Under section 20B(1) Landlord and Tenant Act 1985, a service charge must be demanded of the tenant within 18 months of the relevant cost having been incurred by the landlord. But what happens when there is a head landlord demanding a charge from an intermediate landlord who, in turn, passes the cost on to their lessees? When does the 18 months run from?

The Upper Tribunal (Lands Chambers) has answered this in Westmark (Lettings) Ltd v Peddle & Ors (2017) UKUT 449 (LC). The situation in this case actually involved five layers of ownership:

beginning with the freehold which is owned by Bristol City Council.  In 2005 the City Council granted a lease of the whole of the development for a term of 150 years (“the Headlease”) which is now vested in Epic.  The residential units and their associated common parts were then let together on an underlease granted in June 2007 (“the Underlease”) which has been vested in Westmark (or an associate) since November 2009.  The Underlease was granted subject to a concurrent underlease of the same residential parts which had been granted to the Management Company in May 2007 (the “Concurrent Underlease”).  The Concurrent Underlease sits in the title structure between the Underlease and the occupational sub-underleases of the 29 flats in the development (“the Occupational Leases”).

Epic made demands of Westmark, who in turn made demands of the management company, who in turn made demands of the occupational lessees. There had been a dispute between Epic and Westmark which had led to a delay in charges being sought from the management company by Westmark, and thus of the occupational lessees. The occupational lessees argued that the costs had been incurred by Epic considerably more than 18 months before, so were caught by s.20B.

The FTT agreed with that analysis, finding:

(1)   There is a distinction between a liability to pay and a cost, as the Court of Appeal had explained in OM Property Management v Burr.  The fact that the liability to pay a service charge being charged “down the chain” only arises when a demand is received, does not prevent the cost from arising earlier.  Once a cost had been incurred by Epic “it cannot cease to be a cost and somehow arise a second time when, at a later date, the intermediate landlord or a management company are called upon to pay.”

(2)   Costs incurred by a superior landlord are “relevant costs”, as is clear from section 18(2).  The costs included in the invoices delivered to the occupational leaseholders were costs incurred by Epic, the superior landlord, and “were incurred at the time that superior landlord became liable to pay.”

(3)   Mr Bates’ construction of section 20B(1) would negate much of the protection it was intended to provide against stale claims, whereas the leaseholders’ submission would produce a result consistent with that intention.  On the facts of this case Mr Bates’ approach could result in leaseholders being required to contribute towards costs incurred as much as four and a half years before they received a demand.

(4)   Section 20B(2) provided a solution for intermediate landlords who could make an estimate of the sums they were likely to be called on to pay and give notice to their own tenant or tenants of that anticipated liability within 18 months of the costs in question being incurred by the superior landlord which provided the services.  Such an estimate need not be precise and would not be invalid just because it exceeded the sum eventually found to be due.

(5)   The facility to collect estimated service charges which appears routinely in residential leases substantially mitigated the risk to intermediate landlords of the FTT’s preferred construction of section 20B(1).  The potential shortfall for in this case would have been much less if Westmark and the Management Company had taken the opportunity to collect estimated service charges in advance. 

Westmark appealed.

The UT upheld the appeal.

65. In contractual terms each of the landlords in the chain had a distinct liability of its own. Westmark’s liability to pay the service charge demanded by Epic was not the same as Epic’s liability to pay its own contractors. The liability of the Management Company under the Concurrent Underlease was not the same as Westmark’s liability under the Underlease. In each case the liability was owed to a different person and was payable at a different time and in different amounts (Westmark was liable to contribute only a proportion of the total incurred by Epic, and was entitled to recoup only part of its contribution from the Management Company).

66. In the language of section 20B, at each level in the contractual chain, a cost was incurred by each landlord in turn when it received a demand for payment of its liability.

(…)

70. There therefore seems to me to be no reason to treat the costs incurred by Westmark and the Management Company as if they were costs incurred at any earlier time than when each of those companies received a demand for payment from its superior landlord. In particular there is no reason to treat the relevant costs incurred by the Management Company as if they had been incurred when Epic received invoices from its contractors and suppliers.

So, for the occupational lessees, the relevant period was 18 months from the point the charges had been demanded of the management company by Westmark. Where are tiers of ownership, for the intermediate and bottom lessees, the 18 months runs from when the cost was incurred by their immediately superior landlord.