UK Supreme Court rules in favour of landlord in challenges to service charge certificates

UK Supreme Court rules in favour of landlord in challenges to service charge certificates

Offers an alternative interpretation 'pay now, argue later' to resolve the matter

The UK Supreme Court has pronounced a ruling in favour of the landlord and dismissed the appeal of the tenant against the Court of Appeal's grant of summary judgment.

The Sara & Hossein Asset Holdings Ltd vs Blacks Outdoor Retail Ltd case centred on the issue of whether the tenant had the right to challenge a service charge sum where the landlord's Service Charge Certificate (SCC) was 'conclusive' of the sums payable by the tenant.

The Supreme Court observed that neither party's proposed interpretation of the SCC to date was correct and confirmed an alternative interpretation. It said that the SCC was conclusive on what the tenant was required to pay following certification.

Therefore, the landlord was assured of payment of the service charge without protracted delay or dispute of protecting its cash flow.

The judgment, however, struck a balance between the landlord and the tenant. Referring to a 'pay now, argue later' regimen, it confirmed that the payment of the certified sum did not preclude the tenant from later disputing liability for it.

The affirmation of the decision of the Court of Appeal to grant summary judgment is welcome news to landlords. It confirms that they are subject to the relevant lease provisions and entitled to their money upfront.

On the other hand, it also provides some comfort to the tenants. The service charge provisions provide that the landlord can self-certify the sums payable by the tenant, but they may still have a chance to 'argue later' whether or not they were liable for those costs.

Still, it puts the tenants in the dilemma of having to reclaim the money paid. They would be in a weaker bargaining position compared to if they were entitled to withhold the payment pending resolution of the dispute.

Case background

The defendant, Blacks Outdoor Retail Limited, was the tenant of commercial premises in Liverpool under two successive 2013 and 2018 leases.

In 2016, Sara & Hossein Asset Holdings Limited was assigned both leases and became Blacks' landlord.

S&H served the SCC in January 2019 for approximately £400,000. Comparatively, it was higher than the previous £55,000 SCC served on Blacks. Thereafter, S&H issued a monetary claim in April 2019 against Blacks for failure to pay the service charge pursuant to the lease for 2017-2018 and 2018-2019.

Blacks were obliged to pay a 'fair and reasonable' proportion of the service charge. The lease required S&H to provide a certificate of the service charge due from Blacks for each year 'in the absence of manifest or mathematical error or fraud, such certificate shall be conclusive.'

Relying on the clause, S&H applied for summary judgment. It stated that the certificates issued were conclusive and the lease contained a clause preventing the set-off of any rent or the right to counter-claim.

However, Blacks argued that the certificates were not conclusive of its service charge liability, as some works did not fall within the meaning of the relevant repairing covenants or were unnecessary. The summary judgment was refused on the basis that SCC could not be conclusive on the sums owed.

Subsequently, S&H appealed before the high court.

Judgment of the high court

The court agreed that the parties could not have intended for the landlord to decide 'the issues of law and principle that might arise in the course of determining the service charge payable.'

Thus, the judge stated that the provision for the certificate to be conclusive applied only to routine accounting matters. It did not apply to whether certain costs fell within the remit of the service charge. Also, while the 'no-set off' provision in the lease prevented Blacks from bringing a counter-claim, it was not prevented from bringing a defence to the claim. Therefore, it was entitled to challenge whether certain items could be claimed through the service charge in defence of its liability.

In May 2020, the summary judgment appeal was dismissed. But, subsequently, S&H was allowed to appeal the decision.

Decision overturned by Court of Appeal

In November 2020, the Court of Appeal overturned the decision of the high court. Deciding the SCC was conclusive, the court raised the points:

• The identification of the services properly falling within the service charge.

• The total costs incurred in respect of those services (unless vitiated by manifest or mathematical error or fraud). None were alleged by Blacks.

Unlike the high court, the Court of Appeal did not believe that the two elements could be separated with the certificate being conclusive only as to the second element.

The judge advised the tenants to 'consider very carefully before agreeing on a lease in these terms'. He relied on Lord Neuberger's comments in the Arnold vs Britton case to make the point that it was not the function of contractual construction to save a party from an imprudent term.

He added that the court's role was to identify what the parties agreed and not what the court considered they should have agreed. The term made commercial sense for S&H, as it meant it could potentially avoid very drawn-out and detailed arguments over what works fell within the definition of the service charge.

Therefore, S&H was granted summary judgment for its service charge claim. Thereafter, Blacks appealed before the Supreme Court.

Supreme Court affirms decision

While dismissing the appeal of the Blacks, the Supreme Court released its judgment affirming the decision of the Court of Appeal. However, it disagreed with the Court of Appeal on the interpretation of the relevant provisions.

The highest court deemed S&H's interpretation that SCC was conclusive to all issues in dispute. It made sense to the certification provision and not the other provisions of the leases. It was inconsistent with the detailed dispute mechanism related to the proportion of the service charge payable and the rights of Blacks to inspect the receipts and invoices. The provisions would become superfluous if SCC was deemed wholly conclusive.

The Supreme Court added that SCC was conclusive only to the landlord's costs and not to the sum payable by the tenant. This contradicted the natural and ordinary meaning of the certification provided that the certificate was conclusive to the 'amount of the total cost' and the 'sum payable by the tenant'.

The majority judgment found a new alternative interpretation that the SCC was conclusive of what was required to be paid by the tenant following certification, subject only to certain permitted defences within the provisions.

Describing it as a 'pay now, argue later' method, the court held that the interpretation was consistent with the contractual wording. It enabled all the provisions of the lease to fit and work together satisfactorily. Also, it avoided any "surprising implications and uncommercial consequences."