When it comes to providing services under a lease and recovering the cost through the service charge, timing matters!

Section 20B of the Landlord and Tenant Act 1985 imposes a strict time limit on the recovery of service charge expenditure. If it is overlooked, the consequences can be severe. A landlord may find itself unable to recover legitimate expenditure, leaving a substantial deficit that has to be funded elsewhere. For managing agents, any failure to demand charges in time could also expose them to claims from their client under the terms of their management agreement.

Time, in leasehold management, can be a cruel mistress.

The 18-Month Rule

Section 20B provides that a leaseholder is not liable to pay a service charge if the relevant costs were incurred more than 18 months before the demand is made.

The purpose of the provision is straightforward. Parliament considered it unfair for leaseholders to receive demands for historic expenditure years after the event, when they may have assumed that all liabilities had already been settled.

It therefore places the burden on landlords and managing agents to administer service charges efficiently and without unnecessary delay.

Does It Apply to Every Service Charge Demand?

Thankfully, no.

The decision in Gilje v Charlegrove Securities Ltd [2003] EWHC 1284 (Ch) confirmed that Section 20B does not prevent recovery of:

• payments on account demanded before expenditure is incurred; and
• expenditure which ultimately does not exceed those payments on account.

In other words, where leaseholders have already contributed sufficient funds in advance, Section 20B is unlikely to present any difficulty.

However, matters became more complicated following Skelton v DBS Homes (Kings Hill) Ltd [2017] EWCA Civ 1139.

The Court of Appeal confirmed that Section 20B can apply to demands for payments on account where the landlord is seeking to recover costs that had already been incurred more than 18 months before the demand was served.

The distinction between the two authorities is important.

In Gilje, the demand was made before the expenditure was incurred.

In Skelton, the expenditure had already been incurred long before the demand was issued.

The timing of the demand therefore becomes critical.

The Real Danger – Balancing Charges

In practice, the area where Section 20B most commonly causes problems is balancing charges.

Most service charge schemes operate by collecting estimated expenditure throughout the year before producing final accounts and issuing a balancing charge.

Where preparation of the accounts is delayed, perhaps because of disputes with contractors, incomplete information from accountants or management issues, it is surprisingly easy for more than 18 months to pass.

Once that happens, those historic costs may become irrecoverable unless the landlord has taken appropriate protective steps.

When Is a Cost “Incurred”?

This is one of the most important questions under Section 20B.

The leading authority is OM Property Management Ltd v Burr [2012] UKUT 2 (LC), where the Upper Tribunal indicated that expenditure is generally incurred when an invoice is received or payment becomes due, rather than when the works themselves are carried out.

Like many leasehold issues, there is no universal rule and each case will depend upon its particular facts.

Nevertheless, the practical lesson is a simple one:

Do not leave invoices sitting on desks.

Delays in processing invoices, approving certificates or finalising accounts can quickly erode the 18-month period before anyone realises there is a problem.

Where Problems Commonly Arise

The greatest difficulties tend to arise where matters do not proceed as planned.

Examples include:

• major works projects that continue for many months;
• prolonged disputes with contractors;
• delayed certification of accounts;
• management transitions between agents;
• complex accounting exercises; and
• ongoing litigation with leaseholders.

Debt recovery proceedings present a particularly awkward example.

Solicitors will often advise landlords not to issue fresh service charge demands whilst forfeiture proceedings remain under consideration, as doing so may inadvertently waive the right to forfeit.

That advice is frequently correct.

However, given the current state of the court system, a relatively straightforward service charge claim may take many months or even years to reach trial.

During that period, Section 20B continues to run.

Accordingly, landlords should always discuss the Section 20B implications with their solicitors before simply postponing future demands.

The Section 20B(2) Safety Net

Fortunately, Parliament recognised that final accounts cannot always be produced within 18 months.

Section 20B(2) therefore provides a valuable safeguard.

Provided a compliant notice is served within the 18-month period, the landlord preserves its right to recover the expenditure once the final amount is known.

The requirements were considered by the Court of Appeal in London Borough of Brent v Shulem B Association Ltd [2011] EWHC 1663 (Ch).

To be effective, the notice should make clear that:

• relevant costs have been incurred;
• if the precise amount is not yet known, a reasonable estimate may be provided (it is generally sensible to estimate on the higher side, provided the figure is reasonable); and
• those costs will be recoverable from the leaseholder as service charge under the terms of the lease.

A properly drafted Section 20B(2) notice can therefore prevent what would otherwise be a very expensive mistake.

Practical Tips

In our experience, Section 20B rarely causes difficulties where service charge administration follows its usual annual cycle.

Problems arise when something unusual occurs—and in property management, unusual situations have a habit of becoming daily occurrences.

Small delays can quickly snowball into significant financial exposure.

To minimise the risk:

• Use your case management system to diary key service charge deadlines. If your software cannot do this, Outlook reminders are far better than relying on memory.
• Ensure balancing charges are issued promptly after accounts are finalised.
• Keep invoices moving through the approval process without unnecessary delay.
• If solicitors are instructed on debt recovery or forfeiture matters, inform them whenever new service charge periods fall due so that Section 20B implications can be considered.
• Where delays are unavoidable, consider serving a compliant Section 20B(2) notice before the 18-month period expires.

Final Thoughts

Section 20B is one of those statutory provisions that is easy to overlook because it rarely causes difficulty, until it does.

When the leasehold machinery is operating smoothly, the 18-month time limit usually passes unnoticed. However, once projects become delayed, disputes arise or accounts fall behind, Section 20B can turn what appears to be a recoverable service charge into an irrecoverable loss.

Good diary management, robust accounting procedures and early legal advice remain the best protection.

If you have concerns about historic service charge demands, balancing charges or the use of Section 20B notices, our specialist leasehold team would be happy to assist.