Service charge costs

When are service charge costs incurred by tenants and intermediate landlords?

The background

Westmark (Lettings) Ltd v Peddle [2017] concerned the settlement of residential service charges. By statute, a tenant is not liable to pay service charges incurred more than 18 months before a demand is served; however, this does not apply if the tenant is notified that the costs have been incurred during that 18-month period.

The leasehold chain of the relevant building comprised a freeholder, a head lease, a sub-lease, a sub-underlease and 29 occupational leases. The head lessee provided services to the building, and each subsequent lessee (other than the occupational lessees) was entitled to recover its costs from the party below it in the chain.

The occupational leaseholders argued that they were not liable for some of the service charges on the grounds that the 18-month period ran from when the head lessee incurred the costs, but that no demands had been made of them during that time.

The decision

The Upper Tribunal concluded that the 18-month period did not start when the head lessee incurred the costs, but instead when each subsequent lessee became liable for them.

At each stage of the leasehold chain therefore, a new 18-month period started which meant that the occupational leaseholders were liable for the costs demanded by their immediate landlord (in this case, the sub-underlessee).

Advice and action for landlords

This case is reassuring for landlords, particularly of properties commonly held as investments, as it ensures that the chain of liability continues.

Where a new 18-month period starts afresh at each stage according to when each lessee becomes liable for the service charge costs, even in long chains, each landlord has the reassurance that it should recover those costs it has incurred.