London Borough of Brent v Shulem B Association Ltd [2011] EWHC 1663 (Ch)

[2011] EWHC 1663 (Ch)Case No Appeal no 2011/0401
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 29/06/2011
Before
MR JUSTICE MORGAN
Between
THE MAYOR AND BURGESSES OF THE LONDON BOROUGH OF BRENTClaimant/RespondentSHULEM B ASSOCIATION LIMITEDDefendant/Appellant
Ms Marie-Claire Bleasdale (instructed by Bude Nathan Iwanier) for AppellantMr Nicholas Grundy (instructed by Legal Services London Borough of Brent) for RespondentHearing Hearing dates: 14 th and 15 th June 2011
Judgment

Introduction

[1]This is an appeal against the decision of Judge Cowell in the Central London County Court. The appeal raises issues about the degree of formality which is required as to a lessor’s demand for a service charge under a lease and further issues as to the construction of section 20B of the Landlord and Tenant Act 1985, which imposes a time limit within which a lessor can serve a valid demand for a service charge. The issues arising in relation to section 20B of the 1985 Act have been the subject of a number of decisions in the County Court and in various tribunals but those decisions are not wholly consistent.[2]Miss Bleasdale appeared on behalf of the appellant, Shulem B Association Ltd (“Shulem”) and Mr Grundy appeared on behalf of the respondent, the London Borough of Brent (“Brent”).

The facts

[3]Brent is the freehold owner of five blocks of flats at Gloucester Close, Stonebridge Park, Willesden, London NW10 8EG. These five blocks form the whole or part of a residential estate at Gloucester Park. The blocks are of very different sizes. The first block comprises flats 1 and 2; the second block comprises flats 3 and 4; the third block comprises flats 5 to 37; the fourth block comprises flats 38 to 41 and the fifth block comprises flats 42 to 47.[4]Shulem is the lessee, under fifteen separate leases, of fifteen of the flats at Gloucester Close. It is not necessary to give the individual numbers of the flats. Shulem is the lessee of one flat in the first block, one flat in the second block, eleven flats in the third block, no flats in the fourth block and two flats in the fifth block.[5]I have been shown the lease of flat 1 and the parties are agreed that I can proceed on the basis that all fifteen leases are, so far as material, in the same terms as the lease of flat 1. The leases were, when granted, under-leases but it is accepted that the reversion on the under-leases is now vested in Brent as freeholder and the terms of the leases are now vested in Shulem.[6]The lease of flat 1 is dated 26th November 1974 and demised flat 1 for a term of 90 years less 10 days from the 25th August 1956. The lease reserved a rent of £50, payable by quarterly instalments on the usual quarter days. The lease also reserved by way of further rent a sum which was to be a fair proportion of the monies expended by the lessor in insuring the building of which the demised premises formed a part. The lease reserved, again by way of further rent, a further sum which was to be a fair proportion of the cost and expense of cleaning and lighting the entrance hall and the staircase in, it appears, the building of which the demised premises formed a part. The sums payable in relation to insurance and cleaning and lighting as described above were payable once a year on demand.[7]By clause 2(6), the lessee covenanted with the lessor in the following terms: “ At all times during the said term to pay and contribute a rateable or due proportion of the expenses of making, repairing, maintaining rebuilding and cleansing and lighting the exterior of the flat and the building of which it forms part and including the roof walls timbers sewers drains pipes watercourses cisterns gutters gas water and electric pipes or installations and entrances passages staircases pavements manholes roads party walls party structures fences and the land garden and pathways coloured brown on the said plan and other conveniences which shall belong to or serve or be used for the flat hereby demised and the said building such proportion in case of difference to be settled by the Surveyor for the time being of the Lessor whose decision shall be final and to be paid to the Lessor on demand”.[8]Clause 2(6) refers to various expenses. The expenses must relate to the flat and the building of which it forms part together with the services and facilities etc. which relate to the flat or such building. Accordingly, whilst the repair of the roof of the building in which the individual flat is to be found is within clause 2(6) of the lease of that flat, clause 2(6) does not require the lessee of such a flat to pay towards the cost of repairing the roof of another building on the estate.[9]Clause 2(6) is an early form of service charge clause. A typical service charge clause in a modern lease of a flat would be more elaborate. These days, one expects a service charge clause to contain a detailed, often lengthy, list of service charge items and to contain detailed procedural provisions as to the collection of service charge contributions from the lessee. It is now typical for service charges to be computed by reference to a financial year, for a lessor to provide an estimate of likely costs to be incurred in the next financial year, for the lessee to be obliged to contribute towards the estimated expenditure, even in advance of the expenditure being incurred by the lessor and then for the lessor to prepare a final account following the end of the relevant financial year and to make adjustments depending upon whether the actual costs incurred exceed or are less than the estimated costs. These matters are not of any real relevance to the true construction of clause 2(6) of the lease but the typical form of a service charge clause in a modern lease may form part of the background to the interpretation of the statutory provisions which have been enacted to regulate a lessor’s right of recovery of a service charge from a lessee.[10]Clause 2(6) in the present case does not require the expenses of the lessor to be computed by reference to a financial year. Clause 2(6) does not entitle the lessor to prepare an estimate of future expenditure nor oblige the lessee to make a contribution on account of that estimated expenditure. When clause 2(6) refers to “the expenses”, in my judgment, this requires the lessor to have actually incurred the expense in question. Following such expense being incurred by the lessor, the lessor is entitled to serve a demand under clause 2(6) requiring the lessee to pay the appropriate proportion of the expense in question. Following the service of a valid demand under clause 2(6), the lessee is obliged to pay the sum which is due under clause 2(6). There is no limitation in clause 2(6) as to the period of time which must elapse between successive demands by a lessor. The lessor is therefore entitled to raise a fresh demand under clause 2(6) every time that the lessor has incurred an expense and wishes to recover a proportion of it from a lessee. No doubt, for reasons of convenience, a lessor may choose to calculate the relevant expenses at regular intervals and the lessor may even choose to calculate expenses by reference to a financial year.[11]In around 2003, the lessor in the present case took the view that extensive works were required to the blocks at Gloucester Close. The lessor instructed surveyors, Sanderson Weatherall, to act on its behalf. The surveyors drew up a specification of works to be carried out. In a subsequent report on tenders which I have seen, the works in question appear to have been broken down so that the works to the five blocks are separately described. The lessor invited tenders for the intended works and received four tenders in response. The tender sum in each case was a global sum for the totality of the work intended to be carried out to the five blocks. In February 2004, the lessor’s surveyor prepared a tender report and recommended that a building contract be entered into with the lowest tenderer.[12]The works in question amounted to “qualifying works” within section 20 of the Landlord and Tenant Act 1985, as amended. I will refer to section 20 of the 1985 Act later in this judgment. The lessor then sought to comply with the consultation requirements imposed by section 20. On 12th March 2004, the lessor wrote a standard form of letter to each lessee who was liable to contribute by way of service charge. I have been shown the form of letter addressed to the lessee of flat 1, which is typical of the letters which were sent. The letter is headed “Notice of Intended Works” and refers to section 20 of the 1985 Act. The notice informs the addressee that the lessor intends to carry out works “to your property”. The intended works were described as works of external decoration and window replacement at Gloucester Close Estate. The letter then refers to three estimates which had been provided by three of the tendering contractors. The figures given are the global figures for the work to the five blocks on the estate. The letter stated that the lessor intended to accept the tender of the contractor which had tendered the lowest sum. The letter continued in these terms:
“When the works are completed you will be required to pay a proportion of the cost of the works. It is estimated that your proportion of the cost will be £19,359.81. This includes the charge for consultancy and management costs. If unforeseen work does arise which will raise the above estimate by more than 15% then you will informed. A breakdown of estimated costs is shown on the attached schedule. The invoice for the estimated cost of the works will be raised to your service charge account once the works have been completed. The final invoice will be raised on receipt of actual cost of the works, and any adjustment required for the difference of costs already invoiced will be raised to your service charge account.”
[13]Attached to the letter of 12th March 2004 was a schedule headed “calculation of costs”. COST OF WORKS Scaffold £948.00 Roof Works £1,220.85 General Repairs and Decorations to External and Communal Parts £8,268.68 Windows & Flat Door £4,032.66 Communal Windows N/A Communal Doors N/A Works Sub Total £14,470.19 Preliminaries £2,364.43 SUB TOTAL £16,834.62 Administration/Consultation Fees at 15% £2,525.19 TOTAL ESTIMATED CHARGE £19,359.81[14]It seems from documents I have been shown that the lessor entered into a building contract with the chosen contractor on 24th May 2004. I infer that there was a single building contract for the entirety of the work to be carried out to the five blocks. I have not been shown a copy of the building contract and I was told that the lessor was no longer able to provide a copy of it. The parties to the building contract acted on the basis that it provided for a contract administrator, for the contract administrator to value the work as it progressed, for certificates of such valuation to be prepared, which certificates would identify the sums payable on account by the lessor to the contractor. There were altogether some nine certificates issued in this way. Certificates 1 to 7 inclusive were issued prior to the 15th December 2006, the date of a relevant demand for payment served by the lessor on the lessee. Following that date, there were two further certificates, certificates 8 and 9, but no issue arises on the present appeal in relation to certificates 8 and 9.[15]The dates of certificates 1 to 7 are as follows: Certificate number Date 1 15.7.2004 2 6.8.2004 3 31.8.2004 4 13.10.2004 5 14.12.2004 6 14.2.2005 7 4.4.2005[16]Certificate number 7 states that the contract sum under the building contract was £654,289 and the valuation as at 4th April 2005 was £639,240.65. Practical completion was certified on 18th March 2005 so that a twelve month defects liability period was expressed to begin on 17th March 2005.[17]Although certificates 8 and 9 are not directly relevant to the issues on the present appeal, I note that certificate 8 appears to have valued the work as at 18th March 2006 in the sum of £669,825. Certificate 9 did not involve any further valuation of the work but provided for the release of the last 2.5% of the contract sum which had been retained.[18]On 23rd February 2006, the lessor wrote to the lessee the letter which is at the heart of the present dispute. I have been shown the form of letter written to the lessee of flat 1 and I proceed on the basis that the same form of letter was used in the case of all fifteen flats. The letter is in these terms:
“ Summary of Major Works 2003/04 19. Customer Reference: FD86/64038 This is the invoice for the major works carried out to your property during the financial year of 200 (sic). The estimated costs for these works were sent to you on 12th March 2004, as required under section 20 of the Landlord and Tenant Act 1985. The actual costs have not been calculated as yet therefore this invoice is based on the estimated costs that you were sent with the section 20 Notice. When we receive the actual costs, a further invoice will be sent to you detailing these and the adjustment required as the actual costs may vary from the estimated costs. If the actual costs are less than the estimated costs then we will refund the difference to each leaseholder. The estimated costs and the details of the works are shown below. Payment or proposal for payment is required within 28 working days of the date of this invoice. Methods of payment are enclosed. Property Details: Property Address: No 1 Gloucester Close Details of Works: External Decorations and Window Replacement Cost of Works: Scaffolding £948.00 General repairs and External Decorations £8286.68 Communal Windows N/A Windows to Property £4032.66 Roof Repairs £1220.85 Communal Doors N/A Preliminaries £2,364.43 Sub Total £16,834.62 15% Management fee £2,525.19 TOAL (sic) £19,359.81 We will offer a discount of 5% if this invoice is paid in full within 28 days of the above date. Therefore full payment must be received by 23rd March 2006. Your discounted charge is: £18,391.82”
Property Details: Property Address: No 1 Gloucester Close Details of Works: External Decorations and Window Replacement Cost of Works: Scaffolding £948.00 General repairs and External Decorations £8286.68 Communal Windows N/A Windows to Property £4032.66 Roof Repairs £1220.85 Communal Doors N/A Preliminaries £2,364.43 Sub Total £16,834.62 TOAL (sic) £19,359.81 Your discounted charge is: £18,391.82”

TOAL (sic) £19,359.81

[19]The lessee did not pay any sum as claimed in the letters of 23rd February 2006.[20]On 15th December 2006, the lessor wrote to the lessee of each of the fifteen flats. I have been shown the standard form of letter which was addressed to the lessee of flat 1. The first paragraph of this letter read: “We enclose herewith the actual invoice for major works carried out to your property during the financial year 2003/04. An estimated invoice has been raised and sent to you dated 28th February 2006 (sic). The final account has been received from our consultants and we have now been able to raise an actual invoice for the works carried out to your property and block. Please accept our sincere apologies for the delay in producing this invoice”.[21]The letter of 15th December 2006 continues with some explanation as to the way in which the relevant costs have been computed. The letter then continued in these terms:
“The remaining balance on your invoice and your major works account has been calculated by subtracting any payments received since the Estimated Invoice was raised by the Actual Charge for the works carried out. Estimated total: £19,359.81 Actual total: £15,794.99 Difference: £- 3,564.82 Balance on your major works account as of 8th December 2006: £19,359.81 New balance on your major works account: £15,794.99.”
Estimated total: £19,359.81 Actual total: £15,794.99 Difference: £- 3,564.82 Balance on your major works account as of 8th December 2006: £19,359.81 New balance on your major works account: £15,794.99.”

Balance on your major works account as of 8th December 2006: £19,359.81

[22]The letter of 15th December 2006 continued by referring to a further breakdown on an attached invoice. The attached document was headed “Certificate of Actual Major Works Expenditure 2002/2003 Customer Reference: FD86/64038.” The body of the certificate also referred to work carried out in the financial year 2002/2003. It referred to “the Section 20 notice”, giving the lessee the estimated cost of the work, being sent to the lessee on 28th February 2006 (sic) and it also referred to “an Estimated invoice”. The letter continued by referring to the individual items of work and the costs involved. The individual items of work were broadly similar to the items of work described in the earlier letter of 23rd February 2006. In some cases the costs were the same and in other cases the costs were different. The “Actual Cost” was given as £15,794.99.

Section 20B of the Landlord and Tenant Act 1985

[23]Section 20B of the Landlord and Tenant Act 1985 was inserted by the Landlord and Tenant Act 1987, Section 41 and schedule 2 paragraph 4 and was then the subject of minor amendment. The current form of section 20B, and the form current at the relevant time in the present case provides as follows: “20B - Limitation of service charges: time limit on making demands.(1) 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.(2) Subsection (1) shall not apply if, within the period of 18 months beginning with the date when the relevant costs in question were incurred, the tenant was notified in writing that those costs had been incurred and that he would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge”.[24]Certain matters are common ground as to the application of section 20B of the 1985 Act to the facts as described above. The lessee accepts that the letter of 15th December 2006 was, in point of form, a valid demand under clause 2(6) of the lease in each case. The parties agree that the lessor incurred costs in relation to the matters covered by certificates 1 to 7. The parties do not agree as to the precise date when the lessor should be taken to have incurred costs for the purposes of section 20B in relation to certificates 1 to 7. The dates suggested by the parties as the date when costs were incurred by the lessor in relation to a particular certificate are:(1) the date of the certificate;(2) the date of service of the certificate on the lessor;(3) the date of payment of the sum identified in the certificate (if paid within 28 days after the certificate); or(4) the date of expiry of the period of 28 days after the certificate. As it happens, nothing turns on the answer to this question as to precisely when the lessor incurred costs in relation to the subject matter of a particular certificate. The lessor accepts that whichever of the suggested dates is taken as the date on which costs were incurred, those costs were incurred in respect of each of the certificates numbered 1 to 7 more than 18 months before the demand of 15th December 2006. Accordingly, if the demand of 15th December 2006 is the only relevant demand, then that demand does not comply with section 20B(1), in relation to the costs incurred pursuant to those certificates, as it was not served on the lessee within the requisite period of 18 months from the date when the relevant costs were incurred.[25]The lessor says that the demand of 15th December 2006 was not the only relevant demand. The lessor contends that the letter of 23rd February 2006 was a relevant demand for the purposes of section 20B(1). If the letter of 23rd February 2006 were a relevant demand, then the lessee accepts that the costs which were the subject of certificates 3 to 7 were incurred by the lessor within the relevant 18 month period. Conversely, the lessor accepts that the costs incurred in relation to certificates 1 and 2 were outside the relevant 18 month period. The lessor has an alternative case which is, if the letter of 23rd February 2006 was not a valid demand for the purposes of section 20B(1), it was a valid notification for the purposes of section 20B(2). As before, the costs incurred in relation to certificates 3 to7 (but not the costs incurred in relation to certificates 1 to 2) were within the relevant 18 month period for the purposes of section 20B(2). As before, nothing turns on the dispute, to which I have referred, as to the precise date when costs are taken to be incurred in relation to certificates 1 to 7.[26]I was urged by counsel for the lessee to decide when costs were incurred by the lessor in relation to the various certificates in this case. Conversely, counsel for the lessor urged me not to decide that matter. In my judgment, it is not appropriate for me to discuss, or express any views, on the question as to when relevant costs were incurred by the lessor. The principal reason for this conclusion is that the answer to the question is likely to turn upon, or be affected by, the terms of the building contract. As I have explained, I have not been provided with a copy of the building contract which was actually entered into nor indeed with the standard form of building contract which was probably used in this case. Further, nothing in the present appeal turns on the question as to the date when the costs were incurred. As I have explained, the costs in relation to certificates 1 and 2 are in any event outside any relevant 18 month period and the costs in relation to certificates 3 to 7 are within the 18 month period prior to 23rd February 2006, which is claimed by the lessors as the relevant period either for purposes of section 20B(1) or section 20B(2). Any discussion of this point would therefore be obiter and in the absence of the critical document, namely, the building contract.

The procedural history

[27]Before proceeding to discuss the issues which arise I ought to summarise the relevant procedural history. The present proceedings were brought by the lessor against the lessee to recover various sums which include, but are not confined to, the sums said to be due under clause 2(6) of the leases. The sums alleged to be due for the major works carried out by the lessor are identified for each of the fifteen flats. In the case of flat 1, the sum claimed is £15,794.99 which is the sum identified in the demand of 15th December 2006, rather than in the letter of 23rd February 2006. The lessee has defended those proceedings. In its defence, the lessee asserts that the relevant costs were incurred by the lessor more than 18 months before the 15th December 2006 and relies on section 20B of the 1985 Act. This defence is not the only line of defence put forward. There were various interlocutory hearings followed by an application by the lessee for an order that the claim be struck out as having no reasonable prospect of success because, it was said, the lessor was debarred from recovering the costs by virtue of section 20B(1) of the 1985 Act.[28]The strike out application came before His Honour Judge Cowell in the Central London County Court on 18th November 2010. He held that the letter of 23rd February 2006 was not a valid demand for the purposes of clause 2(6) of the leases and/or for the purpose of section 20B(1). He then considered whether the letter of 23rd February 2006 was a relevant notification for the purposes of section 20B(2) and he held that it was. The learned judge held that the letter of 23rd February 2006 notified the lessee that the costs which were the subject of section 20B had been incurred. He described the purpose of section 20B(2) as being to inform the tenant of what the tenant is likely to be asked to pay, so that he can budget. Accordingly, he declined to strike out the proceedings or any part of them.[29]The learned judge refused to grant the lessee permission to appeal his decision. He gave brief written reasons for the refusal of permission. He regarded it as arguable that the letter of 23rd February 2006 was a demand for payment and, if so, that would have been an additional reason for refusing to strike out the proceedings. He regarded the lessee’s argument as to section 20B(2) as “entirely wrong”.[30]The lessee has served an appellant’s notice challenging the judge’s ruling on section 20B(2). The court ordered that the lessee’s application for permission to appeal should be listed for hearing and so that the appeal, subject to permission, would follow at the same hearing. The lessor has served a respondent’s notice seeking to uphold the learned judge’s refusal to strike out the proceedings but on the additional ground that he ought to have held that the letter of 23rd February 2006 was a valid demand which was in time for the purposes of section 20B(1). At the hearing, I heard full argument from both parties on all the points arising. In my judgment, the present is an appropriate case for permission to appeal. Whatever I ultimately decide, I am of the view that the lessee has a real prospect of success on the appeal so that its arguments should be heard and considered. In addition, the issues of principle which arise on this appeal as to the true interpretation of section 20B have been considered in a number of decisions of the Leasehold Valuation Tribunal, the Lands Tribunal, the Upper Tribunal (Land Chamber) and the County Court. The approach taken by those other tribunals and courts are not all consistent and it appears to me to be desirable for the High Court to give its ruling on the questions of interpretation which arise. The present appeal is a suitable appeal for such a ruling. Accordingly, I grant the Appellant permission to appeal and I will deal with the substance of the arguments on either side.

Other statutory provisions

[31]I have set out section 20B earlier in this judgment. The section refers to “service charge” and “relevant costs”. Those terms are defined in section 18 of the 1985 Act. I will set out section 18 of the 1985 Act in the form in which it appeared when section 20B was introduced into the 1985 Act and then refer to one later amendment.[32]Section 18 of the 1985 Act as amended by the Landlord and Tenant Act 1987 was in these terms:
“18. Meaning of “service charge” and “relevant costs” (1) In the following provisions of this Act “service charge” means an amount payable by a tenant of a dwelling as part of or in addition to the rent – (a) which is payable, either directly or indirectly, for services, repairs, maintenance or insurance or the landlord’s costs of management, and (b) the whole or part of which varies or may vary according to the relevant costs. (2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable. (3) For this purpose – (a) “costs” includes overheads, and (b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period. ” (1) In the following provisions of this Act “service charge” means an amount payable by a tenant of a dwelling as part of or in addition to the rent – (a) which is payable, either directly or indirectly, for services, repairs, maintenance or insurance or the landlord’s costs of management, and (b) the whole or part of which varies or may vary according to the relevant costs. (2) The relevant costs are the costs or estimated costs incurred or to be incurred by or on behalf of the landlord, or a superior landlord, in connection with the matters for which the service charge is payable. (3) For this purpose – (a) “costs” includes overheads, and (b) costs are relevant costs in relation to a service charge whether they are incurred, or to be incurred, in the period for which the service charge is payable or in an earlier or later period. ”
[33]Section 18(1) was amended by the Commonhold and Leasehold Reform Act 2002. The amendment consisted of adding the word “improvements” after the word “maintenance” in section 18(1)(a). That amendment is of no significance in the present context.[34]It may be helpful to refer briefly to some other relevant provisions in the 1985 Act and amendments of them from time to time. Section 19 is one of the central provisions in the relevant group of sections in the 1985 Act. In summary, section 19 restricts a lessor’s right of recovery of relevant costs so that costs are only taken into account to the extent that they are reasonably incurred and only if the services and works for which a charge is made were of a reasonable standard. When 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 must be made by repayment, reduction of subsequent charges or otherwise.[35]Section 20 of the 1985 Act introduced a limitation on a lessor’s ability to recover service charges, by imposing requirements as to the obtaining of estimates and consultation with the lessees. In 1987, when section 20B was enacted, the then section 20 of the 1985 Act imposed requirements as to estimates and consultation only in relation to “qualifying works”. “Qualifying works” were defined by section 20(2) as meaning works (whether on a building or any other premises) to the costs of which the lessee would be required to contribute by way of service charge. Section 20 then identified the relevant requirements as to the obtaining of estimates and consultation with the lessees. Section 20(9) provided that in any proceedings relating to a service charge the court might, if satisfied that the landlord acted reasonably, dispense with all or any of the relevant requirements.[36]Section 20 of the 1985 Act has more recently been amended, by the Commonhold and Leasehold Reform Act 2002. Section 20 has been supplemented by section 20ZA, also introduced by the 2002 Act. Further, Regulations have been made pursuant to section 20 of the 1985 Act. The relevant Regulations in this case are the Service Charges (Consultation Requirements) England Regulations 2003. It is not necessary for present purposes to refer in any further detail to the requirements imposed in this way, save to point out that the relevant provisions apply to the costs of “any qualifying works” and to a “qualifying long term agreement”. These terms are defined by section 20ZA(2).[37]It emerges from this review of the statutory provisions that some costs which a lessor wishes to include in a service charge, but not all such costs, will have been subject to the requirements of section 20 of the 1985 Act as to estimates and consultation. Section 20B potentially applies to all costs which are to be included in a service charge and these are not restricted to those costs within the reach of section 20. It so happens that the costs in issue in the present appeal were both costs incurred in relation to “qualifying works” within section 20 of the 1985 Act and also relevant costs which are potentially within section 20B.

The requirements of clause 2(6) of the lease

[38]The first issue is whether the letter of 23rd February 2006 was a valid demand for the purposes of clause 2(6) of the leases. This question involves two subsidiary questions. The first subsidiary question is as to what clause 2(6) requires as to the form of a demand. This is a question of construction of clause 2(6). The second question is whether the letter of 23rd February 2006 meets the requirements of clause 2(6) as to the form of a demand. This question involves the construction of the letter.[39]I make four points as to clause 2(6). The first point is that clause 2(6) specifies the matters in relation to which a charge may be made. The second point is that clause 2(6) entitles the lessor to charge in relation to “the expenses” of the specified matters. The third point is that the lessor is entitled to charge “a rateable or due proportion” of the expenses of the specified matters. The fourth point is that the amount of the proportion, in the case of a difference, is to be settled by the surveyor of the lessor, whose decision is stated to be final. It may be that this reference to the finality of the surveyor’s decision is no longer contractually effective in view of section 27A(6). I did not hear specific argument on that point. However, for the purpose of construing clause 2(6), I do not think it is material to take into account the possible operation of the later statutory provision.[40]It is clear that the lessor must serve a demand under clause 2(6) on the lessee before the lessee comes under a present liability to pay a sum of money to the lessor. What are the minimum requirements of clause 2(6) as to the form and content of such a demand? In my judgment, it is clear that a demand must specify a figure which is to be paid by the lessee. Clause 2(6) simply will not operate if all that the landlord does is to ask the lessee to pay a proportion of the lessor’s expenses without notifying the lessee of the figure which is said to be payable. As a matter of form, the demand must relate to the specified matters for which a charge may be made and a demand which on its face relates to other matters will not be valid in point of form, quite apart from the lessor having no entitlement to charge for those other matters. I can illustrate this point with an example. The specified matters include works to the building of which the flat forms a part. Accordingly, the specified matters do not included works to another building. If the lessee of a flat in building 1 was served with a demand to pay a proportion of the lessor’s expenses of repairing building 2, in my judgment, that would not be a valid demand pursuant to clause 2(6) of the relevant lease and, in addition, the lessor would not be entitled to recover the expenses of the works to building 2 from the lessee of a flat in building 1.[41]Clause 2(6) entitles the lessor to charge the lessee with a proportion of the lessor’s expenses. “Expenses” refers to monies which the lessor has spent or, possibly, monies which the lessor is under a present liability to expend. The word does not include anticipated future expenditure. Accordingly, if the lessor served a demand on a lessee that the lessee should contribute a proportion of sums which the lessor expected to expend in the future, that demand would not comply with clause 2(6). In my judgment, the form and content of the demand would not satisfy the requirements of clause 2(6) and, in addition, the lessor would not be entitled to recover a proportion of anticipated future expenses.[42]Clause 2(6) refers to a proportion of the lessor’s expenses. In the case of a difference between the parties, the proportion is to be settled by the lessor’s surveyor. These provisions give rise to two possible questions. The first is whether the demand must specify the amount of the expenses and the amount of the proportion separately or whether it suffices for the lessor to demand a specified sum stating that it is a due proportion of the expenses. In other words, must the demand be for x% of £y or can a simple demand for £z suffice? It can certainly be argued that the demand must specify the amount of the proportion to enable the lessee to understand the proportion which is claimed and to be in a position to dispute it so that it can be referred to the lessor’s surveyor for decision. On balance, I prefer the construction which requires the lessor to state the sum which he demands (as a due proportion of its expenses) without separately stating the amount of the proportion and the amount of the expenses. The second point concerns a possible case where the landlord demands a sum of money under clause 2(6), the lessee challenges the proportion which has been used by the lessor, the matter is referred to the lessor’s surveyor who determines that the proportion used by the lessor was too high and specifies a lower proportion. Is the original demand formally valid but operates as modified by the surveyor or is the original demand formally invalid so that a further demand needs to be made using the proportion determined by the surveyor? In my judgment, there is no real difficulty in holding that the original demand was valid as a matter of form but it takes effect in the way modified by the surveyor’s determination. On that basis, it is not necessary to serve a further demand.[43]The final point which arises in relation to clause 2(6) relates to the correct treatment of a demand which is for a specified amount which is in excess of the lessor’s true entitlement under clause 2(6). The amount demanded by a lessor may be too high for any number of reasons. The landlord may have made a mathematical error in computing the amount of its expenses or the due proportion or the result of multiplying one by the other. The lessor may have included costs which are not recoverable under clause 2(6) although that fact does not appear on the face of the demand. If, for whatever reason, the figure specified in the demand is in excess of the lessor’s underlying entitlement, is the demand formally invalid? This type of problem is likely to arise frequently. A typical case would be where a lessor serves a demand for a specified sum, the lessee does not pay all or any part of the demand, the lessor sues for the sum stated in the demand, the matter is investigated in court proceedings as a result of which it emerges that the lessor’s entitlement is to a smaller sum. In such a case, does the court dismiss the lessor’s claim because there is no prior demand for the smaller sum as determined by the court or does the court give judgment for the smaller sum? In my judgment, the court should give judgment for the smaller sum on the basis that the original demand was formally valid but cannot entitle the lessor to recover the specified sum unless the lessor has an underlying entitlement under clause 2(6) to that sum.[44]Thus far, I have considered the construction of clause 2(6) of the leases without reference to authority. I have relied upon the wording of clause 2(6) and its evident purpose to arrive at my assessment of the presumed intention of the parties as to how clause 2(6) was intended to work. However, it can be seen that even a simple clause like clause 2(6), imposing a requirement of a prior demand, can give rise to several points as to the form and content of such a demand. In the course of the hearing, I invited Counsel to put before me any authority which might be relevant as to the form and content of a demand, whether a demand pursuant to a contractual provision or a statutory provision. Overnight, the considerable industry of both Counsel produced a large number of authorities dealing with matters such as demands under loan agreements, guarantees, mortgages, performance bonds and also notices or demands in the statutory context such as a statutory demand in bankruptcy, a notice under section 146 of the Law of Property Act 1925 and a notice to pay rent under case D in schedule 3 to the Agricultural Holdings Act 1986. I am grateful to counsel for their impressive response to my request. I have considered all the authorities which have been cited. It is not necessary to consider the individual authorities as no one of them is precisely in point. What the authorities show is that the form and content of the demand depends upon the wording of the contractual or statutory provision in question and, critically, on the perceived purpose of that provision. The authorities cited covered a complete range starting, at one end, with a demand which was valid even though it did not identify the amount to be paid ranging to the other end where a demand was invalid when it overstated the amount due, even by a modest amount. In my judgment, there is nothing in the authorities which detracts from the conclusions I have expressed as to the form and content of a demand pursuant to clause 2(6).

Was the letter of 23rd February 2006 a valid demand?

[45]The next issue is whether the letter of 23rd February 2006 complies with the requirements of clause 2(6) of the leases as to the form of a demand. This question necessarily requires the court to look carefully at the content of the letter. Although it is necessary to examine several different features of the letter, the court must not lose sight of the point that the standard of reference to be applied is that of a reasonable recipient of the letter exercising his commonsense in the relevant context. A demand can be valid even if it lacks absolute clarity. The court does not insist on perfect precision. The authority for these remarks is, of course, Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749; see in particular per Lord Clyde at 782C-D.[46]I have set out the full text of the letter earlier in this judgment. The letter is headed “Summary of Major Works 2003/2004”. That is a puzzling heading. Counsel for the lessor told me that the financial year conventionally taken by the lessor in relation to service charge matters under the relevant leases was 1st April to 31st March. If the lessee is to be taken to have known that, then the lessee would read the heading as referring to the period 1st April 2003 to 31st March 2004. The lessee would also know that it had received a section 20 notice relating to the same major works on 12th March 2004. Indeed, that notice of 12th March 2004 is specifically referred to in the second line of the letter. The section 20 notice told the lessee of the lessor’s future intention to carry out major works and gave the lessee one month from the date of the letter to respond to the letter. Accordingly, the lessee would understand that the major works were not to begin before the middle of April 2004. The court knows that the building contract was actually entered into on the 24th May 2004 although I have no reason to think that the lessee would have been aware of that precise date. It is also debatable whether the lessee would have been aware of the time when the physical work started on site. I incline to the view that a reasonable recipient of the letter of 23rd February 2006 should be taken to know that fact. Accordingly, if the reasonable recipient had given much thought to the reference to the period 2003/2004 he might have wondered why he was being asked to pay for that period when no major works were done in that period.[47]The first sentence of the letter refers to “the Major works carried out to your property”. That seems to say that major works have actually been carried out. The letter then states that these works were done “during the financial year of 200”. “200” is obviously a mistake. In view of the heading, the reasonable assumption to make is that the relevant financial year is the financial year 2003/04. That creates the difficulty that the reasonable recipient knows that major works were not done during that financial year.[48]The letter then refers to the estimate as to costs which was sent with the section 20 notice on 12th March 2004. That cross reference certainly justifies, and probably requires, one to construe the letter of 23rd February 2006 against the background of the letter of 12th March 2004. Two things emerge from that. The first is that one can immediately see that the figures which are used in the letter of 23rd February 2006 are the same figures as were used in the notice of 12th March 2004. In the notice of 12th March 2004, the figures are clearly stated to be estimates of anticipated future expenditure. The other matter which arises from this cross reference is that the letter of 12th March 2004 describes what was intended to happen in relation to later billing for the works. I have quoted the relevant paragraphs of the letter of 12th March 2004. They state that when the works are completed the lessee will be required to pay a proportion of the cost of the works. The paragraphs go on to say that the sum which will be required to be paid will be based on the estimated cost of the works rather than the actual cost of the works.[49]The letter of 23rd February 2006 then uses the phrase:
“the actual costs have not been calculated as yet”
. That phrase tends to show that the lessor has actually incurred costs. However, the lessor does not state what its actual costs were. Indeed the lessor expressly states that it has not calculated the actual costs. No explanation is given as to why the lessor has not done the calculation. In the course of her submissions, counsel for the lessee argued that the lessor could have calculated the actual cost and could have made a demand for the actual cost and therefore I should conclude that the letter of 23rd February 2006 was invalid. It seems to me that this is not the correct approach. The true construction of the letter involves an assessment of what a reasonable recipient of the letter would have understood it was being told by the letter. The test does not involve an assessment of whether the lessor used reasonable endeavours to convey the necessary information. If clause 2(6), properly construed, requires the lessor to communicate certain information in a demand and the lessor does not do so, then the demand does not satisfy the requirements of the sub-clause as to formal validity.[50]The letter of 23rd February 2006 continues by referring to “this invoice”. That language is appropriate to the making of a demand. The letter goes on to say that the invoice:
“is based on the estimated costs that you were sent with the section 20 Notice”
. Indeed it is clear from comparing the letter of 23rd February 2006 with the section 20 notice that the figures in the letter are exactly the same as the estimated figures as to anticipated future expenditure. In my judgment, this point alone gives rise to a serious question as to the formal validity of the letter of 23rd February 2006. Is a letter requiring payment of a sum which is stated to be assessed by reference to anticipated future expenditure and not by reference to actual expenditure something which meets the requirements of a demand for the purpose of clause 2(6)? Before answering that question, I will refer to one further feature of the letter. Although the letter asks the lessee to pay the sum identified in the letter, the lessor states that there will need to be a subsequent stage when the estimated costs used in the letter are compared with the actual costs. The actual costs may be greater or may be less than the estimated costs. If the actual costs are less than the estimated costs then the lessor states it will refund the difference to each lessee. Whilst the lessor’s suggestions as to the procedure to be adopted are quite clear, they are different from what is permitted by clause 2(6) of the leases. Clause 2(6) allows a lessor to identify a sum which the lessor says is the due proportion of actual expenditure on specified matters. Clause 2(6) does not permit a lessor to demand a sum which the lessor states is, or may be, in excess of a due proportion of actual expenditure on specified matters.[51]Having analysed the letter of 23rd February 2006, I can now express my conclusion as to its validity as a demand under clause 2(6) of the leases. The letter makes it clear that the lessor requires the lessee to pay the specified sum of £19,359.81. As I have explained, the fact that the letter does not specify the actual expenditure and then specify the due proportion, leading to a calculation of the sum demanded, does not result in the requirement being invalid. Further, as I have already explained, the fact that the sum required may well have been in excess of the lessor’s underlying entitlement (as judged by the lower figure in the letter of 15th December 2006) does not of itself invalidate the requirement. Although the letter is somewhat confusing on the point, the overall message in the letter is that the lessor has carried out major works and has incurred actual costs. The confusion arises from the reference to the year 2003/04 when a reasonable recipient of the letter would know that no major works had been done. If that were the only source of confusion in the letter, it may be that the court would not hold the letter to be an invalid demand on that account. However, my overall conclusion is that the letter does not satisfy the requirements of clause 2(6) of the leases as regards the form and content of a valid demand. Clause 2(6) allows the lessor to demand a due proportion of actual expenditure. It does not allow the lessor to require payment of a figure which the lessor states is not based on actual expenditure. Further, clause 2(6) does not allow a lessor to claim a sum which the lessor states may be in excess of its entitlement (because it has not calculated its true entitlement) and at the same time to offer to refund the overpayment at a later time.[52]So far, I have only considered the validity of the letter of 23rd February 2006 as a clause 2(6) demand and have not considered the statutory context of section 20B of the 1985 Act. Accordingly, at this stage, it is not necessary to consider the statutory purpose of section 20B nor whether that statutory purpose should lead to the court adopting a strict view or a relaxed view as to the contents of a demand for service charge. The question being considered at this point is based on the true construction of the contractual provision. I would be reluctant to construe clause 2(6) of the leases so as to produce an over technical requirement and a trap for the lessor. In fact, I have construed clause 2(6) of the leases in a way which is not particularly onerous. I have held that a lessor need not specify the due proportion which is claimed. I have also held that a demand which specifies a figure in excess of the lessor’s underlying entitlement can nonetheless be valid as to form. The implications of these findings is that if the lessor in the present case had said: “I demand the sum of £19,359.81 as the due proportion of the expenses of the matters specified in clause 2(6) of the lease”, that would have been a valid demand for the purposes of clause 2(6). However, I conclude that because the letter of 23rd February 2006 did not ask for a proportion of the lessor’s expenses but asked for a contribution based upon figures which did not, or did not necessarily, represent the lessor’s expenses, the letter did not conform to the requirements of a demand for the purposes of clause 2(6).

The application of section 20B(1)

[53]The next question to be considered is whether the letter of 23rd February 2006 was “a demand for payment of the service charge” for the purposes of section 20B(1) of the 1985 Act. Section 18(1) of the 1985 Act defines “service charge” as, in effect, an amount payable by a tenant for services. The reference to a demand in section 20B(1) presupposes that there had been a valid demand for payment of the service charge under the relevant contractual provisions. In this case, I have held that the letter of 23rd February 2006 was not a valid demand for service charge under clause 2(6) of the leases. It follows that it was not “a demand for payment of the service charge” within section 20B(1).

The requirements of section 20B(2)

[54]The next question is whether the letter of 23rd February 2006 was a written notification for the purposes of section 20B(2). The subsection requires the notification to relate to two matters. The first matter that must be notified is “that those costs had been incurred”. The second matter is “that [the tenant] would subsequently be required under the terms of his lease to contribute to them by the payment of a service charge”. The parties do not agree as to the extent of the statutory requirements. In particular, they do not agree as to what information has to be given to satisfy the requirement that the tenant is notified “that those costs have been incurred”. It is clear from the decisions of the county court and the various tribunals that this question is not without difficulty and the answers to it which have so far been provided are not wholly consistent. It is not suggested that I am bound to follow any of the earlier decisions. I have considered what the learned judges in those cases have said on the subject. Their remarks have been helpful to me as they have revealed the range of possible interpretations of the statutory wording and the facts of the cases have illustrated the kinds of difficulties that can arise in practice. However, with respect to those other judges, I do not think that it is necessary or appropriate in this judgment to set out passages from the earlier decisions. With the benefit of my reading of those judgments, I will approach the task by addressing the language used in section 20B(2) and also by considering the purpose of section 20B as a whole.[55]A written notification under section 20B(2) must state “that those costs had been incurred”. “Those costs” refers back to “the relevant costs in question” and this in turn refers back to the costs in question for the purposes of section 20B(1), that is, the costs which the lessor wants to take into account in determining the amount of a service charge but which costs were incurred more than 18 months before a demand for payment of the service charge. Thus, the phrase “that those costs have been incurred” can be expanded so that it reads “that the relevant costs which were incurred more than 18 months before the relevant demand for payment of the service charge have been incurred”.[56]Counsel for the lessee submits that a notice for the purposes of section 20B(2) must state the amount of the costs which the lessor states have been incurred. Counsel for the lessor submits that it is not necessary to state the amount of such costs. He submits that it is sufficient that the notification states that the lessor has carried works or provided relevant services. Put that way, that submission cannot be right. Section 20B(2) does not require the notification to state that work has been done or services have been provided; it requires the lessor to state that costs have been incurred. It may be that Counsel for the lessor would submit that it is sufficient if the lessor states that it has done works or provided services and has incurred costs (unspecified) in relation to those works or services. In my judgment, there are a number of objections to the lessor’s submission on this point. The first is based on the language of section 20B(2). As expanded in the way I have described, the subsection appears to require the lessor to identify the costs which have been incurred so that when one comes to apply section 20B(2) to the relevant notification one will be able to say whether the costs, which the lessor wants to take into account in determining the amount of the service charge, were notified to the lessee. A second objection is that if it is clear that a statement that work has been done or services have been provided does not suffice, I do not see that any real purpose is served if the lessor adds the statement that it has incurred unspecified costs in relation to the works or services. The lessee would no doubt assume in any event that the lessor had not obtained the works or services free of any charge.[57]If the notification for the purposes of section 20B(2) has to state some information as to the amount of the relevant costs, is it sufficient if the lessor states that it does not know what the costs have been but instead states that it knows what it expected the cost to be in advance of the work being done? In my judgment, subsection 2, taken literally, appears to require the lessor to state the costs it has actually incurred. A statement that, in advance of the work, it expected to incur a particular cost does not give the necessary information.[58]I have considered what a lessor should do if it knows that it has incurred costs but it is unable to state with precision what the amount of those costs was and it is concerned to serve a notice under section 20B(2) to stop time running against it. In my judgment, there is a clear practical course open to a lessor in such a case. It should specify a figure for costs which the lessor is content to have as a limit on the cost ultimately recoverable. In my judgment, a lessor can err on the side of caution and include a figure which it feels will suffice to enable it to recover in due course its actual costs, when all uncertainty has been removed. If a lessor states that its actual costs were £x that will be a valid notification in writing for the purposes of subsection (2) even though the lessor knows that it may turn out that the costs will be somewhat less than £x. If the lessor wants to ensure that the lessee is not misled by such a notice, it will be open to the lessor to explain that although it is making a clear statement that its costs were £x, it hopes that it might be in a position later to state that the actual costs were less than £x. An example might be where the lessor is in dispute with the builder as to the sums payable to the builder. The lessor could properly notify the lessee that the builder is claiming a sum which means that the costs will be £x but the lessor is attempting to negotiate with the builder so that the resulting costs will be less. In such a case, the lessee would not be misled and the lessor would have protected itself by making a statement that the costs it had incurred were £x. In any event, it is my view that if a lessor states that the cost was £x, it satisfies the subsection even in a case where it is not certain as to what the costs will eventually turn out to be. If the lessor states that the costs are £x, and it later puts forward a service charge demand based on a smaller sum, then the statement of the greater amount includes a statement of the lower amount. In the present case, no issue arises as to what the legal result would be if the section 20B(2) notice referred to £x and the lessor later put forward a service charge demand which takes into account a figure which is greater than £x. My view is that the lesser sum of £x does not include the excess over £x so that no notification for the purposes of the subsection was given in relation to the excess.[59]The second matter which must be stated in a notification under section 20B(2) is that the tenant would subsequently be required under the terms of his lease to contribute to the costs by the payment of a service charge. Taken literally, this does not oblige the lessor to state the resulting amount of the service charge. On this reading, there will be a valid notification for the purposes of the subsection if the lessor notifies the lessee that it has incurred costs of £x on certain service charge matters without telling the lessee what sum the lessee will ultimately be expected to pay. It may be that in some cases, the lessee will know what proportion of the total costs it will have to pay. The lease in question may identify a fixed percentage of service charge costs. However, many leases do not specify a fixed percentage. It would no doubt be of more use to a lessee to be told what sum it will be expected to pay by way of service charge but, in my judgment, the words of section 20B(2) do not clearly so require.[60]Having identified what the language of section 20B(2) appears to require, it is relevant to consider the purpose of section 20B. It is obvious that the purpose of section 20B taken as a whole is to impose a time limit on a lessor’s ability to make a demand for payment of a service charge. This purpose is advanced by the wording of subsection (1) in particular. This imposes a time limit of 18 months beginning with the time when the cost is incurred by the lessor and ending with the service of a valid demand for payment of the service charge. The period of 18 months might be said to be relatively short. Further, there is no power in the court to extend the time limit of 18 months, although subsection (2) gives the lessor the unilateral power to extend the period of 18 months by giving a written notification which satisfies subsection (2) within that 18 months. It should also be noted that if the lessor does operate subsection (2), time is put at large. There is no further requirement that the lessor’s demand for payment of the service charge is within 18 months of the notice given under subsection (2). Further, once a demand for payment of the service charge is given and the lessee comes under a liability to pay it, then the limitation period under the Limitation Act 1980 applies.[61]Although it is easy to see that the purpose of section 20B was to impose a time limit on the service of a demand for payment of a service charge, there is room for speculation as to why precisely this was thought desirable. In Gilje v Charlegrove Securities [2004] HLR 1, Etherton J said at [27]:
“Finally, I agree with [counsel] that, so far as discernible, the policy behind section 20B of the Act is that the tenant should not be faced with a bill for expenditure, of which he or she was not sufficiently warned to set aside provision. It is not directed at preventing the lessor from recovering any expenditure on matters, and to the extent, of which there was adequate prior notice.”
[62]When section 20B was enacted, the 1985 Act already included in section 20 a requirement that a lessor provide estimates in relation to “qualifying works”. That section was enacted for the purpose of allowing lessees to participate in relevant decisions as to the carrying out of those works. However, one consequence of the lessor providing estimates of cost and of the lessees being involved in the process would be that the lessees would have thereby some prior warning of the likely level of expense involved. That warning would be based upon estimates or predictions of future expenditure rather than notification of actual costs. Section 20B was plainly intended to operate in tandem with section 20. Section 20 as enacted only applied in the case of qualifying works whereas section 20B applies to all service charge matters. Nonetheless, the existence of section 20 does suggest that the reference in section 20B(2) to “those costs” is referring to actual costs so that a notification of predicted future costs would not suffice.[63]There were other suggestions as to the purpose behind section 20B. It was submitted that difficulties could arise if there were a lengthy gap between the time when services were provided and the service charge bill was presented to the lessee, particularly if there were a change of lessee by way of an assignment of the lease. Further, there might be difficulties in terms of establishing necessary facts and calling relevant evidence in any dispute if there was a lengthy gap between the provision of the services and the date of the service charge demand. It is clear that section 20B(1) was enacted for the benefit of the lessee but that the right conferred by section 20B(2) to stop time running was for the benefit of the lessor. I consider that Parliament plainly recognised that there would be cases where an 18 month period between incurring costs and making a service charge demand could be too short. The service charge provisions in the present leases are not typical of provisions in modern leases. Typically, a modern service charge clause requires the lessor to draw up an account of actual expenditure by reference to a 12 month period. Thus, such an account will include some services which were provided nearly 12 months before the end of the accounting period. It will obviously take a little time after the end of the accounting period to do the accounting exercise. Further, some leases require the account to be audited or certified before a service charge demand can be prepared. If a lessor finds that it will not be able to make a service charge demand within the 18 month period required for section 20B(1), the lessor has the right to stop time running by giving a notice for the purposes of subsection (2). It might be said that if the lessor’s difficulty is that it cannot specify the actual costs for the purpose of making a service charge demand, it will have a similar difficulty in notifying the lessee of the amount of the costs which have been incurred. There may be some force in that point in some cases but in my judgment the difficulty is met by an interpretation of subsection (2) along the lines I have already put forward. If a lessor is not able to specify with complete accuracy the amount of actual costs, then the lessor can specify a figure which it thinks will cover the claim which it will later wish to make.[64]Finally, in relation to the purpose of section 20B, it should be noted that the potential scope of the section is considerably cut down by the decision in Gilje v Charlegrove Securities [2004] HLR1 where it was held at [20] that section 20B has no application where(a) payments on account are made to the lessor in respect of service charges, and(b) the actual expenditure of the lessor does not exceed the payments on account, and(c) no request by the lessor for any further payment by the tenant needs to be or is in fact made.[65]Accordingly, my conclusion as to interpretation of section 20B(2) is that the written notification must state a figure for the costs which have been incurred by the lessor. A notice which so states will be valid for the purpose of subsection (2) even if the costs which the lessor later puts forward in a service charge demand are in a lesser amount. Secondly, the notice for the purposes of subsection (2) must tell the lessee that the lessee will subsequently be required under the terms of his lease to contribute to those costs by the payment of a service charge. It is not necessary for the notice to tell the lessee what proportion of the cost will be passed on to the lessee nor what the resulting service charge demand will be.[66]It remains to apply this interpretation of section 20B(2) to the letter of 23rd February 2006. I have already analysed the contents of that letter in some detail. The letter does not state the actual costs which were incurred by the lessor in relation to the major works. It does state that major works have been carried out and that the lessor has incurred actual costs. The letter states that the lessor does not know what those actual costs were. The letter repeats the figures which were initially provided in March 2004 as a prediction of future cost. There is a separate point which can be made about the statement of costs in the letter. The letter does not attempt to say what were the total costs which will be taken into account in determining the amount of the service charge but rather goes to the end of the process by identifying (on the basis of estimated costs) the sum which will be claimed by way of service charge from the lessee. I think it is likely, in another case, if a lessor served a notice stating that it had incurred costs on major works and that the lessee’s liability to pay would be a specified sum that would be taken as sufficient compliance with section 20B(2). However, in the present case, the letter does not state the actual costs which have been incurred nor does it state what figure will be payable by the lessee as its proportion of actual costs but rather it states what the lessor says is the lessee’s proportion of estimated costs.[67]I can see that if the letter of 23rd February 2006 had been drafted somewhat differently it would then have been a valid notification under subsection (2). If the lessor had stated that the actual costs were a specified figure and the lessee’s proportion of those actual costs was again specified, that would be valid for the purposes of subsection (2), even though the lessor did not truly know what the actual costs would finally turn out to be. Indeed, as explained earlier, I would uphold a notice which stated that the actual costs were £x even if the lessor added a statement that the lessor might be able to inform the lessee in due course that it had managed to reduce its liability towards those costs.[68]Judge Cowell in the present case directed himself that the purpose of subsection (2) was to enable the tenant to know within the 18 month period of what it was he would be asked to pay so that he could budget for the expenditure. When he refused permission to appeal, Judge Cowell said that the lessee’s argument on this point was “entirely wrong”. Judge Cowell is a very experienced county court judge and I attach weight to his views. I am also anxious not to adopt too strict or onerous an interpretation of subsection (2). Nonetheless, I must give effect to my own conclusion which is that the letter of 23rd February 2006 does not satisfy the requirement of subsection (2) that the notification contains a statement “that those costs had been incurred”, when it does not purport to state what the actual costs were and it contains a statement that the actual costs may be greater than the estimated costs which are referred to and that the lessor will wish to recover any excess over the estimated costs referred to in the letter.[69]For the sake of completeness, I will address the second requirement of subsection (2) that the notice tells the lessee that he will subsequently be required to contribute to the costs by the payment of a service charge. The letter of 23rd February 2006 is not drafted with this requirement in mind. Instead of stating that the lessee will subsequently be required to contribute by way of service charge, it purports to state that the lessee is thereby required to contribute by way of a service charge. However, adopting a non technical approach, in view of the fact that the letter states that the lessee is required to contribute by way of a service charge and if the actual costs are greater than the sums identified in the letter the lessee will then be required to pay the difference, I would have concluded that the letter of 23rd February 2006 did contain the second statement required by subsection (2).

The result

[70]The result of the above reasoning is that I hold that the letter of 23rd February 2006 was not a demand for the purposes of clause 2(6) of the lease, nor a demand for payment of the service charge within section 20B(1) nor a notification in writing for the purposes of section 20B(2). I therefore allow the appeal of the lessee. I will hear Counsel on the form of order which is appropriate to give effect to my decision.

Cited in 39 later judgments

and 30 more of the most senior