Service Charge: Whether the leaseholder admitted liability for service charges by paying disputed sums (Lacy v Homeselect Finance (No.3) Ltd – 2023)

Where a leaseholder paid service charge sums which were in dispute, did it admit liability for those service charges?  The Upper Tribunal considers this appeal following the First-tier Tribunal’s decision that the leaseholder had so admitted liability.

The background

In Lacy v Homeselect Finance (No.3) Ltd [2023], the leaseholder held a long lease of a flat in a building containing 9 residential flats. The respondent was the landlord and freeholder. The freeholder was required to maintain the property, and the leaseholder covenanted to pay service charges.

Substantial works to the driveway and retaining wall were proposed, and constituted ‘qualifying works’ under s.20 of the Landlord and Tenant Act 1985 such that the freeholder was required to follow the statutory consultation procedure. The freeholder made an application for a grant of dispensation from the First-tier Tribunal in 2013, which ordered that the freeholder should follow the consultation procedure save where some time periods could be shortened.

Further proceedings in 2016 concluded, following an application made by leaseholders for determination of reasonableness of service charge, that the service charges were reasonable.

The leaseholder appellant in these proceedings made an application in 2021 for determination as to its liability to pay service charges. Under their leases, leaseholders were to pay £100 per quarter in advance, with the remainder paid on demand at the end of the service charge year. The freeholder had demanded service charges on a quarterly basis, calculated to be a quarter of the estimated service charges due from the leaseholder, rather than the £100 specified in the lease, and also including some additional ad-hoc charges.

In the present application, the leaseholder argued that the quarterly service charges had not been demanded as per the provisions contained in the lease. The freeholder stated that the leaseholder should be estopped from using this argument as an unfair advantage had been gained from the leaseholder remaining silent on the issue for many years. This was rejected by the FTT, but it was found that the leaseholder having paid service charges during the disputed period had admitted liability for payment of those sums. The leaseholder appealed.

The decision

The Upper Tribunal allowed the appeal, finding that the leaseholder was not estopped from arguing that charges had not been demanded in accordance with lease provisions. The charges were also found to be unreasonable on a review of the facts of the case and based on a lack of consultation.

The UT considered whether the FTT had been right to find that the leaseholder was estopped from relying on the lease provisions and had admitted sums due by paying the service charge demands.

Referencing Cain v Islington London Borough Council [2015], in that decision the leaseholder was found to have agreed or admitted the sums demanded following an assessment of the natural implication or inference caused by payments of service charges demanded. In the present appeal, no evidence could be found to support the freeholder’s argument on this basis, and the UT set aside the FTT’s decision that the leaseholder had admitted the sums due.

The freeholder benefited from demanding overpayments of service charge from the leaseholder. The freeholder was therefore not blameless, but the leaseholder was also in a position to know the provisions contained in the lease and therefore a claim that the leaseholder suffered a detriment in reliance on something said by the freeholder did not stand.

The UT considered the argument of estoppel by convention, which does not require a party to suffer a detriment although one was evident in this claim. The freeholder relied on the leaseholder accepting the service charge demands as valid, thus risking a finding that the sums were not payable. The UT substituted the FTT’s finding that the leaseholder was estopped from arguing that charges were not demanded in accordance with the lease.

The court also considered whether the service charges were reasonable. The freeholder had commissioned works to the driveway and retaining wall, in respect of which the leaseholder argued that the consultation process contained in the Service Charges (Consultation Requirements) (England) Regulations 2003 had not been complied with. As a result, the leaseholder believed its liability to be limited to £250.

Further, the service charge demand had been made prior to the costs being incurred rather than within 18 months after costs were incurred; the leaseholder argued that this reduced its liability to nil. The UT dismissed this latter argument, finding that the statute did not prevent charges being demanded prior to costs being incurred.

The UT did, however, find that the leaseholder was only responsible for a payment of £250. The freeholder did not make any argument about this issue at the FTT hearing, and the leaseholder’s appeal therefore succeeded on this point.

Together with analysis of specific items of the service charges demanded, the leaseholder’s appeal succeeded on all grounds.

Advice and action for landlords

The nature of the estoppel argued by the parties was discussed in this decision. The leaseholder had not acted to its detriment by relying on actions of the freeholder, because the leaseholder itself knew what the terms of its lease said. The UT found that the freeholder’s argument was in fact estoppel by convention, for which no detriment was required. As a result, the FTT’s decision was set aside by the UT and the leaseholder’s argument that it had not admitted the sums due by its actions was accepted.

A lack of consultation in line with the statutory requirements also rendered the service charges demanded as unreasonable.

Landlords are advised to exercise caution when making service charge demands, ensuring that lease provisions are followed to the letter and utilising the statutory consultation procedure (or making a proper application for dispensation from consultation) where out-of-the-ordinary works and costs are anticipated.