Service Charges: Regulation of residential service charges under long leases & impact of the ’18-month rule’ (No.1 West India Quay (Residential) Limited v East Tower Apartments Limited – 2020)

Where a landlord employed subcontractors to read electricity meters and manage billing processes for electricity at a residential block, was the landlord entitled under the terms of the lease to recover the costs of such subcontractor from leaseholders by way of surcharge on electricity costs?

The background

In No.1 West India Quay (Residential) Limited v East Tower Apartments Limited [2020], the landlord owned a block comprising a hotel with residential flats above. The respondent was the long leaseholder of around 30 flats in the building. The landlord covenanted under the leases to provide electricity to the building, and was entitled to recover its costs of supplying services to the building by way of service charge.

The landlord employed subcontractors to read electricity meters at the premises and to manage the billing of electricity to individual leaseholders. The landlord sought to recover the costs of the subcontractor as a surcharge on the electricity costs. At First-tier Tribunal, the Court found in favour of the landlord but on appeal to the Upper Tribunal, that decision was reversed as the Court concluded that the costs could not be recovered in such a way, limiting recovery only by way of service charge.

The leaseholder brought further proceedings in the First-tier Tribunal, arguing that demands were invalid as a result of having been charged for by way of surcharge rather than service charge, and as more than 18 months after the costs were incurred, the demands did not therefore qualify as valid demands to satisfy s.20B(1) of the Landlord and Tenant Act 1985. The First-tier Tribunal agreed, finding in favour of the leaseholder. The landlord appealed.

The decision

The Upper Tribunal dismissed the appeal, finding in favour of the leaseholder. S.20B served to protect leaseholders from the service of demands for works carried out much earlier.

The Court followed the direction of the case of Skelton v DBS Homes (Kings Hill) Ltd [2017], which held that demands must be contractually valid in order to become payable. In this case, the demands were not contractually valid and could not therefore be validly served under s.20B.

Advice and action for landlords

This long-running service charge dispute may well continue to a higher Court if the landlord appeals.

Under the current decision, landlords must exercise caution when making demands for costs incurred to ensure that they are demanded correctly as service charges, rather than surcharges or by other means.