Estoppel by convention: a legal principal which has been the subject of a number of service charge cases in the Upper Tribunal (Lands Chamber) recently and which managing agents may well find of interest.
By way of background, it is generally accepted that the leading authority on estoppel by convention is the case of Republic of India v India Steam Ship Company Limited [1998] AC 878, in which Lord Steyn described the principle as:
“Estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by both of them or made by one and acquiesced in by the other. The effect of the estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on an assumption…. it is not enough that each of the two parties acts on an assumption not communicated to the other. But … a concluded agreement is not required for an estoppel by convention.”
When considering whether an estoppel by convention may have arisen it is important therefore to have due regard for this authority, as the Upper Tribunal did in each of the following cases:
Clacy & Nunn v Sanchez & Others [2015] UKUT 0387 (LC) (‘Clacy’)
This was an appeal which concerned itself primarily with whether the certification of service charges was a condition precedent to recovery, however as a further issue the Upper Tribunal also considered whether an estoppel by convention had arisen which duly prohibited the lessees from challenging their liability to pay service charges because of the landlord’s failure to have such certified.
The background to this issue began in 1993 when the landlord acquired the freehold interest to the building, following which he wrote to each of the lessees to ask how they would like the building to be managed. A meeting was held between the landlord and some of the lessees and it was agreed that the landlord would send demands at the end of each year and provide copies of receipts to any lessee should they so wish; this agreement did not however make certification a requirement for the recovery of the service charges. The landlord proceeded to manage the building in accordance with this agreement over the course of the following 19 years, during which he did not encounter any significant issues in the recovery of service charges. The lessees of the flats also changed during this time, and the landlord duly gave notice of the original agreement when responding to pre-sale enquiries.
In determining this case, the Upper Tribunal concluded that an estoppel had arisen and that the lessees could not challenge their liability in respect of the service charges due to the absence of certification; the service charges were therefore recoverable by the landlord. The Upper Tribunal also reached the same conclusion with regard to the lessees’ liability on the basis that they had waived the right to abandon the position adopted by their predecessors in title due to their conduct in accepting previous demands for uncertified service charges and continuing to pay these over the course of the 19 years.
Bucklitsch & Bucklitsch v Merchant Exchange Management Company Limited [2016] UKUT 527 (LC) (‘Bucklitsch’)
Similarly to Clacy, this case dealt with a failure by the landlord to demand service charges in accordance with the requirements of the lease (most notably due to the service charge accounts not being audited), with the FtT concluding that these requirements were a condition precedent to the recovery of those charges. However, the FtT went on to determine that the landlord was nonetheless entitled to recover the relevant service charges due to an estoppel or waiver having arisen which prevented the lessees, Mr & Mrs Bucklitsch, from relying upon the condition precedent. The FtT, who relied heavily upon Clacy in reaching their decision, found the following to be grounds for either an estoppel or waiver having arisen:
- Mr & Mrs Bucklitsch had been tenants of the flat for 11 years and had never previously complained about the way that the service charge accounts were prepared;
- Mr & Mrs Bucklitsch were both shareholders in the landlord company;
- Mr Bucklitsch had attended the landlord’s AGM in 2014, raising a query regarding water rates before the accounts for 2013 were adopted unanimously;
- In an earlier case between the two parties in 2014, when challenging the service charges Mr & Mrs Bucklitsch had not raised any issue with regard to the accounts.
On appeal, the Upper Tribunal concluded that these grounds, without more at least, could not give rise to a finding of estoppel or waiver, considering the case to be different to that in Clacy where a significant meeting had been held regarding how the property was to be managed; the appeal was therefore allowed. This did not necessarily warrant however that the FtT had been wrong to determine that an estoppel or waiver had arisen, only that such a finding could not be upheld on the grounds which they had identified within their original determination, and the issue of whether an estoppel or waiver had indeed occurred was one that was remitted back to the FtT to be reconsidered.
Admiralty Park Management Company Limited v Ojo [2016] UKUT 421 (LC) (‘Ojo’)
This case related to a development, Admiralty Park, which contains 9 separate blocks all managed by the same management company. The leases of the flats at each of these blocks require the lessees to pay a service charge based upon a proportion of the costs relating to their own block plus a smaller proportion of estate costs, however the management company had demanded service charges calculated with each lessee paying a proportion of the costs relating to all 9 blocks. This issue was not identified until being raised by the FtT at a hearing in 2015, who consequently determined the lessee’s service charge liability to be nil.
The appeal to the Upper Tribunal concerned itself with three issues, one of which was whether the lessee, Mr Ojo, was prevented from objecting to the incorrect way the management company had calculated service charges. The management company argued that an estoppel by convention had arisen and that Mr Ojo was prevented from doing so, this on the basis that it had been clear from statements sent to the him since at least 2009 that the method of apportioning service charges was not in accordance with the lease. Mr Ojo had not taken issue with this method and had made payment in response to previous service charge demands, and at an earlier LVT in 2011 Mr Ojo was recorded as having said that he did not deny his liability for service charges which were claimed from him. Notably, Mr Ojo did not take any part in the appeal proceedings and consequently the management company’s arguments were unchallenged.
The Upper Tribunal agreed with the management company that an estoppel by convention had arisen, noting that Mr Ojo had opportunity to understand his lease in terms of how service charges were to be accounted but that he had never challenged the management company on the error which the FtT had identified. The appeal, and after the other issues having been considered by the Upper Tribunal, was therefore allowed.
Comment
There are two mantras which are regularly heard from lawyers who deal with service charge matters – “read the lease” & “the courts and judges don’t like windfalls” – and both spring to mind in terms of these three cases.
It is perhaps true of each case that had the respective landlords and management companies read and understood the leases then the consequences of litigation may have been limited, if not avoided altogether, particularly so in Bucklitsch where the landlord will now be faced with the potential of not being able to recover the service charge. There are reasons however why strict compliance with a lease may not always be appropriate or even possible, although by reading and understanding the lease then it is at least possible to take steps to mitigate against any risks which might arise.
These cases also show that the onus of ensuring compliance with the lease, particularly when it comes to the recovery of service charges, is not entirely on the party wishing to recover such charges. For instance, each case shows that it is not acceptable for a lessee to pay service charges over a sustained period only to later challenge those charges when an issue is identified, and where if successful they would benefit from a windfall in that they may avoid liability for any service charges in the relevant years. It is instead reasonable to expect a lessee to understand their lease and, if they are provided with sufficient information to do so, to raise any issues with the landlord or management company in a timely manner.
That’s all for this latest blog, I hope that you have found it interesting. If you have any comments of questions with regard to anything contained within this blog then please do not hesitate to get in touch.
NW
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