Leasehold conveyancing - When are service charge costs incurred?

Earlier this month Court of Appeal handed down its judgment in OM Property Management Limited v Burr ([2013] EWCA Civ 479) on an appeal from a decision of the Upper Tribunal (Lands Chamber) dated 26th January 2012.

At the heart of the appeal was the consideration as at what point in time service charge costs are incurred under Section 20B of the Landlord and Tenant Act 1985.

Section 20B of the said Act provides that service charges are not recoverable if the landlord does not demand payment, or notify the leaseholder that a payment will be due, within 18 months of the service charge costs being incurred.

Mr Burr owned a flat on the Royal Eastwood Park in Redhill. Royal Eastwood Park is a substantial estate, with communal facilities which include a leisure center and swimming pool, the latter heated by gas. OM Property Management Ltd, the management company, recovered the cost of the gas through the service charge.

When OM began managing the estate in April 2001, the developer told it that the gas for heating the pool was supplied by EDF Energy. Gas bills were duly received from EDF and paid. However, in November 2007, Total Gas and Power informed OM that it, not EDF, had been supplying the gas to the development. Worse, a gas meter had been misread and EDF had been undercharging. Total demanded the balance, which amounted to £135,337.28. This sum was later reduced to £100,289.28.

Proceedings were issued against Mr Burr in the county court and transferred to the Leasehold Valuation Tribunal (LVT). The LVT took the view that the costs were “incurred “when the gas was supplied and as the demand for payment was made more than 18 months after this date the charge was not recoverable from Mr Burr. OM appealed to the Upper Tribunal (Lands Chamber).

The Upper Tribunal found in favour of OM. In their opinion costs were not incurred when the gas was supplied but on the presentation of an invoice or on payment.

The Upper Tribunal made clear that the question of when costs were incurred depends on the facts of the particular case. For example where payment of an invoice had been delayed the question as to when the cost was actually incurred might be different depending on the circumstances. It might be relevant to decide whether payment had been delayed as there was a justified dispute over the amount of the invoice or whether delay was a mere evasion or device of some kind.

As the invoice had been sent to OM in November 2007 and the demand sent to Mr Burr in April 2008 the requirements of Section 20B had been met and the service charge was payable.

The leaseholder appealed to the Court of Appeal who upheld the decision of the Upper Tribunal.

The court accepted that as a matter of ordinary language a liability must crystallise before it becomes a cost and 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.