22 July 2011

Timing in recovery position cannot be overestimated

The Message: Sometimes, the law is both unclear and unfair

The Case The High Court has strictly applied the statutory legislation on the 18-month time limit for recovering residential service charges, despite the unfair consequences for landlords (London Borough of Brent v Shulem B Association, 29.06.11).

Brent owns five blocks of flats in Willesden, north-west London, and Shulem is the tenant under long leases of 15 flats within the blocks. The leases require the tenants to pay a service charge to cover all repairs and other expenses of maintaining the blocks.

In 2003 Brent decided that extensive repair works were required. Estimates were obtained and the statutory consultation procedure with tenants was followed. In March 2004, tenants were informed of the proposed works and given a breakdown of likely costs of around £19,000/flat.

The service charge terms in the leases were somewhat antiquated in that there was no provision for advance payments. They only required tenants to pay retrospectively for expenses incurred.

Works began in 2004 and were completed by April 2005 at a cost of £640,000. On 23 February 2006 Brent invoiced tenants for their proportions of the costs based on estimates, as the actual costs had not yet been calculated. It was not until December 2006 that tenants were told of final costs and liabilities.

Under section 20b of the Landlord and Tenant Act 1985, residential service charge expenses are irrecoverable if they are not demanded or tenants notified of their liability within 18 months. This is so tenants can budget accordingly. Shulem argued it was not liable, as there had been no demand for – or notification of – the actual costs until 20 months after the expenses were incurred.

Brent argued that its February 2006 invoice was a section 20b demand or notification. However, the judge held it could not have been a demand, as the lease liability was for actual expenditure, and the invoices were based on estimated expenditure.

The case therefore turned on whether the February 2006 invoice was a written notification under section 20b of the expenses incurred and the tenant’s liability. Surprisingly, there is no clear case law on this, so the judge – a leading landlord and tenant expert – had to decide this issue entirely on his own views.

His views were that section 20b only relates to actual costs incurred by the landlord. Its purpose is not simply to tell tenants works have been done and that they will have to contribute in due course.

It is to let them know the actual costs to which they must contribute. He considered that, where there was uncertainty on the actual costs – such as where the costs were disputed with the builder – a landlord should notify the tenants of a figure it considers will not be exceeded and can then recover on that basis or, if the actual costs are less, the lower final figure.

The judge noted that the 18-month period was relatively short and that there was no power to extend it. Notwithstanding that the consequences of non-compliance are very severe, as the landlord loses the right to recover all the costs, despite the tenants benefiting from the works, the judge held that Brent had failed to comply with section 20b, so Shulem did not have to pay anything.

The judge did query the purpose of section 20b, as the consultation process ensures tenants are alerted to the likely costs of works. One suggestion was that it was intended to avoid delays and allow for leases to change hands without outstanding and unknown liabilities.

Whatever its purpose, section 20b has become a serious trap for landlords and managing agents have to ensure that demands or notifications are now given in the correct way.

Summing up: Brent v Shulem

  • Brent invoiced tenants for work on the flats two months after it was meant to.
  • It said an estimated invoice sent earlier should count as written notification.
  • The judge disagreed.  He said the notification must be actual costs, not an estimate.

 

First seen in Property Week, 22 July 2011.

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