In a large residential complex a large bill for the supply of water to three blocks of flats, builds up, but relates to water supplied to the three blocks between June 2005 and April 2011.
A recent case about this considerably increases the scope for landlords to reopen service charges for costs which, regardless of semantics, relate to many years past and predecessors under leases.
In the Upper Tribunal (Lands Chamber) case of Ground Rents (Regisport) Ltd v Dowlen & Ors  Abbey Mills was a modern development of purpose built flats comprising Vista House (69 flats), Prospect House (55 flats) and Independence House (40 flats) making 164 flats in total.
For many years Thames Water Utilities Ltd had delivered invoices for water consumed at two of the buildings to the original developer while the appellant, which acquired the freehold of Abbey Mills on 1 October 2006, received invoices only for the third building.
In the mistaken belief that the invoices they received related to all three buildings, the appellant’s managing agents, apportioned those sums and collected them through the service charges payable by all 164 leaseholders of flats at Abbey Mills.
The developer had not paid the invoices for the other two buildings, nor did it pass them on to the appellant.
Both the appellant and the individual leaseholders believed that all of the sums due from them in respect of water had been paid.
The mistake was eventually discovered in 2010 and since then Thames Water had sought to recover the arrears from the developer and from the appellant, which in turn had sought to pass them on in full to its 164 leaseholders.
The Leasehold Valuation Tribunal for the London Rent Assessment Panel (“the LVT”) decided that the leaseholders were not liable to contribute to the historic water bill through their service charge to the extent that the water invoices had first been raised before 30 January 2009.
The LVT reached that decision because the appellant had first included the arrears of water charges in the service charges demanded in June 2010, and section 20B(1) of the Landlord and Tenant Act 1985 (“the 1985 Act”) said that if any of the relevant costs taken into account in deciding the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge was served on the tenant, then (subject to sub-section (2)), the tenant should not be liable to pay the service charge to the extent that the costs incurred were that historical.
Many of the original leaseholders who had owned the flats between 2005 and 2010 had sold them. So in many cases the current leaseholders were now being faced with additional charges for water which had not been supplied to them but to their predecessors.
When the appellant appealed from the decision of the LVT to the Upper Tribunal (Lands Chamber) it identified the main issues as:
1. Whether the fourth schedule of the leases permitted the appellant to charge leaseholders for water supplied during a service charge year for which accounts had already been finalised, demands had been issued and payments had been made in full by the leaseholders;
2. Whether, assuming such a charge was permitted by the parties’ lease contract, the leaseholders were entitled to rely on section 20B as a defence against their liability to pay part of those charges.
Paragraph 4 of the fourth schedule of the leases provided for the calculation of a service charge adjustment after each service charge year end.
Paragraph 5 of the fourth schedule was also significant, and provided that (subject to paragraph 3.3 of the Schedule) a certificate signed by the Lessor purporting to show the amount of the service charge adjustment should be conclusive of such amount save as regards manifest errors.
In this case the Tribunal ruled that a certificate given by the appellant purporting to record expenditure on water and sewage charges for the year ending 30 June 2010 might be conclusive of the amounts actually expended in that year (save as regards manifest errors), but that would not prevent the inclusion in a certificate for a future year of expenditure in that future year which related to the water supplied in a previous year or years.
This was because the service charge adjustment to be determined under paragraph 4 and certified under paragraph 5 was the amount by which the estimate of expenditure likely to be incurred in a particular service charge year fell short “of the actual expenditure in the service charge year” in question.
Here before June 2010 there was no “actual expenditure” on the supply of water to Prospect House and Independence House.
Where successive landlords were liable for the same costs, it was the liability of the landlord for the time being which was relevant, since only costs incurred by a person in the capacity of landlord could be included in the service charge.
Neither the appellant nor its predecessor landlords had had a liability to pay for water under Section 142 of the Water Industry Act 1991 until a demand had been received by them. So the appellant had no existing liability to make a payment for the water supplied to Prospect House or Independence House until at least April 2010.
So for the purposes of section 20B no relevant cost was incurred by the appellant for water supplied to Prospect House and Independence House, until it received the first demands for payment in April and June 2010.
As a result, when calculating and certifying the service charge adjustment for the year ending 30 June 2011 and for subsequent years, pararaph 5 of the fourth schedule of the leases did not preclude the appellant from including expenditure, actually incurred in those years, in discharging any liability which the appellant could be shown to have in April and June 2010 when it began to receive demands, in its own right, albeit for water supplied in the period from 1 October 2006 up to then.
This was because paragraph 5 only precluded such service charge demands in relation to historic liabilities incurred, and though the water and its recipients were historic, the liabilities for it were only “incurred” by Thames Water serving the relevant water demands on the appellant in April and June 2010. Though these were only belatedly served on the correct recipient, the appellant’s service charge demands seeking to recoup those extra costs from its 164 tenants were served well within the 18 month period, allowed under section 20B(1) of the 1985 Act, from that liability being incurred.
This blog is posted as a matter of general interest. It does not remove the need to get bespoke legal advice in individual cases.