Know your limitations 

This ostensibly straight forward provision has been the subject of a not- inconsiderable amount of case law in recent years. There have been two cases in particular which are worthy of attention in the last 12 months.

The question of what constitutes a valid “demand” for the purpose of s.20B has already been considered in the well known High Court case: The London Borough of Brent v Shulem B Association Ltd. In that case, Mr Justice Morgan held that a demand which was not a valid demand for the purpose of satisfying the requirements of the lease was also not a valid demand for the purpose of s.20B.

In Johnson v County Bideford, the Upper Tribunal had to consider whether a demand which satisfied the lease requirements, but which did not comply with s.47 of the Landlord and Tenant Act 1987 (the requirement to state the landlord’s name and address), was nevertheless a valid demand for the purpose of s.20B.  We now know that the answer to this question is “yes”.

A failure to comply with the requirements of s.47 is capable of retrospective correction. Once the required information is provided, the demand is validated and the sum demanded falls due for payment. It is not known whether the same principle would apply to a demand which failed to include a summary of rights and obligations (under s.21B of the 1985 Act), but it is considered likely that it would.

On Friday 3rd May 2013, the Court of Appeal handed down its decision in the case of O M Property Management v Burr. Dismissing the leaseholder’s appeal, the Court upheld the Upper Tribunal decision: namely, that a cost is “incurred” for the purpose of s.20B, either on the presentation of an invoice, or on the payment of that invoice. Whether a cost is incurred on the date of the invoice of on payment will depend on the facts of each case (if there is a genuine dispute about the invoice, for example, then the cost is likely to be “incurred” on the date of payment). In particular, a cost is not “incurred” when a contractual liability arises. There is a distinction between a liability to pay and the incurring of costs. A liability must be converted into a concrete sum before it is “incurred”.

Of particular interest is the Court’s interpretation of s.19(2) of the 1985 Act, which provides that “...after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise”. Although it was not a relevant factor in O M v Burr; arguably, s.19(2) provides a statutory right to a balancing charge or credit (following the collection of “on account” charges), notwithstanding the lease provisions.

The next big dispute about s.20B is likely to focus on one of the more controversial aspects of Brent v Shulem B: a s.20B(2) notice should contain an actual figure for the costs that have been incurred, but where the landlord does not know the precise figure, he may “specify a figure for costs which the lessor is content to have as a limit on the cost ultimately recoverable” (Morgan J, at p.58).

To avoid funding the next big test case for s.20B, landlords and their agents would be well advised to ensure that service charge demands and accounts are served in a timely manner; and comply with the lease requirements.

Roger Hardwick is Head of Leasehold Enfranchisement at Brethertons LLP