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Is a housing association holding a head lease over a property restricted by section 20B in respect of the service charges it can charge to its under lessees if it receives the relevant invoices the superior landlord more than 18 months after the costs were incurred?

Reader’s E-mail:

Managing agent does not send the audited service charge accounts until 9-12 months after the year end. If there is a deficit are liable for any overspend if no section 20b was served. Are we allowed to pass over the deficit to our tenants. OM property v Burr (2013) Court of appeal decision.

Reply from Service Charge Dispute Guide

1. We understand the position of your organisation to be that of a housing association which holds a head lease over a property, and which has in turn granted under leases to individual residents, most likely through a shared ownership scheme.

2. Whether or not the sales have been granted through a shared ownership scheme is irrelevant, however, the extent of the housing association’s involvement in the actual management of the property is a key determinant in respect of the operation of the Section 20B rule in relation to the service charge invoices which you issue to the under lessees.

3. There are two basic types of management arrangements which tend to be in place in respect of housing associations which hold head leases depending on what it is they have actually leased:

Type i. Which normally applies where the housing association hold head leases over the individual properties within a building.

Or

Type ii. Which normally applies where the housing association holds a head lease over an entire building.

4. In a Type i. management arrangement the freeholder, or a management company in a tripartite lease, is the party which actively manages the building and directly incurs the costs. Given that your organisation is the recipient of audited service charge accounts we suspect that this type of management arrangement applies.

5. If a Type i. management arrangement is in fact in place then the section 20B rule applies to your organisation in two stages:

a) Firstly, in respect of your organisation’s liability to pay its landlord, the freeholder or a management company.

b) Then in turn, secondly in respect of the liability of the under leases to pay your organisation in response to the service charge invoices which it issues.

6. In respect of this first stage, and the effect of the Section 20B rule on the housing association’s liability to pay its landlord, you need look no further than the case law to which you referred to in your message: OM Property Management Ltd v Burr [2013] EWCA Civ 479.

7. If the actualised accounts are sent your organisation more than 18 months after the costs are incurred, then a claim for any sum in excess of any estimated amount previously demanded in respect of the same period are statute barred under Section 20B of the Landlord and Tenant Act 1985. Although you would need to think carefully about which point in time the overspend related to. If the accounts were issued 12 months after the previous service charge billing period then the section 20B restriction might only apply to amounts spent over and above the earlier estimated sums during the first six months of that period.

8. The position, however, is different in respect of the service charge invoices which your organisation will in turn issue to its under lessees. To understand the precise nature of that position helpful guidance is given in the case of Ground Rents (Regisport) Ltd v Dowlen [2014] UKUT 144 (LC).

i. In the Ground Rents (Regisport) Ltd case the question which the Upper Tribunal was asked to consider was whether the landlord (Ground Rents (Regisport) Ltd) was statute barred under section 20B from claiming from its leaseholders the cost of water bills as a service charge. An issue over the applicability of the section 20B rule arose because the water bills were issued several years prior (incorrectly) to the original developer who had long before sold the property to the current landlord. When these bills were finally passed onto the current landlord they attempted to bill those charges to the leaseholders, who promptly objected on the basis that the costs were incurred more than 18 months prior.

ii. The key question which the Upper Tribunal had to decide in this case, and this is central to your query, was whether the relevant 18 month period ran from the point when the developer received invoices from the water company, or when the landlord in turn received those invoices.

iii. The decision of the Upper Tribunal was, correctly in our opinion, that the 18 months ran from the point when the landlord (Ground Rents (Regisport) Ltd) received the invoices from the water company, albeit via the developer.

iv. The reasoning of the Upper Tribunal is summed up in the final sentence of paragraph 33 of the decision:

“it is the liability of the landlord for the time being which is material since only costs incurred by a person in the capacity of landlord may be included in the service charge.”

v. Applying this principle to the situation you describe, then so long as your organisation invoices its under lessees within 18 months of receiving its own service charge demands, in the form of audited accounts, then it is not statute barred under section 20B from demanding payment of any excess sums over and above those already invoiced on account to its under lessees.

vi. The 18 months runs the point the landlord incurs the costs and your housing association does not incur such costs until it receives a demand for payment from its own landlord or it pays such invoices, whichever occurs first.

9. From a legal perspective you should, however, be aware that this not necessarily the end of the story in respect of your organisation’s rights to demand payment of excess sums from their under lessees in such circumstances.

10. There may be other grounds upon which the under lessees might still successfully challenge their liability.

i. Firstly, the leases which your organisation has granted may include a requirement to scrutinise the invoices it receives from its landlord (and withhold payment if they are incorrect) and failure to take reasonable steps to do so may be a breach of such a covenant on the part of the housing association.

ii. Secondly, the under lessees may have grounds to argue that if the housing association makes payment of sums which are statute barred that this in turn would mean that the service charge which it as landlord invoices have not have been reasonably incurred for the purposes of section 19 (1) (a) of the Landlord and Tenant Act 1985.

a) We would not be in the slightest bit surprised if a First Tier Tribunal concluded that, as a point of law, a service charge was not reasonably incurred if the costs to which it relates arose as consequence of a landlord’s failure to challenge a liability which, under section 20B, was statute barred and therefore did not require payment.

b) The case of Continental Property Ventures v White [2007] L&TR 4 could be interpreted as implying that, as a point of law, a service charge is not reasonably incurred if the cost to which it relates could reasonably have been expected to have borne by a third party, in this case the superior landlord which was statute barred from passing on the costs to the housing association.

11. For these reasons, we suggest that best practice for your housing association would be dispute their liability for any sums which appear not to be due for payment (on the basis of section 20B or for any other reason). If the housing association simply pays without further comment then there is a real risk that they may be unable to do recharge those costs to their under lessees, either because of the terms of the individual leases, or because those costs would not be reasonably incurred.

Click on the link to read more Reader’s Questions and Answers on the 18 Month Rule (Section 20B)