Valid demand for interim payments
Gilje v Charlegrove Securities Ltd (No2)
 EWHC 1284 (Ch);  1 All ER 91.
Section 20B of the Landlord and Tenant Act 1985 provides as follows:
20B(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. In this case projected budgets were prepared for the accounting periods ending March 1999 and March 2000 and supplied at the beginning of each year. Quarterly demands for interim service charges were subsequently made. However, final accounts for those years were not supplied until the beginning of October 2001. Those accounts showed that the amounts expended for those two years were less than the interim quarterly charge demands for those years. The tenants therefore sought to argue that the landlord was prevented from recovering by way of service charges any expenditure in those accounts because the expenditure was incurred more than 18 months previously.
(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.
Held: Section 20B has no effect upon interim payments. It only applies where a further demand is made for a balance.
.. section 20B of the Act has no application where: (a) payments on account are made to the lessor in respect of service charges; (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. .. it is quite clear that section 20B(1) operates only where the relevant costs were incurred more than 18 months before a demand for payment. (paragraphs 20 and 21)See also Brennan v St Paul's Court Limited  UKUT 403 (LC) where Gilje was applied.
Interim payments never validly demanded
Section 20B and the “18 month rule”
Skelton v DBS Homes (Kings Hill) Ltd
 EWCA Civ 1139
Section 20B of the Landlord and Tenant Act 1985 applies to interim demands or demands for payments on account of work to be done, as much as to final demands for costs already incurred. Therefore, an interim demand must be made no later than 18 months after the charges that it refers to were incurred. Further, the date that a ‘demand for payment’ was served was the date upon which it was complete and valid according to the requirements of the lease.
A lease provided that the tenant’s liability to pay service charges did not arise until the landlord had prepared and served a summary of estimated costs together with a demand in the form of a statement showing the amount payable on account of those estimated costs. For the service charge years 2011/12, 2012/13 and 2013/14 the landlord had served a demand shortly before the start of each year, but had failed to provide the summary of estimated costs. No demands for balancing or final charges were ever made for the relevant service charge years. The required summaries of estimated costs for all three years were provided in April 2014.
The tenant argued that he was not liable to pay the interim charges because he did not receive a valid demand for payment until more than 18 months after the charges had been incurred. He contended that the demands were not complete and valid without the summary of estimated costs.
Both the First Tier Tribunal and the Upper Tribunal disagreed with the tenant and found the service charges became payable when the summaries of estimated charges were served in April 2014. They found that the demands were not valid before this date, but considered that section 20B did not apply to demands for payment on account relying on the decision in Gilje v Charlegrove Securities Ltd  EWHC 1284 (Ch),  1 All E.R. 91. The case was appealed to the Court of Appeal.
Decision on appeal
The Court of Appeal reversed the decision of the Upper Tribunal and found that section 20B did apply to interim demands or demands for estimated costs not yet incurred. The Court of Appeal relied on the definition of ‘service charge’ in section 18 of the 1985 Act which clearly includes costs to be incurred as well as costs which had been incurred.
The Court of Appeal distinguished Gilje on the basis that, in that case, there had originally been a valid demand for interim charges. Whereas, in the instant case, the interim payments had never been validly demanded.
Further, the Court of Appeal confirmed that the late service of the estimate of charges did not retrospectively validate the demands at the date when they were originally given. Rather, the demands should be treated as having been made on the day that they became complete – i.e. when the summary of estimated charges was served and not before. The Court of Appeal distinguished the instant case, where there had been a failure to serve a valid demand in accordance with the terms of the lease, from the position in Johnson v County Bideford  UKUT 457, where a demand was retrospectively validated by the belated provision of the landlord’s address under section 47(1) of the 1985 Act, on the basis that the latter case concerned a rule of statutory validity as opposed to contractual validity between the parties.
This decision makes it clear that the 18-month deadline for demanding service charges applies to interim demands or demands for payments on account under a lease. The FTT, the UT and the Court of Appeal were also agreed that that the impugned demands were not valid until they were accompanied by the mandatory estimate of charges.
The decision reminds us that there is an important distinction to drawn between contractual rules of validity, which will vary depending on the construction of the particular lease, and statutory rules of validity, which are universal.
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