Another contentious service charge case: Lessons to learn

19th December 2016

Service charges can be costly and are often contentious. Admiralty Park v Ojo [1], yet another service charge dispute to hit the legal headlines, highlights important lessons for landlords, tenants and contracting parties generally.  Housing Litigation and Management Partner Karl Anders and Real Estate Litigation specialist Martin McKeague explain.

The rule

A service charge is a mechanism contained in a lease that allows the landlord to recover its running costs for the building from the tenant[s]. As service charges can be costly and sometimes complex, they are often the source of friction.  The starting point when dealing with any service charge dispute – as, indeed, it is with any lease or other contract question – is the terms of the lease/contract itself.  A tenant’s service charge liability does not arise at all unless and until the landlord has properly complied with the service charge procedure and calculations set out in the lease and so, as with any other contractual clause, the wording of the service charge provision is key.  In accordance with leading authority, this general principle can be summarised simply as: the letter of the lease/contract is king [2].

An exception – estoppel by convention

So, if landlord or its agent does not comply fully with the service charge procedure in the lease, the tenant can lawfully resist its landlord’s claim for payment. But what happens if the tenant does not resist in those circumstances, and instead repeatedly pays service charge pursuant to the landlord’s non-compliant demands, as happened in the Admiralty v Ojo case?

The principle of estoppel by convention can come into play here, and can operate as an exception to the general rule.

Walker Morris has reported recently on cases in the commercial contract context which confirm that legally binding contracts can sometimes come into existence, or existing contracts can be varied, as a result of the parties’ conduct [3].  Similarly, an estoppel by convention may arise where parties act on an assumption that is either shared by both or is made by one and acquiesced by the other, to preclude one party from then denying the assumed circumstances where that would be unjust to the other.

Applying that principle to the Admiralty v Ojo scenario, when the tenant repeatedly paid up pursuant to the landlord’s non-compliant service charge demands, he acquiesced in the assumption that the landlord’s method of demanding service charge was acceptable.  It therefore became unfair for the tenant subsequently to seek to deny the landlord’s demands, and the tenant was estopped from so doing.  The parties’ conduct effectively gave rise to a new binding service charge mechanism and varied the terms of the lease.

WM Comment

It was relevant to the finding of an estoppel by convention in this case that the tenant had acquiesced over a long period in the landlord’s service charge methodology; that he had had the opportunity to read the lease and understand how service charges were supposed to be accounted for; and that he had even been involved in a prior service charge dispute in relation to the same lease in which he had not raised any objection. The best advice therefore remains that landlords and their agents should have regard to, and should strictly comply with, the particular provisions of all individual leases within their property portfolio.  Failure to do so could leave landlords out of pocket as they remain obliged to provide services but may be unable to recover costs where procedural failings mean that tenants’ payment liabilities do not arise.

Practical advice

However, a key lesson to learn from this case is that, even if the wording in a lease or other contract is clear, if one party has departed from its terms and the other has gone along with that, an estoppel by convention or a variation may have occurred.

• Landlords and their agents should have regard to, and should strictly comply with, the particular provisions of all individual leases when making service charge demands.
• Tenants should also have regard to the specific service charge provisions in their lease. If they wish to preserve an ability to challenge a non-compliant demand, they should take immediate specialist advice on whether it is legally and tactically advisable to withhold payment.
• Parties should be aware that the lack of any legal requirement for formality means that binding arrangements can be formed by conduct as well as orally or in writing. It is therefore important that parties should not act in any way that is inconsistent with their intentions.
• Landlords, tenants and commercial parties in general should review their leases/contracts to see where any inconsistent or non-compliant conduct might have left their arrangements vulnerable to unexpected or inadvertent variation.
• It is vital that businesses educate their staff as to the risks of estoppel by convention and informal or inadvertent lease/contract formation or variation.
• Landlords’ agents, in particular, should ensure that where they are managing properties on their clients’ behalf, they act strictly in accordance with the terms of the relevant leases, or they could face negligence claims when procedural failings cause landlords to suffer loss.

If you would like any further advice or assistance, or if you are in any doubt as to your rights and liabilities pursuant to a service charge provision or indeed any other lease/contract term, please do not hesitate to contact Karl or Martin, who will be very happy to help.

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[1] Admiralty Park Management Company Ltd v Ojo [2016] UKUT 421 (LC)
[2] See our earlier briefing on the leading authority, Arnold v Britton & Ors [2015] UKSC 36: https://www.walkermorris.co.uk/publications/real-estate-matters-august-2015/letter-of-lease-is-king-says-supreme-court/
[3] https://www.walkermorris.co.uk/publications/disputes-matter-may-2015/contract-by-conduct-a-cautionary-tale/; https://www.walkermorris.co.uk/publications/disputes-matter-summer-2016/beware-letters-inadvertent-commitment/; https://www.walkermorris.co.uk/publications/disputes-matter-summer-2016/anti-variation-clauses-court-appeal-confirmation/