For the purposes of Section 20B(1) of the Landlord and Tenant Act 1985 (“the 1985 Act”) a relevant cost is incurred by an intermediate landlord when that intermediate landlord receives a demand from its own landlord in respect of services provided by it or a superior landlord. A residential tenant’s 18-month limitation period begins to run only when his or her immediate landlord receives a demand incurring the cost, not when the superior landlord providing the service originally incurs its own cost.
The matter concerned a chain of leasehold relationships in respect of a residential apartment block.
The appellant was headlessee of the block. Under the headlessee was an underlease of the block, which was granted subject to a concurrent underlease held by the management company. Thereunder the individual flats were held on long leases. The respondents were occupational leaseholders of the individual flats.
The freeholder did not provide any services under the headlease. The headlessee had the relevant repair obligations in respect of parts not demised to the end occupational tenants. The costs of doing so were then passed down the chain – from headlessee to underlessee, underlessee to management company, and management company to the occupational tenants.
Under the terms of the various leases, this was done by the relevant costs being billed down the chain. Each tenant receives a demand from its immediate landlord, and passes that down until at the end of the chain the occupational tenants had to foot the bill.
The dispute concerned the payability of service charges in respect of services provided in 2012, 2013 and 2014. The question was: when were the relevant costs incurred by the management company demanding sums from the occupational tenants – (1) when the management company itself had been billed by the underlessee; or (2) when the headlessee had originally incurred those costs?
The First-tier Tribunal (“FTT”) decided in favour of the respondents, for the following reasons:
- It was established in OM Property Management v Burr  EWCA Civ 479 that there is a distinction between a liability to pay and a cost. A cost is incurred once an underlying liability to pay for a service crystallises (e.g. once demanded by invoice). Once the headlessee had incurred a relevant cost, that cost had been established. Only liability to pay needs to be re-established down the chain, not the incurring of the relevant cost;
- Costs incurred by a superior landlord are “relevant costs” under Section 18(2) of the 1985 Act. The service charges demanded of the occupational tenants were the headlessee’s costs, which were incurred when the headlessee was liable to pay them;
- To decide in favour of the appellants would be to contrary to the purpose of Section 20B(1) of the 1985 Act to insulate tenants from stale service charge demands, whereas deciding in favour of the respondents protects that purpose;
- Section 20B(2) provided protection to immediate landlords as the estimate provided thereunder need not be precise; and
- Residential leases routinely include the ability to demand interim service charges, which if utilised properly may insulate intermediate landlords from the effect of Section 20B(1) of the 1985 Act.
As a result, the respondents only had to pay for services where the cost was actually incurred by the headlessee within 18 months of the management company’s demand.
Decision on appeal
The Upper Tribunal (“UT”) overturned the FTT’s decision. The Deputy Chamber President Martin Roger QC considered the same statutory provisions as the FTT, and preferred that a new relevant cost arises at each stage of the process of passing the liability down the chain, notwithstanding that the new cost is in respect of the same service. The UT’s reasoning may be split into statutory/contractual interpretation and then policy considerations.
As to statutory interpretation, the UT first noted that the provisions of Sections 18 – 30 of the 1985 Act both appreciate that services may be provided by a superior landlord and be paid for ultimately by a party several links below it on the chain of title, and that there may be some delay before a landlord may state the final service charge payable clearly.
Contractually, where a chain exists each of the landlords in the chain has a distinct liability to a different party. In the language of Section 18 of the 1985 Act, each individual payment up the chain is a “relevant cost” payable “directly or indirectly, for services”. Those costs do not arise unless each leaseholder bills its immediate tenant. It is possible, where a landlord does not ever bill its immediate tenant, for that immediate tenant not to incur a cost itself. This exposes the FTT’s error: treating the incurring of a cost by the headlessee the same as the incurring of that cost by the management company (2 links down the chain), even if the management company is never billed by the underlessee.
As to policy, the UT considered that if its interpretation is correct, a tenant may have to pay costs originally incurred years earlier by the headlessee. However, if not, the last in the line of intermediate landlords could be rendered incapable of recovering service charges from the occupational tenant owing to its superior landlord(s) delaying in making their own demands.
In that event, Section 20B(2) is not sufficient protection to the intermediate landlord because of the decision in Brent London Borough Counsel v Shulem B Association Ltd  1 WLR 3014, where Morgan J’s view (albeit obiter) was that any amount incurred over the provided estimate would not enjoy the benefit of the notification under Section 20B(2), resulting in the intermediate landlord suffering a loss.
Ultimately, the UT could not find a reason why overturning the FTT’s decision would create a result absurd enough to warrant rejection. As a result, the UT decided that the time limit for Section 18(1) of the 1985 Act began to run for the respondents when the management company was billed for the services provided (ultimately by the headlessee) by the underlessee. Any demand of the respondents for an appropriate service charge contribution made within 18 months of that date was not time-barred.
Whilst Burr clearly delineated between the arising of a liability to pay, and the incurring of a cost, here the UT went further. It distinguished between the service provided itself, the liability to pay for that service, and the incurring of the associated cost in respect of that service. The FTT’s error was in considering that the original service provided was inextricably linked to the incurring of the cost, and that once this cost had been incurred by one landlord it had in turn been incurred by all.
That conclusion did not hold up to scrutiny; costs are simply not incurred by inferior landlords unless and until they are billed by their immediate superior.
The result is that, where a chain of leasehold relationships can be infinitely long, occupational tenants are theoretically capable of being met with service charge bills for services provided decades prior, as long as each of the intermediate landlords properly billed its immediate tenant within 18 months of the receipt of its own bill. So much for the purpose underlying the 18-month rule.