The 18 Month Rule: When does the clock start running?

The 18 month rule can often be a headache for landlords and managing agents. Equally it is viewed by some residential tenants as a loophole for avoiding payment for services that they have enjoyed the benefit of but would rather not pay for.  In fact, the rule is there to encourage timely and proper accounting practices to be implemented by landlords in order to prevent tenants from receiving unpleasant and expensive service charge surprises for historic works and supplies.

The rule is contained in section 20B of the Landlord and Tenant Act 1985 which says:

“If any of the relevant costs taken into account in determining the amount of any service charge were incurred more than 18 months before a demand for payment of the service charge is served on the tenant, then (subject to subsection (2)), the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred”

One of the issues which arises out of this provision is when is a cost “incurred”.  This is obviously crucial to ascertaining when the 18 month clock starts ticking.  This was considering recently in the Upper Tribunal in the case of OM Property Management Ltd v Burr. 

The facts of this case were that a gas bill for the heating of a swimming pool in a block of flats (wish we all had one of those).  The managment company, OMPM had been given erroneous information by the builder about who to pay the gas charges to for a period of 6 years.  When this was discovered, the bill was recalculated and a new invoice issued showing a £100,000 shortfall dating back to 2001.

One of the leaseholders, Mr Burr contended in the LVT that it was too late for OMPM to claim this £100,000 shortfall from him as the gas bill had been incurred more than 18 months beforehand, effectively at the time of supply and not at the time of the eventual bill.  The LVT agreed with him but the Upper Tribunal did not, ruling that each and every case will turn on its own facts but in this case the liability for the gas was incurred upon presentation of the invoice for payment.  Crucially, this had happened within the 18 month period and Mr Burr would have to pay his share.

There are interesting implications for this principal, even though each case must be judged on its own facts.  For example, where a utility supply is invoiced on estimated use as opposed to actual use it can be many years before a reading is taken.  Where that results in a fresh demand for payment, the logic of this case is that the landlord can still recover as the invoice has been demanded in time, even if the supply itself pre-dates the 18 month period. 

The legislation is there to encourage landlords to act responsibly and the punishment for not doing so is that they cannot recover certain expenditure.  The Upper Tribunal seems to have taken a sensible approach to this issue but I suspect it may not have been so sympathetic had the error in the charging sat with OMPM and not with the original builder.

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