Wenghold Ltd v George Stephen Egleton [2012] UKUT 0420 (LC)

Mr Egleton, the lessee of Flat 16, Brockenhurst Court, Hillcroft Close in Lymington, Hampshire, applied to the LVT for a determination of his liability to pay for electricity used in lighting the common parts of his building between 2004 and 2009. It would appear that the building was a new one and no invoices were received from the electricity supplier for almost all of the first five years of the building’s occupation.

The small estate containing Mr Egleton’s flat comprised five similar blocks. Mr Egleton’s block contained fourteen flats, and was completed in 2004. Each block contained two electricity meters.

In the lease, the landlord covenanted to provide lighting for the common areas of the block, for which Mr Egleton was to pay through an annual service charge. The service charge year ran from 01 April to 31 March.

No invoices were received for one of the meters in Mr Egleton’s block from the date completion of the estate until 07 October 2009. The amount demanded by the electricity supplier was £9,362.28. The landlord’s managing agents paid it on 14 October 2009.

In September 2010, the managing agents gave all the lessees in the building notice under section 20B(2) of the 1985 Act that expenditure on the historic electricity charges had been incurred and informed the lessees that they would be required to contribute towards it through the service charge.

The annual accounts for the service charge year ending 31 March 2010 were certified in July 2011. The landlord raised a demand for £619.78 from Mr Egleton in respect of the cost of the common parts electricity. That demand in turn gave rise to Mr Egleton’s application to the LVT.

The LVT first determined that the notification of 16 September 2010 was valid notice for the purpose of section 20B(2) of the 1985 Act. Consequently electricity charges incurred within 18 months of that date were recoverable.

It then grappled with the question of when costs were incurred, and decided that a cost was incurred when the service to which the cost related was supplied.

It accordingly concluded that section 20B precluded the recovery of the costs of any electricity supplied more than eighteen months before 16 September 2010, which was the date that the lessees were notified of the charges.

Just a few weeks after the LVT’s decision, the Lands Chamber determined OM Property Management Ltd v Burr [2012] UKUT 2 (LC), and held that a cost was incurred when an invoice or demand for payment was made of a landlord, not when the service was supplied.

In Mr Egleton’s case therefore, when the landlord applied for permission to appeal, its application was granted, but the appeal was stayed to await the decision of the Court of Appeal, which, in May, upheld the Lands Chamber’s decision (OM Property Management Ltd v Burr [2013] EWCA Civ 479).

Wenghold Ltd’s appeal was decided on written submissions.

Justin Bates of Counsel was instructed by the landlords.

The original basis of the appeal was that the LVT’s decision had been shown to be wrong by the decision of the Upper Tribunal (His Honour Judge Mole QC) in OM Property Management Ltd v Burr [2012] UKUT 2 (LC).

Since then, the Court of Appeal had approved the Upper Tribunal’s reasoning and conclusions, and decided that a cost was incurred when an invoice or other demand for payment was raised, or when that demand was actually paid.

It did not resolve the ambiguity as to which of these two events was the date on which the cost was incurred, but gave three reasons why costs are not “incurred” within the meaning of sections 18, 19 and 20B of the 1985 Act on the provision of a service or supplies to a landlord or management company:

“11.First, as a matter of ordinary language, there is an obvious difference between a liability to pay and the incurring of costs… As a matter of ordinary language, a liability must crystallise before it becomes a cost.

“12. Secondly, the difference between a liability to pay and the incurring of costs is recognised by the draftsman in section 20B(1) itself. Where he wishes to refer to a liability, he does so: note the words “the tenant shall not be liable to pay so much of the service charge as reflects the costs so incurred.” It is significant that the phrase “relevant costs” is defined in section 18(2) as “the costs or estimated costs incurred or to be incurred”. It is not defined as “the liability or estimated liability for costs”. Similarly, section 20B(1) does not say “if any liability for any of the relevant costs is 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 that liability so incurred.”

“13. Thirdly, section 19(2) provides strong support for the view that costs are incurred only when they are paid (or when an invoice or other demand for payment is submitted by the supplier or service provider) and not when services are provided or supplies are made. The subsection 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.

“Section 20B deals with (ii). The significance of section 19(2) in relation to relevant costs that have been incurred is that it provides in relation to such costs that any necessary adjustment to the service charge shall be made by “repayment, reduction or subsequent charges or otherwise”. Such an adjustment of the service charge to reflect the costs that have been incurred 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). In other words, the incurring of costs entails the existence of an ascertained or ascertainable sum which is capable of being adjusted by repayment, reduction etc. The mere provision of services or supplies does not without more entail anything which is capable of being adjusted in this way.

“14. On the other hand, as section 19(2) makes clear, there is a different regime in relation to estimated costs before they are incurred. The landlord or management company is entitled to reflect reasonable estimated costs in the service charge and the statute makes no provision for adjustment of estimated costs.”

As to the purpose of section 20B(2): the Court of Appeal considered that it caters for situations such as those where there are problems allocating costs between tenants or where an invoice is disputed.

Martin Rodger QC concluded that Wenghold Ltd was clearly correct that the LVT’s decision was inconsistent with the reasoning of the Court of Appeal in OM Property Management Ltd v Burr [2013] EWCA Civ 479.

In its decision, the LVT had relied on Brent LBC v Shulem B Association Ltd [2011] EWHC 1663 (Ch), a decision of Morgan J. in the High Court. Martin Rodger QC distinguished the two cases however, because in Shulem B, the precise date on which the relevant costs were incurred did not matter.

He therefore allowed the appeal and held that the full £9,362.28 was recoverable from the lessees.

I have little to add to my previous observations here and here as to when costs are incurred.

The point that has come to mind however is whether the decisions in Burr and in this case will send sufficiently strong ripples across the accounting pond that accountants will need to man the lifeboats. Will they need to reconcile the difference between accruals-based accounts and Burr-incurred costs? If so, how? Will those costs be recoverable?

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