Section 20B issued from Landlord. Is it enforceable?

Smileitsfree

A Management Company is in place to manage communal services and expenditure of our apartment block containing 10 private units.  The financial year runs from 1 Jan to 31 Dec. Estimated costs were invoiced in January 2020 and annual fees were paid in advance.

All residents have received a S20B notice on 27th September 2021 relating to £3562.59 deficit in 2020 expenditure. We were advised signed off accounts were to follow. 

On 4th October 2021, residents received the certified 2020 accounts (dated 1 October 2021) confirming an increased deficit of £3891.00 A service demand of £389.10 has been issued to residents for immediate payment. 

When does the 18 month timeframe start? Is it at the start of the financial year I.e. January 2020? Should we have had a S20B notice before 30 June 2021? 

One of the apartments was sold on 30 September 2020 and another one was sold in January 2021. The new owners have been issued with the service demand for 2020 deficit. Surely this cannot be right, they can’t be expected to pay for services prior to purchase. Can the landlord pursue the previous owners to recover the deficit? Can the landlord demand recovery of the full deficit from the 8 owners?  

Any advice is appreciated. 

Lunchbox

It starts at the beginning of the previous financial year, so 1 Jan 2020. You’re going to have a few months they can’t recover costs for if that really is your FY; you’ll need to check the invoices for the dates they were incurred. Do check though; our FY runs from 1 April-31 March with accounts issued in September (or indeed a 20B with accounts later).

It is correct that the new owners inherit the SC ‘account’ for the property along with any credit or debit. Their solicitor should have arranged a retention for outstanding actuals, they should contact their conveyancer to check whether there really was no retention requested. They are unlikely to have any recourse against the sellers unless the purchase contract said they’d accept liability for any excess charges.

Smileitsfree

Thanks for the information. 

Yes it’s in the lease, financial year runs from 1 Jan - 31 Dec. Accounts should have been certified by 30 June 2021, but only just been done on 1 October 21. 

I asked for all invoices and dates of receipt and payment. Limited information has been provided and I have raised discrepancies against certified expenditure. I’m waiting on a response. Because the service fees are one pot of money, is it a case of any invoices paid outside the 18 months (Jan - March) are non recoverable? Can they recover all the expenditure within the 18 month timeframe? Do we need to formally reject the S30B notice? 

I don’t think the new owners had a retention in place for outstanding actuals. Both the landlord and Management Company provided confirmation that accounts were clear with nothing outstanding. They are going to contact their conveyancer to check. 

Lunchbox

I’d recommend speaking to the Leasehold Advisory Service about most of your queries; you will need to pay the invoiced amount but should do so under protest whilst contesting the charges. LAS will advise you how to go about this. We’re currently going through a similar process for a 50% excess payment for this year.. 

The landlord and management company would confirm the accounts were clear, because they were at that point in time. They are however asked to fill in an LPE1 form which asks about expected excess service charge payments. It might be that the form was filled in months before this became apparent. There might be an argument though that the sellers, had they had the Section 20B notice at the point of completion, acted in bad faith by not telling the buyers. Either way, the conveyancer should be the first port of call as something hasn’t gone as it should.

eddddy

Smileitsfree said:

I asked for all invoices and dates of receipt and payment. Limited information has been provided and I have raised discrepancies against certified expenditure. I’m waiting on a response. Because the service fees are one pot of money, is it a case of any invoices paid outside the 18 months (Jan - March) are non recoverable? Can they recover all the expenditure within the 18 month timeframe? 

I would think it would be treated like this...

• You paid an estimated service charge in advance for Jan 2020 to Dec 2020

• Your advance payment was enough to cover the bills from Jan 2020 to, say, Oct 2020 - then your advance payment ran out

• So you are now being asked to pay a further amount for the bills from Nov 2020 to Dec 2020

Regarding the people who've recently bought the leaseholds. From what you say...

• The landlord was correct to send the s20b and service charge deficit demand to the new leaseholders - they are liable to pay

• The new leaseholders probably have the right to claim a proportion back from the previous owners. It's usually a standard clause in the sale contract. (But that's between the buyer and the seller - it's nothing to do with the landlord.)

• Solicitors will often keep a 'retention' to make claiming from the previous owner easier. (Although the retention is often only £250)

Lunchbox

eddddy said:

Smileitsfree said:

I asked for all invoices and dates of receipt and payment. Limited information has been provided and I have raised discrepancies against certified expenditure. I’m waiting on a response. Because the service fees are one pot of money, is it a case of any invoices paid outside the 18 months (Jan - March) are non recoverable? Can they recover all the expenditure within the 18 month timeframe? 

I would think it would be treated like this...

• You paid an estimated service charge in advance for Jan 2020 to Dec 2020

• Your advance payment was enough to cover the bills from Jan 2020 to, say, Oct 2020 - then your advance payment ran out

• So you are now being asked to pay a further amount for the bills from Nov 2020 to Dec 2020

Sorry, this isn’t correct. Freeholders or managing agents estimate the annual service charges for each year, split this amount into 12 and bill you monthly through the financial year. At the end of the financial year, they calculate the actual expenditure and bill you for any excess, or return the surplus. They have 6 months from the end of the FY to do this (in this case, until July). 

If they know they won’t be in a position to bill some of their incurred expenditure from say, January/February 2020 by the July 2021 deadline, they must issue a section 20B notice stating the leaseholder bill for those charges will be delayed (as they cannot bill for any invoices more than 18 months old). 

In terms of the rest, they were correct to send the 20B notice but it was late, so charges from Jan-Jun 2020 may not be billable (more than 18 months before the issue of the notice) but Leasehold Advisory Service advice is needed here. It often isn’t included in a sale contract but the buyers need to check, and it may well be the Freeholders problem depending on when they completed the LPE1 as this asks about excess service charge expenditure, but it may be difficult to prove if they knew at that time or not.

Smileitsfree

I’ve arranged a telephone appointment with LEASE to clarify legal position. I’ll update the post with the answer. Thank you for your advice. 

Smileitsfree

Following advice from LEASE it’s been confirmed that invoices raised/paid prior to 18 month of Section 20B notice are not recoverable in this situation. 

eddddy

Smileitsfree said:

Following advice from LEASE it’s been confirmed that invoices raised/paid prior to 18 month of Section 20B notice are not recoverable in this situation. 

That's interesting, because ARMA disagree with that.

They say that, based on a Lands Tribunal case in 2010, the 18 months starts from when when your advance payment "runs out" (unless your lease says otherwise).

Here's ARMA's summary of that ruling:

GUIDANCE NOTE D13 S20B OF THE LANDLORD AND TENANT ACT 1985 - THE 18 MONTH RULE

Service Charge Accounts Should be distributed within 18 months of the date expenditure exceeded the budget or any tighter timescales that are required by the Lease and copies made available to all Leaseholders paying Variable Service Charges.

If Service Charge Accounts are not distributed within 18 months of the date expenditure exceeded the budget, a Section 20B Notice Should be served on an interim basis and any such notice Must be followed by Service Charge Accounts within a reasonable time.  

See: S.20B Landlord and Tenant Act 1985 

Link: https://blocsphere.co.uk/download/136/arma-guidance-notes/12962/d13-s20b-the-18-month-rule.pdf

And here are details of the specific Lands Tribunal decision that ARMA base that on:

A decision of the Lands Tribunal in late 2010 has clarified when the need for S20B (2) notice arises when there is a deficit at the year end. Holding & Management (Solitaire) Limited and Miss Stephanie Sherwin clarified if a S20B (2) notice is required when there is a deficit at the year end. The ruling concerned payments on account and confirmed that a S20B (2) notice is only required from the point when committed expenditure for the year exceeds the payments on account received. UT Neutral citation number: [2010] UKUT 412 (LC) LT Case Number: LRX/67/2009;

Smileitsfree

Thanks Eddddy……Well that’s confusing! I have made a follow up enquiry with LEASE so I have something in writing. Just waiting on a response. Will be interesting to see what they have to say.