Coughing up the cash: are leaseholders inadvertently admitting their service charge is right by paying it?

In light of a recent decision of the First Tier Tribunal (“FTT”) in Poplar Housing and Regeneration Community Association Ltd v Samuel Khan LON/00BG/LSC/2023/0205 and the decision of the Upper Tribunal (“UT”) G & A Gorrara Ltd v Kenilworth Court Block E RTM Co Ltd [2024] UKUT 81 (LC), Laura Tweedy and Callum Reid-Hutchings consider when service charges are deemed to be ‘admitted’ by payment.

What is a s27A application?

1. Section 27A Landlord and Tenant Act 1985 (“the Act”) applications are commonly made by lessors or lessees (and can be made by other persons or bodies to whom or by whom service charge is payable) of long residential leases, to the FTT to have it consider whether the service charge (which has been sought or is planned to be) is payable. It is often used by a landlord as a precursor to forfeiture.

“s27A(1): An application may be made to the appropriate tribunal for a determination whether a service charge is payable and, if it is, as to—

(a) the person by whom it is payable

(b) the person to whom it is payable

(c) the amount which is payable

(d) the date at or by which it is payable, and

(e) the manner in which it is payable.

(2) Subsection (1) applies whether or not any payment has been made…

s27A(3): An application may also be made to the appropriate tribunal for a determination whether, if costs were incurred for services, repairs,

maintenance, improvements, insurance or management of any specified

description, a service charge would be payable for the costs and, if it would, as

to—

(a) the person by whom it would be payable,

(b) the person to whom it would be payable,

(c) the amount which would be payable,

(d) the date at or by which it would be payable, and

(e) the manner in which it would be payable.”

Admitting charges

2. No application can be made under section s27A with respect to a matter that has been agreed upon or admitted by the tenant. But, the tenant is not to be taken to have agreed or admitted any matter by reason only of having made payment (s27A(4) of the Act). Often, payments are made, even those in dispute, to avoid the risk of forfeiture. Hence why, the law inserts this relevant provision to protect tenants who do pay:

“s27A(4):  No application under section (1) or (3) [as set out above] may be made in respect of a matter which –

(a) has been agreed or admitted by the tenant…

(5) But the tenant is not to be taken to have agreed or admitted any matter by reason only of having made any payment.”

3. It is important to note that there is no specific statutory guidance as to when a charge is taken to be admitted. Thus, the tribunals have incrementally sought to piece together what this admission could look like, although, ultimately, it will all depend on the facts of the case.

The jurisdiction of the FTT

4. The FTT is a creature of statute, so if it does not have the jurisdiction to deal with, assess or reduce service charges that have been admitted, those charges are out of the FTT’s hands. That is an attractive position for landlords in order to obtain the full service charge sought. Thus, it is essential for both landlords and tenants alike to know when the FTT may regard the tenant’s actions as admitting the service charge.

In what circumstances will the FTT find that the service charge has been agreed or admitted through payment?

5. Below, we consider the cases that came before Poplar v Khan and Gorrara, in which the tribunal grappled with whether the lessee had admitted the charges by payment, coupled with other factors.
6. In Shersby v Greenhurst Park Residents Co Ltd [2009] UKUT 241 (LC), the lessee made payments between 1997 and 2004 towards insurance premiums, pursuant to his obligations under the lease, only challenging the payments demanded in 2007. He had made a separate application about his service charge to the then Leasehold Valuation Tribunal in the interim in the course of which he did not raise the issue of insurance. The UT held in conducting a re-hearing on appeal from the FTT, that the lessee must be taken to have agreed or admitted the insurance premiums. The Tribunal’s view was that an agreement or admission was established from a combination of a series of payments over a period of time coupled with (a) substantial delay before challenge and (b) other proceedings in which the applicant had the opportunity to but failed to challenge those elements.

“[44]: As regards the years 1997-2004 … I find that he has agreed or admitted these sums and that section 27A(4) prevents his application in respect of these years. As regards section 27A(5) this provides that the Appellant is not to have been taken to have agreed or admitted any matter by reason of only having made any payment. However, the Appellant has done substantially more than merely make payment in respect of these years. He has not only made the payments but has waited a long time (namely until the 2007 application) before seeking to challenge them, and has in the meantime made a separate application to an LVT raising various matters regarding charges but not raising any matter as regards these insurance premiums. The 2005 proceedings were then withdrawn without the insurance premiums having been raised as an issue. The combination of these repeated payment, without any complaint or reservation, coupled with the lapse of time and with the express challenging in the form of the 2005 proceedings of certain matters (but not these insurance matters) leads me to conclude that the Appellant must be taken to have agreed or admitted these premiums.”

7. In Cain v Islington BC [2015] UKUT 542 the lessee paid service charges between 2001 and 2007 without any protest, only challenging those sums by application to the FTT in 2014. The FTT took the view that it was “now no longer appropriate”[1] for those years to be litigated.  Not only had the lessee made multiple payments, he had made them without protest, had also waited an extremely long time before making his challenge and in the meantime there had been other cases involving the same parties. The UT upheld the decision of the FTT to treat the lessee as having admitted or agreed the amounts of service charge over the period between 2001 and 2007. The admission must be “based upon the objectively ascertained intention of the tenant” [14]. Following the reasoning in Shersby, the UT addressed section 27A(5) at [14]-[15] & [17]-[18]:

“[14] … An agreement or admission may be express, or implied or inferred from the facts and circumstances. In either situation the agreement or admission must be clear, the finding being based upon the objectively ascertained intention of the tenant, which may be express or implied or inferred from the conduct of the tenant – usually an act or a series of acts or inaction in face of specific circumstances or even mere inaction over a long period of time or a combination of the two.

[15] Absent [section 27A(5)] and depending upon the facts and circumstances, it would be open to the FTT to imply or infer from the fact of a single payment of a specific sum demanded that the tenant had agreed or admitted that the amount claimed and paid was the amount properly payable, a fortiori where there is a series of payments made without challenge or protest. Part of the reason for this is that people generally do not pay money without protest unless they accept that that which is demanded is properly due and owing, and certainly not regularly over a period of time. Whilst it would generally be inappropriate to make such an implication or inference from a single payment because it could not be said that the conduct of the tenant was sufficiently clear, where there have been repeated payments over a period of time of sums demanded, there may come a time when such an implication or inference is irresistible.”

 …

 [17] The effect of sub-section (5), however, is to preclude any such finding “by reason only of [the tenant] having made any payment”. The reference to the making of “any payment”, and “only” such payment, indicates that whilst the making of a single payment on its own, or without more, will never be sufficient to found the finding of agreement or admission, the making of multiple payments even of different amounts necessarily over a period of time (because that is how service charges work) may suffice. Putting it another way, the making of a single payment on its own, or without more, will never be sufficient; there must always be other circumstances from which agreement or admission can be implied or inferred. And those circumstances may be a series of unqualified payments over a period of time which, depending upon the circumstances, could be quite short, it always being a question of fact and degree in every case.

[18] Looking at the reasoning behind this provision, no doubt the reason why the making of a single payment on its own, or without more, would never suffice is that such will often be insufficiently clear but also, in the peculiar area of landlord and tenant, it is common enough for tenants to pay (even expressly disputed) service charges so as to avoid the risk of forfeiture and preserve their home and the value of their lease. But the reason why a series of unqualified payments may, depending on the circumstances, suffice is because the natural implication or inference from a series of unqualified payments of demanded service charges is that the tenant agrees or admits that which is being demanded. Putting it another way, it would offend common-sense for a tenant who without qualification or protest has been paying a series of demanded service charges over a period of time to be able to turn around and deny that he has ever agreed or admitted to that which he has previously paid without qualification or protest. Self-evidently, the longer the period over which payments have been made the more readily the court or tribunal will be to hold that the tenant has agreed or admitted that which has been demanded and paid. It is the absence of protest or qualification which provides the additional evidence from which agreement or admission can be implied or inferred.”

8. In Gateway Holdings Ltd v McKenzie [2018] UKUT 371 the UT expressed that the FTT should not look at the subjective intention of the tenant, but rather, should consider, whether, objectively, there has been an admission or agreement [28].
9. In Marlborough Park Services Ltd v Leitner [2018] UKUT 230, the FTT was found to have erred in law in failing to recognise the significance of the payment of service charge without protest over a period of time long before the application to the FTT was made [33].

A recent decision: Poplar Housing and Regeneration Community Association Ltd v Samuel Khan LON/00BG/LSC/2023/0205

10. On 24 February 2024, the FTT considered when a service charge would be deemed to be admitted.
11. The relevant facts were as follows:
    • Mr Khan was a long leaseholder of Poplar, and he rented out the property to tenants;
    • Mr Khan’s service charge account had been in arrears since 2015, with a balance at the hearing of over 6K. There was also a major works account with a balance of 3K outstanding at the hearing. He had previously made 11 payments towards these charges; and
    • In June 2023, Poplar made an application to the FTT under s27A of the Act. Mr Khan responded to the application but did not raise any issues with the major works completed but did challenge the reasonableness of all charges in the round.

11. Poplar promulgated to the FTT that because of this lack of protest in the application, multiple payments and lapse of time, the Respondent should be taken to have admitted the major works costs. If the FTT agreed, it took the major works out of its jurisdiction to determine the amounts payable (section 27A(4)(a) of the Act) and meant that Mr Khan would be prevented from challenging those particular costs. In particular, Poplar’s position was that Khan had no actual issues with the major works accounts or the service charges themselves, despite responding to the section 27A application made by Poplar.
12. In agreeing with Poplar’s position on the law, the FTT held that:

[24] “in any event Ms Tweedy argued that in relation to the major works alone that the Respondent had by implication accepted the cost of the work and it was not now open to him to challenge that cost….and we accept that argument. Accordingly, the major works are payable in full.

Another recent decision: G & A Gorrara Ltd v Kenilworth Court Block E RTM Co Ltd [2024] UKUT 81 (LC)

12. The decision in Gorrara was made on 8 April 2024, following a hearing that took place on 12 March 2024, a month later than Poplar v Khan.
13. The relevant facts were as follows:

• The case involved a dispute over service charges paid by leaseholders in the development of five blocks of flats.;
• Each block was managed by its right-to-manage (“RTM”) company, but the five RTM companies managed the estate as a single unit;
• Service charges were required to be paid by the leaseholders, and estimated charges were payable on a monthly basis. ​Any surplus was transferred to the reserve fund for the estate;
• Annual accounts were provided to the leaseholders, but there was no breakdown to show what had been spent on individual blocks;
• The leaseholders applied to the FTT for a determination of the amount of service charges payable between 2012 and 2020;
• The FTT found that the second and third appellants had admitted or agreed to the service charges by paying them without protest or qualification between 2012 and 2016. ​ This meant that the FTT had no jurisdiction to consider those years, relying on the decision of Cain;
• The FTT also found that the appellants were estopped by convention from challenging the interim charges imposed.​The accounting arrangement had been in place for several years and there was no objection by the leaseholders;
• The leaseholders subsequently appealed to the UT for determination.

14. The UT discussed the decision in Cain in detail and considered how it should be applied. It then proceeded to determine, based on the specific circumstances, whether the leaseholders had agreed to pay service charges solely on the basis of their prior payments.
15. It was held in Cain that a single payment could never amount to agreement under s.27A(4)(5). That was agreed to be “obviously correct”.[2
16. Second, the use of “only” in section 27A(5) meant “absent any other circumstances”. It was held in Cain that when there are multiple payments made over time, those payments alone may be considered as indication of agreement. That was wrong in law.[3] In the case of Cain, the judge stated that the FTT was within its rights to conclude that there was an agreement, based solely on the regular payments made over a six-year period for the service charge. However, in the Gorrara case, the UT clarified that, rather than the series of payments, it was the fact that the applicant waited for another six years before challenging the charges and had access to the necessary information to raise the issue in the meantime, that allowed the FTT to infer agreement.[4]
17. Third, a series of unqualified payments only does not indicate agreement, but it could do so, if there are other relevant circumstances.[5] It is interesting to consider the reality of a series of payments over time, in which it is very likely that there will be additional factors intertwined with these payments.
18. Fourth, when evaluating a series of unqualified payments made by a tenant and the accompanying circumstances, it is crucial to consider whether the tenant delayed before disputing the charge or charges. The FTT held that if the tenant had the necessary information to raise an objection during that time, then the payment in those circumstances may indicate agreement.[6]
19. In Gorrara, the leaseholders argued that they could not have agreed or admitted the service charges in dispute because they did not know the actual expenditure attributable to their block. This was due to the lack of balancing exercise as prescribed by the lease, and the absence of any statement or demand for final charges. The UT highlighted that:

“[61]: …It is not possible to understand, and the FTT has not explained, how agreement that interim charges are payable means agreement also to the final charges based on costs actually incurred. The appellants do not know what costs were incurred for Block E. They cannot be said to have delayed in challenging them because none have yet to be demanded.”

20. After the Gorrara case, the decision in Cain can no longer be followed in the same manner as before. It is incorrect to interpret Section 27A(5) as meaning that a series of payments made without protest indicates an admission of agreement under Section 27A(4). Other factors, such as delay and availability of information, must also be considered before making such an assumption.
21. The act of payment serves as the start of the enquiry, but will not be determinative as to whether there has been an agreement. In the case of Shersby, for instance, the lessee was afforded an opportunity to raise objections concerning the service charges; however, they failed to do so at the appropriate juncture and this is relevant for admission.

Estoppel by Convention

22. Lastly, it was suggested by the FTT in Gorrara that the RTM company was estopped by convention from challenging the estate wide basis on which the interim charges were imposed in the years 2012/13 to 2015/16. The decision of Tinkler v Revenue and Customs Commissioners [2021] UKSC 39, [2022] A.C. 866 was followed in the FTT, in that, the mere sharing of a common assumption was not enough to satisfy the requirements of estoppel by convention, but rather there had to be communication and an intention that the person alleging the estoppel was to rely on the communicated assumption.
23. The UT overturned this and held that the Act is “intended to provide a workable code for landlords and tenants in the resolution of disputes about service charges”. The UT noted that the temptation to use various forms of “estoppel” is obvious because “in a case where the leaseholder has behaved in such a way that it is unfair to allow them to change tune now” and that this naturally “feels estoppel-ish”. However, section 27A(4)(a) does this exact job and should instead be used. It further held that this would be difficult to satisfy in service charge disputes generally where “arrangements can drift on for years without there being any communication about them”.

How to approach service charge admissions: key takeaways

24. The receipt of multiple payments alone will not be sufficient to establish an agreement. The Tribunal should also consider other factors, such as, accompanying delays or whether the tenants had access to the relevant information to dispute the service charges.
25. If a payment has been made, coupled with other factors, for example, other proceedings in which the lessee could have raised the problem with the service charge but did not, then agreement or admission can more easily be implied or inferred.
26. If a tenant has a problem with a particular part of the service charge, then they need to say so. However, be wary of the FTT’s often lenient inquisitorial approach at the hearing.[7]
27. Waiting a long time before challenging the service charge can be a factor that weighs against the lessee: “the longer the period over which payments have been made the more readily the court or tribunal will be to hold that the tenant has agreed or admitted that which has been demanded and paid.”[8]
28. The absence of some form of a challenge or protest when paying repeated service charges which the lessee later goes on to dispute, may be taken against the lessee. The inference of the admission may become “irresistible” for the tribunal: “It is the absence of protest or qualification which provides the additional evidence from which agreement or admission can be implied or inferred.”[9]
29. Every case warrants its own consideration, the tribunal should look at all the facts and circumstances of that case to establish whether or not there has been an admission.
30. The subjective intention of the tenant is irrelevant when determining admission, it is an objective assessment.
31. Estoppel by convention should not be relevant in service charge disputes; instead, this role is filled by section 27A(4)(a).

Laura Tweedy and Callum Reid-Hutchings, Gatehouse Chambers

23 May 2024

[1] At paragraph 6 of the UT’s decision.

[2] See [17] of Cain; and [42] of Gorrara.

[3] See [17] of Cain; and [43] of Gorrara.

[4] See [46]-[47] of Gorrara.

[5] See [44] of Gorrara.

[6] See [45] of Gorrara.

[7] If a new point is raised the proper approach is for the tribunal to adjourn to give the parties an opportunity to respond: Admiralty Park Management Co Ltd v Ojo [2016] UKUT 421 (LC).

[8] See [18] of Cain.

[9] See [18] of Cain.