The Court of Appeal has recently considered the correct interpretation of Section 20B of the Landlord and Tenant Act 1985, ‘the 18 month rule’, in the long-running saga between No. 1 West India Quay (Residential) Limited -v- East Tower Apartments Limited.

Background

The dispute concerns the residential parts of a 33-storey building in Canary Wharf. The twelve lower floors comprise a Marriott Hotel and 57 associated apartments. The twenty-one upper floors consist of 158 residential flats, a large number of which are let on 999-year underleases in substantially the same terms to East Tower Apartments Ltd, the leaseholder. The flats are then sub-let by East Tower Apartments Ltd to residential occupiers.

Our Legal Update from December 2019 (here) outlined the key facts and questions before the FTT. In essence, the litigation related to utility charges demanded by the landlord. Following an earlier Tribunal decision, the landlord re-allocated those charges as service charge costs, as distinct from a direct utility charge.

The leaseholder disputed that the costs were payable, as no service charge demand had been issued for those costs within 18 months of the costs being incurred, as required under Section 20B(1). The only demand issued was as a utility charge, and not as a service charge. The landlord sought to argue that there was no need to issue a demand, as the liability for those costs had already arisen under the lease and Section 20B(1) did not require a contractually valid demand to be issued. If it did, the landlord argued, earlier costs summarises sent with the various heads of cost allegedly encompassing the utility costs amounted to a Section 20B(2) notice, such that a later demand could be issued after the 18 month period.

The earlier decisions

The FTT disagreed and found that a demand for the purposes of Section 20B(1) is a contractually valid demand, relying upon the earlier decision in that Brent London Borough Council v Schulem B Association Ltd [2011] 1 WLR 3014. The FTT went on to decide that the landlord had not proven on the balance of probabilities that the costs summaries sent out to the leaseholders each year did in fact include the utilities previously demanded invalidly, such that there was no valid Section 20B(2) notice.

The landlord appealed to the Upper Tribunal (‘UT’) and in February 2020 the appeal was dismissed. The UT said that the purpose of Section 20B was to ensure that the leaseholder was not taken by surprise by an unexpected bill for works carried out in earlier years, citing the earlier case of Gilje v Charlegrove Securities Ltd [2003] EWHC 1284 (Ch) at [27], in which the Court had said :-

“the policy behind s.20B of the Act is that the tenant should not be faced with a bill for expenditure, of which he or she was not sufficiently warned to set aside provision. It is not directed at preventing the lessor from recovering any expenditure on matters, and to the extent, of which there was adequate prior notice.”

The costs were therefore found not payable, as they had not been demanded in accordance with the contractual machinery for services charges under the lease. The UT distinguished this position from that where the demand does not comply with conditions introduced by statute, such as Section 21B of the Landlord and Tenant Act 1985 (service charge demand to be accompanied by summary of rights and obligations) or Section 47 of the Landlord and Tenant Act 1987 (service charge demand to contain landlord’s name and address).

Of the £212,604.68 utilities charges demanded, this made total deductions of £166,084.88, leaving a total sum payable by the leaseholder of just £46,519.80.

The Upper Tribunal also considered the FTT’s finding that the landlord was not entitled to recover costs of Tribunal proceedings under the lease. The FTT had recorded that service charge demands issued in 2018 included sums totalling a little under £500,000 in respect of legal fees incurred over five years. The landlord sought to rely on the covenants in the lease which required leaseholder to pay the landlord’s costs incurred in contemplation of any proceedings under Sections 146 or 147 of the Law of Property Act 1925 (forfeiture), or arising out of some default on the part of the leaseholder. The UT did not consider that that was an accurate characterisation of the proceedings. Nor did the UT find that the service charge machinery assisted the landlord to recover the costs as a service charge expense, holding that the language in the lease was directed towards the provision of management services, not litigation.

The landlord appealed the decision.

The Court of Appeal decision

The Court of Appeal dismissed the appeal. It said that, even if the matter were free from authority (which it found it was, relying on the Brent London Borough Council v Schulem B Association Ltd case), it  would have little hesitation in concluding that a demand for the purposes of Section 20B(1) must be a contractually valid demand which is served in accordance with the service charge provisions of the relevant lease.

On the costs claim, the Court agreed with the leaseholder that the proceedings had begun by the leaseholder to establish the extent of overcharging by the landlord, who denied that its charges for utilities were excessive. Those proceedings had clearly established that, to a substantial extent, the leaseholder was right and the landlord wrong. In addition, there was no suggestion that the leaseholder had ever been unwilling or unable to pay what it properly owes, once that amount has finally been quantified. There had, therefore, been no "default" within the meaning of either of the relevant clauses in the lease. In short, the leaseholder could not sensibly be regarded as a party in default under the lease when it was the one that started proceedings to clarify the confusion and uncertainty surrounding the payment of utility charges, when it achieved a very substantial measure of success in those proceedings, and when its willingness to pay the correct amount, when ascertained and quantified, has never been in doubt.

Conclusion

The Court’s decision was clearly the right one, particularly bearing in mind the earlier authorities on Section 20B. However, it serves as a harsh reminder of the need for demands issued to comply with all contractual requirements in the lease, or risk irrecoverable charges which could be substantial in amount. Insofar as the Court of Appeal upheld the UT and the FTT’s decision on costs, this will of course always be a fact and lease specific issue in any given case, depending on when the lease will permit costs to be recoverable and whether those circumstances on the facts have the case have been met.

For more information, please contact a member of the team on 01435 897297 or info@kdllaw.com.

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