Commercial Service Charges – Pay Now, Argue Later
In the recent case of Sara & Hossein Asset Holding Ltd v Blacks Outdoor Retail Ltd, the Supreme Court considered the correct interpretation of a service charge clause in a commercial lease. The clause related to the conclusiveness of a service charge certificate produced by the landlord in relation to the amount to be paid by a tenant.
The Court held that a landlord’s service charge certificate was conclusive (in the absence of manifest error or fraud) as to the sum payable by the tenant at that point but was not conclusive as to the tenant’s underlying liability for the service charge.
The key facts were as follows:
- Blacks was the tenant of commercial retail premises in Liverpool, of which S&H was the landlord, under two successive leases dated 2013 and 2018. Blacks was required under the leases to make payment toward the service charges for the building.
- The service charge provisions in the leases required that S&H must supply Blacks, on a yearly basis, with a certificate as to the “total cost and the sum payable by the tenant” and that this certificate was to be conclusive in the absence of “manifest or mathematical error or fraud”.
- Blacks had the right to inspect receipts, invoices and other evidence relating to the service charges. However, Blacks did not have the right to set-off or counterclaim any sum against the service charges.
- The service charge for 2017/2018 was in excess of £400,000, substantially higher than in previous years. Blacks refused to pay and S&H issued proceedings for recovery.
The dispute turned on the interpretation of the service charge provisions in the leases, specifically the meaning of the words “shall be conclusive” in the context of the landlord’s certificate as to the service charge payable by the tenant. S&H argued that the clause should be interpreted literally, namely that the certificate was conclusive as to the tenant’s liability. In other words, a “pay now, argue never” interpretation. Blacks argued that due to the content of other provisions in the leases including those strictly defining what costs were recoverable as service charges, the clause could not be so interpreted. Blacks argued that the clause was only conclusive as to the sums S&H had incurred, not what Blacks was necessarily liable to pay. In other words, an “argue now, pay later” interpretation. Blacks did not contend that there was manifest or mathematical error in the charges (“Permitted Defences”).
The matter was the subject of extensive litigation, finally reaching the Supreme Court. The Supreme Court rejected both parties’ interpretations, essentially reaching a halfway house. By a majority of 4 to 1, it held that S&H’s certificates were binding as to the amount Blacks had to pay on certification (subject to any Permitted Defences) but that this was not determinative of Blacks’ service charge liability. It was open to Blacks to challenge the amount following payment. Essentially, the Court concluded that the clause, in its true interpretation, created a “pay now, argue later” regime. Blacks had to pay the service charges but it had the right to subsequently challenge them.
Lord Briggs, in his sole dissent, criticised the majority’s “imaginative creation” on the basis there was no reason within the lease for the majority’s interpretation. He said he would have favoured the landlord’s interpretation.
The result of the decision is that:
- A landlord can enforce payment of service charges due under a certification clause.
- Payment of a service charge does not prevent a tenant from disputing the liability for such payment afterwards, for instance in relation to any costs excluded under the lease. Where sums are later successfully challenged, the tenant will be entitled to repayment of those sums.
The decision seeks to strike a balance between the interests of landlords and tenants. It will be welcome for landlords in that it ensures a consistent cashflow. A landlord has a clear interest in recovering sums it has properly spent on repair from its tenants, with minimal difficulty. The benefit to tenants is that this provides that the certification as to the sum to be paid to a landlord is not necessarily final. Where a tenant has legitimate concerns as to service charges it has paid, it retains the right to challenge them later down the line.
A lot will depend upon the specific wording of the lease and the precise facts and circumstances. It pays for both landlords and tenants to take advice on what costs are recoverable under a lease by way of service charges. For landlords, that will be important in making decisions about expenditure. For tenants, it will be important in understanding what sums they are liable to pay.
This article is not intended and should not be relied upon for legal advice, Should you wish to discuss your matter, please contact Joe Reeves of our Litigation Department on 0207 481 6383 or firstname.lastname@example.org.