OM Property Management Ltd v Burr [2013] EWCA Civ 479

The LVT found in favour of Mr Burr, holding that the costs of supplying gas had been “incurred” for the purposes of section 20B of the 1985 Act when gas was supplied.

OM Property Management  appealed to the Upper Tribunal (Lands Chamber), on the ground that costs were not “incurred” for the purposes of section 20B until those costs were actually paid or at least until an invoice was received.

The Upper Tribunal (Lands Chamber) allowed the appeal.

Mr Burr appealed to the Court of Appeal.

Mr Burr argued that:

• Through section 20B, Parliament intended to protect tenants from stale demands and from demands for expenditure where they have not had sufficient warning to set aside funds to pay for that expenditure;
• The intention of Parliament would be defeated if costs were incurred when an invoice was rendered or payment made, and so
• If that intention were not upheld, there would be no limit to the time that might elapse between the date when a service is provided to a landlord/management company and the date when a tenant may be called upon to pay by way of service charge.

The Master of the Rolls did not let Mr Burr down gently. He began his discussion of the merits of the appeal by saying: “I am in no doubt that the Upper Tribunal reached the right decision”.

He gave three reasons for his decision:

First, as a matter of ordinary language, there is an obvious difference between a liability to pay and the incurring of costs.

Secondly, the wording of s.20B(1) recognises the difference between a liability to pay and the incurring of costs because it uses both phrases in the same sentence: “the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.”

Thirdly, section 19(2) draws a distinction between (i) what is to happen before the relevant costs are incurred and (ii) what is to happen after they have been incurred. It reads:

“(2) Where a service charge is payable before the relevant costs are incurred, no greater amount than is reasonable is so payable, and after the relevant costs have been incurred any necessary adjustment shall be made by repayment, reduction or subsequent charges or otherwise”.

The significance therefore of section 19(2) is that, before costs are incurred, a reasonable amount – normally based on a budget – is payable, whereas after costs are incurred, that reasonable amount must be adjusted by “repayment, reduction or subsequent charges or otherwise”.

Noting that the adjustment envisaged can only be made after the amount of the costs has been ascertained, usually by the submission of an invoice or other demand for payment, the Master of the Rolls held that: “… costs are not “incurred” within the meaning of section 18, 19 and 20B on the mere provision of services or supplies to the landlord or management company. Like the Upper Tribunal, I do not find it necessary to decide whether costs are incurred on the presentation of an invoice (or other demand for payment) or on payment”.

Looking at the wider picture, the Master of the Rolls agreed that section 20B was enacted in order to protect tenants from stale claims, but he continued: “this merely prompts the question: what is the extent of that protection? The only way to determine the extent of the protection afforded by section 20B(1) is to decide what “costs incurred” means.

“On the conclusion that I have reached, the tenant enjoys the protection that, subject to section 20B(2), he is not liable to pay so much of a service charge as reflects costs incurred more than 18 months after an invoice is presented or payment is made by the landlord/management company. It is true that this provides less protection than if the tenant is not liable to pay so much of a service charge as reflects costs incurred more than 18 months after the service is provided or supply made”.

Once the costs are ascertained, why should the lessor/management company wish to notify the tenant that the costs have been ascertained and that he will subsequently be required to contribute to them by payment of a service charge?

In response to the implicit suggestion that his construction of “incurred” rendered s.20B(2) otiose, the Master of the Rolls referred to the managing agent’s submission that s.20B(2) caters for situations where, for example, there are problems of allocating costs as between tenants or where an invoice is disputed. He described that submission however as persuasive rather than conclusive, although any doubts that he had about it were insufficient to change the outcome of the appeal.

He concluded: “It should be noted that most modern leases give the landlord/management company the right to require the tenant to pay a service charge in respect of estimated costs to be incurred. It follows that the practical relevance of section 20B may be somewhat limited. But for the reasons that I have given, the Upper Tribunal reached the right decision and I would dismiss this appeal”.

I am with the Master of the Rolls on the outcome of this appeal. It is quite a relief to find that I am not at odds with all of the senior judiciary.

Of the three reasons given for upholding HHJ Mole QC’s reasoning in the Lands Chamber, I find the third, the s.19(2) argument, most compelling. It would be quite a challenge for a landlord to make adjustments to or reimburse lessees for the cost of a service if that cost has not been quantified: utility and other unit-by-unit services are prime examples.

The question that the Court of Appeal did not answer was whether s.20B was intended to protect lessees from demands for expenditure where they have not had sufficient warning to set aside funds to pay for that expenditure.

It seems to me that s.20B does not have that aim. Once a demand is made, it is normally payable within twenty eight days or so. That is the case, whether it is made five months or five years after the service is supplied. The focus of s.20B is not therefore the amount of money that the lessee will be asked to pay: it is the amount of time which is allowed to pass before that lessee is notified of an obligation to pay.

One final thought: in this world where flats change hands regularly, the consequence of this judgment is that it may be difficult for conveyancers to quantify for their client purchasers the cost of services which have been provided over the past (probably) six years, and for which a service charge is payable. Purchasers may be well advised to make provision for this in the sale contract.