Service Charges – When is a cost incurred?
Section 20B of the Landlord & Tenant Act 1985 states that unless a tenant is notified in writing that they will have to contribute to costs incurred more than 18 months prior to a service charge demand, they will not be liable for any such costs. In the recent case of OM Property Management Limited (“OMP”) v Burr 2013 the Court of Appeal was asked to decide when a cost is ‘incurred’ for the purpose of this section. The court held (to the relief of landlords and the disappointment of tenants) that under s.20B a cost is incurred when an invoice is presented or on payment not when a supply is made or a service provided.
This case arose after Mr Burr was asked to contribute £194.49 as part of his 2008 service charge for the supply of gas to a communal swimming pool in the housing development in which he lived. This was his share of a bill presented to OMP in November 2007 by Total Gas & Power Limited for the supply of gas during the period of December 2000 to November 2007.
OMP had been under the impression that the gas supply to the swimming pool was made by EDF Energy and for several years received invoices from and paid EDF with the service charge contributions made by the tenants. Following negotiations between OMP, Total and EDF wrongly paid monies were returned and some charges were reduced. However, there was still an outstanding balance for gas supplied for the swimming pool of £100,289.28.
Mr Burr objected to his contribution and initially issued proceedings in the County Court alleging that, but for OMP’s negligence, most of the additional charges for gas would have been paid by the previous leaseholder of the flat (Mr Burr had only moved into the property in 2006). He also argued that the aim of s.20B was to protect tenants from demands for expenditure of which they are not sufficiently warned and as a supplier or service provider may delay years before requiring payment by a landlord or a management company, costs must be said to be incurred when services are provided or supplies made, not when they are invoiced or paid for.
OMP argued that as a matter of ordinary language, a liability must crystallise before it becomes a cost and that looking at the legislation itself, there is a clear difference between the liability to pay and the incurring of a cost. They argued that when a supply is made or a service provided a liability is incurred but it was not until the point at which the landlord or management company paid for or were invoiced for a supply or service, that a cost was incurred.
Proceedings were transferred to the Leasehold Valuation Tribunal (LVT), who held that costs had been incurred for the purposes of s.20B of the 1985 Act when the gas was supplied. This decision was appealed by OMP. The Upper Tribunal (Lands Chamber) disagreed with the LVT and this decision was appealed by Mr Burr.
The Court of Appeal agreed with the decision of the Upper Tribunal accepting the submissions of the Counsel for OMP that a liability must crystallise before it becomes a cost and that the difference between the liability to pay and the incurring of a cost is recognised in the wording of the 1985 Act.
Please follow the link below to read the whole judgement https://www.bailii.org/ew/cases/EWCA/Civ/2013/479.html