Supreme Court sets a ‘pay now, argue later’ regime for tenants when arguing over service charges

Catherine Dear, a senior associate in the real estate disputes department at Irwin Mitchell, discusses the outcome of Sara & Hossein Asset Holdings Ltd (a company incorporated in the British Virgin Islands) v Blacks Outdoor Retail Ltd

A majority Supreme Court decision has overturned a previously contentious Court of Appeal decision where is had previously been determined that once a tenant had received a certificate as to its liability for service charges under its lease it would never be able to argue that its landlord has incorrectly included an expressly “excluded cost” i.e. costs for improvement.

The Supreme Court has now concluded that a service charge certificate is conclusive under the lease following certification subject to permitted defences set out in the lease, but payment of the certified sum does not preclude a tenant from later disputing liability for the payment.

Background

Blacks Outdoor Retail Ltd (“Blacks”) leased commercial retail premises from Sara & Hossein Asset Holdings Ltd (S&H) under two successive leases dated 2013 and 2018 (“the Leases”). The Leases state that S&H, as landlord, should provide a certificate each year “as to the amount of the total cost and the sum payable by the tenant” and that this was to be “conclusive” in the absence of manifest or mathematical error or fraud (certification provision).

Blacks refused to pay service charges for the years 2017 , 2018 and 2019 claiming that the sums due were excessive and included items and expenses that were not payable under the terms of the Leases.

S&H issued proceedings and sought summary judgement for the outstanding service charges arguing that the certification provision under the Leases was complied with as the service charge certificate was “conclusive” and only subject to the permitted defences under the Lease; manifest error, mathematical error or fraud (“permitted defences”).

S&H’s initial application was dismissed in the High Court and their first request to appeal was also dismissed. Their application to the Court of Appeal succeeded however and it entered summary judgement for S&H. Blacks were appealing that Court of Appeal’s decision to the Supreme Court.

S&H’s argument

S&H argued that under the Leases its certificate was conclusive as to Black’s liability, subject only to the permitted defences. Although this argument mirrored the certification provision wording within the Leases it was contrary to other provisions within the Leases i.e. the Leases had a detailed disputes mechanism in relation to the assessment of the proportion of the premises occupied by the tenant and Blacks had a right to inspect S&H’s receipts, invoices etc which related to the service charges for up to 12 months after the certificate was issued.

Blacks’ argument

Blacks argued that the service charge certificate was only conclusive as to the amount of costs incurred by the landlord but not to its liability for service charges.

Supreme Court decision

The Supreme Court dismissed Blacks’ appeal against the grant of summary judgment but in doing so chose to apply neither parties’ interpretation of the certification provision. The Supreme Court believed that Blacks’ interpretation doesn’t sit perfectly with the ordinary meaning of the certification provision and instead proposes an “argue now, pay later” mechanism which undermines the commercial purpose of the certification provision which is designed to enable the landlord to recover costs and expenses it has incurred without delay or dispute.

It determined that the certificate issued by S&H was conclusive to what was required to be paid by Blacks following certification, subject to the permitted defences. Notwithstanding this the Supreme Court also determined and clarified that regardless of this position Blacks was not precluded in any way from counterclaiming in the High Court in relation to its underlying liability for the disputed service charge payments.

Summary

This decision will come as a relief to landlords as it solidifies the commercial purpose behind the certification provisions in leases and dispels set-off mechanisms commonly adopted by tenants in relation to service charges provisions. Landlords can now be assured of payment of service charge without delays in similar circumstances. Notwithstanding this it also will be welcome to tenants as they are now no longer fettered by the Court of Appeal decision preventing them from bringing any action against their landlords following certification and can adopt a “pay now, argue later” regime.