Eighteen Month Rule
Under s20b of the Landlord and Tenant Act 1985 (limitation of service charges: time limit on making demands) leaseholders are not liable for a payment of service charges of any amount unless they:
- Receive a demand for payment within 18 months of a cost being incurred which happens either on the date the landlord receives a demand to pay the relevant cost or pays it, whichever happens first or;
- Receive in writing within that period that a cost has been incurred, the amount and they will be required to pay that cost as a service charge at a later date.
If freeholders fail to do this then they will not be able to recover the charges.
The demand can be either for payment ‘on account’ for an estimated future service charge liability or can be a demand for payment of costs which have already been incurred;
However, an estimated service charge liability in response to which payment is not mandatory, does not count as a demand for payment. Nor does a service charge invoice which does not meet the contractual requirements of a lease. A request for a contribution to a reserve fund is also unlikely to count as a demand for payment of a service charge.
THE s20B NOTICE
If for any reason a landlord can’t send out a demand for payment within 18 months of a cost being incurred they can send a s20B Notice instead of a demand for payment. This is a special letter which if prepared properly and sent within the 18 months it is the only time a landlord can demand payment later than 18 months.
In order to meet the requirements of 20B the notice must:
- List what costs have actually been incurred by the landlord, at the time of writing, in relation to the leaseholder’s building or estate.
- List only the relevant costs. A notice which includes non-chargeable costs, such as those incurred in respect of a building or estate to which a leaseholder is not required to contribute, does not meet the requirements of section 20B.
- Include all the costs the landlords wishes to charge for in the future, including any management fee or relevant VAT. If such costs are not listed then the notice does not meet the requirements of section 20B in respect of those costs.
- The notice must make clear to the leaseholder that the landlord intends to charge the leaseholder a share of those costs as service charge under the terms of their lease.
Note: Whilst the Act says ‘eighteen months’ this is from the date the cost was incurred, so it is advisable that notification is sent about a deficit tell within six months of the year end, i.e. eighteen months from the first day of the accounting year.