SERVICE CHARGES: Contractual Liability Under the Lease; Fairness & Estoppel by Convention

I’ve made this observation before but the starting point of any determination under Section 27A of the Landlord & Tenant Act 1985 of the amount of a service charge liability ought to what is prima facie contractually due under the lease.

However in the FTT where one or both parties may be unrepresented, the terms of the lease are not always uppermost in the minds of the landlords  and tenants in dispute, something conveniently illustrated by Admiralty Park Management Company Limited v Ojo [2016] UKUT 421 (LC) which was decided in September 2016. The case also offers some useful guidance as to how the FTT should proceed where the parties have neglected to apply their minds to something so basic as: what is actually due under the lease?

Ojo also offers useful guidance on procedural fairness and rather less useful guidance on the application of estoppel by convention (by which I mean, it employed a slightly flawed analysis of estoppel by convention albeit to produce the right result).

In Ojo the FTT of its own motion raised for the first time at the start of the hearing decided that the service charges had not been calculated in accordance with the method prescribed by the lease and, having refused the management company, to which the service charge was payable an adjournment, to deal with the point, it went on to hold that the tenant was not liable to pay service charges for the years 2010 to 2014 for services provided by the appellant.

On appeal it was argued that there had been a serious procedural irregularity in the conduct of the proceedings in that the FTT should only have decided the issues raised by the parties and not raised the impermissibility of the mode of calculation of its own motion or, as a fall-back position, that the requested adjournment should not have been refused.

Essentially what had happened in relation to the calculation was that the managing agent had apportioned charges equally between a number of different properties it managed for the same landlord, whereas, under the lease, what should have been charged was a proportion of the service charge expenditure on the single property in which the tenant’s flat was situated.

The exact consequence of apportioning the service charges in this way was impossible to ascertain and was likely to have varied from year to year.The method of accounting adopted by the appellant (which the appellant’s managing agent inherited from a previous agent) was more simple and convenient because it avoided the need to keep separate accounts for each of nine buildings, but it was accepted that it did not conform to the scheme laid down by the lease. No objection to the appellant’s mode of accounting had ever been taken by the tenant nor any other tenant on the estate.

The FTT had asked the appellant’s representative how the method of apportionment it had adopted could be reconciled with the charging provisions of the lease and it its decision had dealt with the exchange which had ensured as follows:

The short answer appeared to be: this is the way the respondent has run the estate. In other words the respondent could not submit that it had followed the service charge regime outlined above. Later, after a substantial adjournment for [the appellant’s representative] to take full instructions, he sought to justify the respondent’s position by seeking to argue that it was entitled to charge Mr Ojo on this basis by virtue of an estoppel by convention as this was the way in which the service charge had been calculated for a number of years. All blocks, he argued, were treated to the same regime and there were useful and beneficial economies of scale. That, with respect, arguably confuses management with charging for it, though it might well be for Mr Ojo’s benefit. But it also runs the risk that a tenant in one building is charged for works carried out in another building for which he has no liability. That much is clear from the schedule submitted by the respondent which starts with a charge for another block for which Mr Ojo has no liability. Further, it would be wholly unacceptable to allow a litigant to put forward such an argument at this late stage, without pleadings, evidence, and advance notice to Mr Ojo that the respondent was claiming the service charge on some variation of the contractual basis.

Having refused to allow the appellant any further opportunity to attempt to answer the point it had raised, the FTT went on to determine that, because the appellant was unable to justify the charges it sought to recover by reference to the terms of the lease, the tenant’s liability was nil for the four years in issue. It described this outcome as “inevitable though regrettable” because it was clear that the tenant should owe something but the amount was impossible to determine on the limited evidence available.

Three issues arose on appeal:
(1) Whether the FTT had acted without jurisdiction, or in a way which was procedurally unfair, by reaching its decision on the basis of a new point which had not been relied on by the tenant or identified before the hearing, and without the appellant having been allowed an effective opportunity to consider and address it.
(2) Whether the tenant was prevented from objecting to the manner in which the Management Charges had been calculated in the past, because he had not raised any such objection since at least 2009.
(3) What Management Charge, if any, was the tenant liable to pay in respect of the years 2010 to 2014.

On the first issue, the Upper Tribunal (The deputy President, Martin Rodger QC) in relation to the FTT’s having raised the terms of charging provisions of its own motion was robust and cited the following passage from Regent Management Limited v Jones [2012] UKUT 369(LC) the Tribunal (His Honour Judge Mole QC) on the entitlement of the LVT (the FTT’s predecessor tribunal) to raise issues which had not occurred to the parties:

The LVT is perfectly entitled, as an expert tribunal, to raise matters of its own volition. Indeed it is an honourable part of its function, given that part of the purpose of the legislation is to protect tenants from unreasonable charges and the tenants, who may not be experts, may have no more than a vague and unfocussed feeling that they have been charged too much. But it must do so fairly, so that if it is a new point which the tribunal raise, which the respondent has not mentioned, the applicant must have a fair opportunity to deal with it.

Although the Deputy President did not demur from the decision in Birmingham City Council v Keddie [2012] UKUT 323 (LC) in which it had been said that the LVT was not “an inquisitorial tribunal”and that:

… where an LVT does feel compelled of its own volition to raise an issue not raised by the application or the parties, it must as a matter of natural justice first give both parties an opportunity of making submissions and if appropriate, adducing further evidence in respect of the new issue before reaching its decision.

he went on to say:

28 Where an application is made to the FTT for a determination under section 27A of the 1985 Act the overarching question to be addressed is, usually: what sum, if any, is payable as a service charge by leaseholder. In order to answer that question a number of sub-questions or individual issues are likely to have to be addressed, but the tribunal’s most important task is to determine that amount.

29 Bearing in mind the FTT’s overriding objective of dealing with cases fairly and justly, avoiding unnecessary formality, seeking flexibility and using its expertise effectively, care should be taken by tribunals to avoid adopting an approach which is too narrow, technical or fixated on adherence to procedure for its own sake. This is especially the case where one or more of the parties is unrepresented and where the FTT is likely to be very much better equipped than the parties to identify all of the important issues which need to be considered before the correct sum due from the leaseholder can be identified. An experienced tribunal, guided by the overriding objective, will have no difficulty in distinguishing between a point of significance which the parties may have overlooked, and a point with no real merit which it would be in nobody’s interest to raise for consideration.

30 In this case the appellant’s departure from the scheme of accounting required by the lease was so fundamental that it was both proper and inevitable, in my judgment, that the FTT should raise the issue at the hearing. When it appeared to the tribunal that sums had been claimed and included in the service charge which fell outside the scope of the fifth schedule because they related to other buildings, it was undoubtedly entitled to ask for an explanation. The fact that Mr Ojo may not have appreciated that the service charges were being demanded on a different basis from the lease did not require the FTT to shut its eyes to an obvious and potentially fatal irregularity. It was, in any event, part of Mr Ojo’s challenge to the service charges that they included at least one item of expenditure, on the employment of a caretaker, which was not wholly for the benefit of his building or even of his estate. It was within both the broad question which the FTT was required to determine, namely the quantum of Mr Ojo’s liability, and this more specific issue, for it to consider the extent to which the charges were consistent with the contractual scheme.

31 I therefore do not accept that part of Mr Fain’s argument which suggests the FTT was simply not entitled to raise the issue of the compatibility of the appellant’s practices with the contractual charging provisions.

As to the refusal of the adjournment, however – and perhaps inevitably given the history outlined above – the Deputy President was equally clear, saying, at 32:

… As was emphasised in both Regent Management and Keddie , where a tribunal raises a new point which has not previously been referred to by either party, before reaching its decision it must as a matter of natural justice give both parties an opportunity of making submissions and, if appropriate, adducing further evidence in respect of the new issue. The FTT regarded it as unacceptable to allow the appellant to put forward an argument based on long practice without giving notice in advance to Mr Ojo. I agree that that would have been unfair, but the same unfairness was visited on the appellant by its not being given adequate notice of, or a sufficient opportunity to respond to, the point taken by the FTT.”

He therefore agreed that the FTT’s decision had been arrived at on a basis which was unfair.

The Deputy President went on to hold at 45:

It would be unfair for Mr Ojo now to be allowed to dispute his liability in those circumstances on grounds which he had chosen not to raise for many years. For him to be permitted to do so would require the appellant to recalculate the service charges back at least to 2009 in order to ascertain Mr Ojo’s correct contribution, which may be more or less than the sums he has actually been charged. If Mr Ojo has been overcharged (and there is no basis for the conclusion that he has) it would mean that other leaseholders in the estate have been under charged, but it would be difficult for the appellant to recoup the shortfall after so prolonged a lapse of time. In all of those circumstances I accept the appellant’s case that Mr Ojo’s liability should be ascertained on the assumption that the lease allowed the appellant to apportion liability for costs incurred in relation to the estate as a whole amongst all of its leaseholders, rather than requiring it to apportion liability for work to an individual building only amongst the leaseholders of that building.estoppel by convention

and determined his service charge liability accordingly.

The modern law of estoppel has been bedevilled by a laxity of expression and a failure of analysis; something I examined a few years ago in an article in Landlord & Tenant Review – The fraudulent tenant: equity, estoppel and statutory purpose (Case Comment on Newport City Council v Charles [2008] EWCA Civ 1541; [2009] 1 W.L.R. 1884) L. & T. Review 2010, 14(2), 63-66. The result is that the main species of the ‘modern’ estoppels, proprietary estoppel, promissory estoppel and estoppel by convention have often been misidentified and the law applicable to each has been subject to a degree of cross-contamination. Estoppel by convention is the one modern estoppel of which it is probably correct to say that it is a “shield and not a sword” (as I explained in the L&TR Article, there is a long history of the phrase having been used of “infancy” but the evidence of its ever having been applied to estoppel of any kind before 1975, when it was said in Crabb v Arun DC [1976] Ch. 179 is dubious to say the least).

Estoppel by convention thus operates regularly and quite properly as a defence to recovery of historically overpaid sums but it does not conventionally assist in establishing a future (or currently unpaid or disputed) liability. The difference between estoppel by convention and proprietary and promissory estoppel, I would suggest (although I would accept this is implicitly suggested rather than being explicitly stated by the authorities) is that because it relates to past actions, reliance and detriment  is presumed, whereas the two latter require reliance and detriment to be proved

The Deputy President’s summary at 45 does, however, suggest that because the exercise of going back and calculating the tenant’s actual liability was, in all probability, if not impossible, prohibitively expensive, recovery on the basis of promissory estoppel might well have been justifiable on the basis of actual detriment, which is why I am not critical of the result, only the route by which it was reached.

On the need to consider first the tenant’s contractual liability and on fairness, Admiralty Park Management Company Limited v Ojo is an exemplary decision.

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