. Sandeep Goenka
    Posted 11/05/2013 at 2:10 pm | link to comment

    I think the interpretation is a joke.

    Bookkeeping has been around for hundreds of years and forms the basis of service charge allocations etc.

    Bookkeper/ accountant will tell you that cost is incurred and liability arises when goods delivered or when services have been provided by the supplier.

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