UPPER TRIBUNAL (LANDS CHAMBER)

	
UT Neutral citation number: [2012] UKUT 0420 (LC)
UTLC Case Number: LRX/24/2012

	TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007

LANDLORD AND TENANT – service charges – date on which costs incurred for the purpose of section 20B, Landlord and Tenant Act 1985 – electricity charges not billed by supplier for five years – relevant costs not “incurred” until invoice delivered or paid – lessee liable to pay - appeal allowed  

	IN THE MATTER OF AN APPEAL AGAINST A DECISION
OF A LEASEHOLD VALUATION TRIBUNAL FOR THE
SOUTHERN RENT ASSESSMENT PANEL

BETWEEN
                                          WENGHOLD LIMITED                                Applicant
and
                                        GEORGE STEPHEN EGLETON                     Respondent

Re:	16 Brockenhurst Court
		Hillcroft Close
		Lymington
		S041 9BA

Before: Martin Rodger QC, Deputy President

Decision on written representations

© CROWN COPYRIGHT 2013

The following cases are referred to in this decision:

Brent LBC v Shulem B Association Ltd [2011] 1 WLR 3014
Jean-Paul v The Mayor and Burgesses of the London Borough of Southwark [2011] UKUT 178 (LC)
OM Property Management Ltd v Burr [2012] UKUT 2 (LC) 
OM Property Management Ltd v Burr [2013] EWCA Civ 479

DECISION
Introduction

1.	This appeal once again raises the important question of when relevant costs are to be taken to have been “incurred” for the purpose of the time limit on the recovery of service charges from tenants imposed by section 20B of the Landlord and Tenant Act 1985 (“the 1985 Act”).
2.	The appeal is against a decision of the Leasehold Valuation Tribunal for the Southern Rent Assessment Panel (“the LVT”) given on 20 December 2011.  Mr George S. Egleton, the lessee of Flat 16 Brockenhurst Court at Hillcroft Close in Lymington, Hampshire (“the Property”) had applied to the LVT under section 27A of the 1985 Act to determine the service charge he was liable to pay to his landlord (the appellant) for electricity used in lighting the common parts of his building in the period from 2004 to 2009.  By an oversight, the appellant’s managing agents did not receive invoices from the supplier of that electricity for almost all of the first five years of the building’s occupation.  The LVT decided that only the costs of electricity supplied in the 18 months ending on 16 September 2010 were payable by the lessees, and that the appellant was prevented from recovering charges for the period before 16 March 2009 by section 20B of the 1985 Act. The basis of that decision was that the relevant costs had been incurred more than 18 months before the lessees had been notified of them by the appellant’s managing agents.
3.	The appeal was brought with the permission of the President granted on 4 May 2012 on the grounds that the LVT’s conclusion was inconsistent with this Tribunal’s decision in OM Property Management Ltd v Burr [2012] UKUT 2 (LC), a case on rather similar facts decided a few weeks after the LVT’s decision.  Since the grant of permission to appeal, the Tribunal’s decision in that case has been upheld by the Court of Appeal in OM Property Management Ltd v Burr [2013] EWCA Civ 479.  This appeal was stayed to await the decision of the Court of Appeal and now comes before me for determination on the basis of written representations.
4.	Mr Egleton, the original applicant before the LVT, has chosen not to participate in the appeal.  Submissions have been made on behalf of the appellant in a statement of case settled by Mr Justin Bates of Counsel.
The relevant statutory provision
5.	Sections 18, 19 (in part) and 20B of the 1985 Act are relevant to this appeal and provide as follows:

"18 Meaning of "service charge" and "relevant costs"
(1) In the following provisions of this Act "service charge" means an amount payable by a tenant of a dwelling as part of or in addition to the rent— (a) which is payable, directly or indirectly, for services, repairs, maintenance, improvements or insurance or the landlord's costs of management, and 
(b) the whole or part of which varies or may vary according to the relevant costs.
(2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable.
(3) For this purpose—
(a) "costs" includes overheads, and
(b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period.
19 Limitation of service charges: reasonableness
(1) Relevant costs shall be taken into account in determining the amount of a service charge payable for a period—
(a) only to the extent that they are reasonably incurred, and
(b) where they are incurred on the provision of services or the carrying out of works, only if the services or works are of a reasonable standard;
and the amount payable shall be limited accordingly.
(2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise.
20B Limitation of service charges: time limit on making demands
(1) If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge is served on the tenant, then (subject to subsection (2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.
(2) Subsection (1) shall not apply if, within the period of 18 months beginning with the date when the relevant costs in question were incurred, the tenant was notified in writing that those costs had been incurred and that he would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge."

The relevant facts
6.	These were not significantly in dispute before the LVT and I take the following summary as the basis of my decision.
7.	The Property is one of fourteen flats in a block which is itself one of five similar blocks on a small estate completed by Barratt Homes Ltd in 2004.  Under a lease of the Property granted by Barratt Homes to Mr Egleton on 30 April 2004, which I take to be in standard form, the lessor covenanted to provide certain services, including lighting the common areas of the building, for which the lessee was to pay through an annual service charge.  The lessee’s contribution to the costs of services provided to the building (as opposed to those provided to the estate as a whole) is 6.62%.
8.	The internal common areas of the building comprise two separate staircases, each of which is served by a separate electricity supply with its own meter located in a storage cupboard on the ground floor.  Each of the blocks on the estate is arranged in a similar manner so that in total there are ten meters for which ten separate bills should have been provided by EDF Energy which supplied electricity to the estate.  
9.	The appellant acquired the freehold interest in the building in October 2005 and appointed agents to manage it on its behalf.  For reasons which are not apparent from the LVT’s decision, the appellant’s agents did not initially receive any bill for electricity supplied through one of the two meters in Mr Egleton’s building.  There is a suggestion that bills for that meter was sent to an incorrect address, but in any event it was not until 7 October 2009 that invoices were sent to the appellant’s agents for electricity supplied through the relevant meter from 17 October 2004 to 13 July 2009.  The invoices totalled £9,362.28 which the agents promptly arranged to be paid on 14 October 2009.
10.	The payment fell in the service charge year which ended on 31 March 2010, the annual accounts for which were not certified until July of the following year.  On 16 September 2010, before the accounts were prepared, the managing agents wrote to all of the lessees in the building giving notice under section 20B(2) of the 1985 Act that expenditure on the historic electricity charges had been incurred and warning that the lessees would be required to contribute towards it through the service charge.
11.	At 6.62% Mr Egleton’s proportion of the historic electricity charges came to £619.78 and that sum was duly included as part of a total end of year adjustment of £915.01 demanded of him.  On 8 August 2011 Mr Egleton applied to the LVT for a determination of his liability to pay the disputed charge.

The LVT’s decision
12.	The LVT first decided that the agent’s letter of 16 September 2010 was a valid notice for the purpose of section 20B(2) of the 1985 Act with the result that any part of the historic electricity charges incurred within 18 months of that date was recoverable.  It then went on to consider how much of the total charge of £9,362.28 had been incurred within that period.
13.	The LVT decided that the reference in section 20B(2) to “the date when the relevant costs were incurred” did not mean the date on which a demand for payment was received, but rather meant the date on which the service to which the cost related was supplied.  It was at that point that the liability to pay was incurred and they took that to be the natural meaning of the expression “costs incurred”.  They thought that there would be no particular need for section 20B(2) if costs were only incurred when they became payable, and they found support for their preferred interpretation in some words of Morgan J in Brent LBC v Shulem B Association Ltd [2011] 1 WLR 3014 in which (at paragraph 58) he had “considered what a lessor should do if it knows that it has incurred costs but is unable to state with precision what the amount of those costs was”.   Morgan J’s observations were taken by the LVT as freeing it from its duty to follow the decision of the President of the Tribunal, Mr George Bartlett QC in Jean-Paul v The Mayor and Burgesses of the London Borough of Southwark [2011] UKUT 178 (LC) in which he found a clear distinction between incurring a liability (i.e. an obligation to pay) and incurring costs, and interpreted section 20B as meaning that costs were only “incurred” when payment was made. The LVT concluded that the effect of section 20B(1) of the 1985 lessee was that Mr Egleton was not liable to pay so much of the charges as related to electricity supplied before 16 March 2009.  
OM Property Management Ltd v Burr
14.	The original basis of the appeal was that the LVT’s decision has been shown to be wrong by the decision of the Tribunal (His Honour Judge Mole QC) in OM Property Management Ltd v Burr.  Since the appeal was launched that decision has itself been the subject of an appeal to the Court of Appeal, where it was upheld.  
15.	The facts of OM Property Management v Burr were quite simple.  A new development of leasehold flats was served by a swimming pool the water for which was heated by gas.  The management company which ran the services at the development (“OMP”) understood incorrectly that gas for the swimming pool was supplied by EDF Energy, which supplied gas to the development for all other purposes.  In fact the gas for the swimming pool was supplied by Total Gas and Power, but due to an oversight it had omitted to present any bill for the period December 2000 to November 2007.  When Total eventually delivered a bill it totalled more than £135,000 which was reduced by negotiation and set off to a little over £100,000.  That sum was included in service charges for the year ended 30 April 2008 which were demanded by OMP from the lessees, including Mr Burr, in October 2008.  

16.	Mr Burr challenged his liability to pay on the grounds of negligence on the part of OMP; he also relied on section 20B of the 1985 Act and that part of the dispute was considered by a leasehold valuation tribunal.  The tribunal found in favour of Mr Burr and decided that, for the purpose of section 20B, the relevant costs were incurred when the gas was supplied and not when the invoice was first delivered many years later.  
17.	The tribunal’s decision was reversed by His Honour Judge Mole QC, whose reasoning and conclusions were subsequently approved by the Court of Appeal. The judgment of the Master of the Rolls, with which Lord Justice Elias and Lord Justice Patten agreed, now provides a definitive interpretation of section 20B of the 1985 Act.
18.	The Master of the Rolls did not find it necessary to decide whether costs are incurred on the presentation of an invoice (or other demand for payment) or on payment itself.  In paragraphs 11 to 14 of his judgment he gave three reasons for his conclusion that costs are not “incurred” within the meaning of sections 18, 19 and 20B on the mere provision of service or supplies to a landlord or management company:
“11.First, as a matter of ordinary language, there is an obvious difference between a liability to pay and the incurring of costs. I accept the submission of Mr Arden QC that, as a matter of ordinary language, a liability must crystallise before it becomes a cost. 
12.	Secondly, the difference between a liability to pay and the incurring of costs is recognised by the draftsman in section 20B(1) itself. Where he wishes to refer to a liability, he does so: note the words "the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred." It is significant that the phrase "relevant costs" is defined in section 18(2) as "the costs or estimated costs incurred or to be incurred". It is not defined as "the liability or estimated liability for costs”. Similarly, section 20B(1) does not say "if any liability for any of the relevant costs is incurred more than 18 months before a demand for payment of the service charge is served on the tenant, then (subject to subsection (2)), the tenant shall not be liable to pay so much of the service charge as reflects that liability so incurred." 
13.	Thirdly, section 19(2) provides strong support for the view that costs are incurred only when they are paid (or when an invoice or other demand for payment is submitted by the supplier or service provider) and not when services are provided or supplies are made. The subsection draws a distinction between (i) what is to happen before the relevant costs are incurred and (ii) what is to happen after they have been incurred. Section 20B deals with (ii). The significance of section 19(2) in relation to relevant costs that have been incurred is that it provides in relation to such costs that any necessary adjustment to the service charge shall be made by "repayment, reduction or subsequent charges or otherwise". Such an adjustment of the service charge to reflect the costs that have been incurred can only be made after the amount of the costs has been ascertained (usually by the submission of an invoice or other demand for payment). In other words, the incurring of costs entails the existence of an ascertained or ascertainable sum which is capable of being adjusted by repayment, reduction etc. The mere provision of services or supplies does not without more entail anything which is capable of being adjusted in this way. 
14.	On the other hand, as section 19(2) makes clear, there is a different regime in relation to estimated costs before they are incurred. The landlord or management company is entitled to reflect reasonable estimated costs in the service charge and the statute makes no provision for adjustment of estimated costs.” 
19.	The Master of the Rolls also considered a point which had found force with the LVT in this case, namely why was section 20B(2) necessary at all if costs are only incurred when an invoice is rendered or payment made?  He was persuaded by the suggestion that the sub-section caters for situations such as where there are problems of allocating costs between tenants or where an invoice is disputed.
Conclusion
20.	 The appellant is clearly correct in arguing that the LVT’s decision is inconsistent with the reasoning of the Court of Appeal in OM Property Management Ltd v Burr.  In this case the charges for electricity supplied between 2004 and 2009 were not incurred, for the purpose of section 20B, until 7 October 2009 at the earliest since it was on that date that EDF first delivered its invoices to the appellant’s managing agents.
21.	In view of the decision of the Court of Appeal the discussion of section 20B by Morgan J in Brent LBC v Shulem B Association Ltd (on which reliance was placed by the LVT) is no obstacle to the conclusion that the appeal must be allowed.  Tying up that loose end, however, and in agreement with Judge Mole QC, I would add that it is clear that in that case the precise date on which the relevant costs were incurred did not matter. Morgan J’s observations were part of his characteristically exhaustive consideration of the issues but they were not directed to a case of wholly unanticipated costs and did not form part of the reasoning essential to his conclusion.     
Disposal
22.	The appeal is allowed.  The relevant costs which fall to be taken into account in calculating the service charges payable under the lease of the Property for the year ending 31 March 2010 include the whole of the sum of £9,362.28 paid on 14 October 2009.  
23.	Finally, the LVT made an order under section 20C of the 1985 Act that no part of the appellant’s costs of the proceedings before it were to be regarded as relevant costs to be taken into account in determining the amount of the service charge payable by Mr Egleton.  There has been no application for permission to appeal against that order and it therefore remains undisturbed by this decision.  On the other hand, there has been no application for an order under section 20C in relation to costs incurred in the appeal.  Those costs may therefore be treated as relevant costs if the terms of the estate leases so permit (as to which I express no view).  

Dated: 4 September 2013

Martin Rodger QC
Deputy President