Should both parties act on a mistaken assumption about a certain provision, this can override the terms of the lease, with potentially costly consequences.
Introduction
Ordinarily, the parties to a lease either abide by its terms or, if a there is a breach, the dispute is settled one way or the other.
But what happens if a party mistakenly breaches a term of a lease, and the other party mistakenly accepts this breach? This can result in a scenario where both parties carry on acting in breach of the lease, unaware that anything is wrong. Can the breach be enforced at a later date, or has the subsequent conduct of both parties overruled the terms of the lease?
The recent case of Admiralty Park Management Company Limited v Ojo [2016] UKUT 421 (LC) dealt with this issue.
Facts in Admiralty Park Management Company Limited v Ojo
In 2004 Mr Ojo (the tenant) entered into a long lease of a flat with Freehold Managers Ltd (the landlord) and Admiralty Park (a management company). The flat was one of sixteen in a block, which itself was one block in an estate of twelve buildings.
There was an provision in the lease which obliged that Mr Ojo to pay a service charge to Admiralty Park, who were responsible for managing most of the estate. The basis of the provision was that any service charge was to be calculated by dividing the total charge for Mr Ojo’s block of flats, by the number of flats within the block.
In fact, Admiralty Park proceeded to charge Mr Ojo (and the other tenants in the estate) a service charge which was calculated by dividing the total charge for the whole estate, by the number of flats in the estate. As each block contained a different number of flats, the resulting service charge was not the same as it would have been had the lease been abided by.
Despite this, Mr Ojo (and all of the other tenants in the estate) did not object to the calculation of the service charge and proceeded to make regular payments to Admiralty Park.
Decision of the First Tier Tribunal (Property Chamber) (‘FTT’)
In 2014, Admiralty Park brought proceedings against Mr Ojo for the payment of outstanding service charges. During these proceedings, the FTT noticed that the service charge had been incorrectly calculated and raised the issue of whether Admiralty Park was actually allowed to charge the tenant, as they had not complied with the lease. The FTT refused Admiralty Park an adjournment to put forward an argument on the issue, and held that Mr Ojo was not liable to pay any service charge.
Permission was granted for an appeal, and as part of their appeal, Admiral Park argued that there had been an estoppel by convention.
Estoppel by convention
The requirements for estoppel by convention were set out by Mr Justice Newey, in Prudential Staff Pensions Ltd v The Prudential Assurance Company Ltd [2011] EWHC 960 (Ch), who said the following:
“It is settled that an estoppel 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 acquiescing 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 it was rightly accepted by counsel for both parties that a concluded agreement is not required for an estoppel by convention.”
Estoppel by convention therefore prevents a party to an agreement, where both parties have been acting under a certain (incorrect) assumption about that agreement, from disputing the veracity of that assumption at a later date.
Decision of the Upper Tribunal
The Upper Tribunal reversed the decision of the FTT, finding that there had been an estoppel by convention, and that Mr Ojo was required to pay the outstanding service charge.
The Upper Tribunal’s decision was based on the following key points:
Lasting effect
The irony of this case is that at no point was it established whether the inconstancy in accounting would have resulted in Mr Ojo paying more or less in service charges than he would have if the lease had been complied with.
This case is important however, as it illustrates how dangerous it can be for parties to acquiesce to a breach of a lease’s terms. It shows that an assumption made by the parties, and their subsequent conduct in acting by this assumption, can prevail over the terms of a lease, with potentially costly consequences.
In this case Mr Ojo did not necessarily realise that there had been a breach of the lease. The Upper Tribunal were satisfied, however, that having had ample time to consider the terms of his lease, Mr Ojo should have realised the error in accounting and raised the issue.
The message to take away from this case is that parties to a lease must ensure that they read the document thoroughly, and that they understand all its provisions. If there is any doubt as to the terms of a lease, the issue should be raised straight away, as any delay might cause serious problems some years down the line.
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