Service charge deficits/surplus’ must be calculated within a reasonable time

My most recent blog looked at what is often called the “18 month rule” which disallows landlords from recovering service charge expenditure where it is demanded more than months after the expenditure was incurred. 

Most long residential leases require that tenants pay interim service charge contributions at various points during each service charge year followed by a balancing payment at a later date.  Interim payments are clearly made within that 18 month period.  Therefore, the 18 month rule generally affects demands for deficit / balancing payments once the accounts have been completed for the service charge year.  Landlords may avoid the consequences of this rule by notifying tenants of the estimated “worst case” situation within the 18 month period.  However, the leases themselves rarely prescribed a time limit on the calculation of these balancing charges.

A recent case before the Upper Tribunal (Land Chamber) confirmed that as well as being subject to the 18 month rule, that where the lease is silent as to the time for completing the accounts then the landlord must complete the accounts within a reasonable period.

The case was Redrow Homes (Midlands) Ltd v Hothi and others which was an appeal of an LVT decision.  The LVT had disallowed the landlord from recovering any service charges from the tenants for 2 years on the basis that it had failed to calculate the balancing payment within a reasonable time.  This was even though the tenants had paid their interim charges on account in each of the years in question.  The LVT had implied a term into the lease and then said that by breaching that term, the interim service charge demands were invalidated.

That seems to be to be a harsh punishment for the landlord, who through a pure procedural failing lost its right to recover the cost of providing the services that the tenants had received the benefit of.  Unsurprisingly, it was this decision that was appealed.

The Upper Tribunal overturned the LVT’s finding that nothing was due but accepted that there was an term that should be implied into the lease requiring that the balancing payment be calculated by the landlord within a reasonable time.  However, the consequence of the landlord failing to do this was not that all of the Tenant’s obligations to make payments of service charge in respect of that year disappeared. The remedies potentially open to the Tenants were either:

1. an action for damages; or

2. an action for specific performance or for an account; or 

3. an application to the LVT under the Landlord and Tenant Act 1985 for the determination of the service charges payable.

The 18 month rule was not discussed in this case, probably because even though it was 18 months after all of the 2007 and some of the 2008 expenses had been incurred the landlord had still not made its demand for any deficit charge and none was in fact likely to be due and the interim payments had been sufficient.  However, had a deficit charge been payable it is likely that the landlord would have been out of time for 2007 and possibly 2008 in any event.  Therefore, it still pays to ensure that the accounts are audited and any balancing payment invoiced within that time frame.


About leaseholdlawyer

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