Blog - 06/03/2023
Commercial Lease Service Charge – Supreme Court Update
The Supreme Court has recently provided a rare determination on the interpretation of service charge provisions contained in commercial leases.
In this case, Sara and Hossein Asset Holdings Limited (“S&H”) was the landlord of a retail commercial premises rented by Blacks Outdoor Retail Limited (“Blacks”). The dispute concerned Blacks’ failure to pay service charges, with S&H claiming that over £400,000 was outstanding from 2017-2019. This bill was nearly eight times higher than the previous year.
S&H were ultimately successful in obtaining summary judgment at the Court of Appeal, where they were granted an award of £407,842.77 for the unpaid service charges. The case proceeded to the Supreme Court on Blacks’ appeal.
This case hinged on the interpretation of a certification provision contained in the lease between the parties, worded as follows: “The landlord shall on each occasion furnish to the tenant as soon as practicable after such total cost and the sum payable by the tenant shall have been ascertained a certificate as to the amount of the total cost and the sum payable by the tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive”.
The primary issue in dispute was whether the certificate was conclusive as to both the total cost and the sum payable by the tenant. If it was found to be conclusive in respect of both the total cost and the sum payable, Blacks would naturally be liable for the sums claimed by S&H. Conversely, if the certificate was only conclusive in relation to the total cost incurred by S&H but not in respect of the amount payable by the tenant, Blacks was not necessarily liable for the amount demanded by S&H.
S&H argued that the clear commercial purpose of the certification provision was to allow the landlord to recover the service charge without delay or dispute having already assumed the commercial risk by incurring the costs. If this was not the correct interpretation, any landlord would be in the unenviable position of taking on a substantial liability that may ultimately be disputed by the tenant. Short of establishing a permitted defence, Blacks should therefore be liable according to the ordinary and commercial meaning of the certification provision.
Blacks disagreed, arguing that the certificate could only determine the costs incurred by S&H and not the sum payable by them, since there was real potential for dispute when determining various aspects of the service charge. If Blacks were unable to scrutinise these points, the landlord would be a “judge in his own cause” and the tenant rendered “powerless to challenge its liability”. It was further asserted that S&H’s interpretation of the certification provision was not in keeping with other aspects of the lease, most notably the dispute resolution mechanism.
The Supreme Court made the following determinations:
- Neither party’s interpretation was satisfactory.
- S&H had adopted the “natural and ordinary” meaning of the certification provision, but the Supreme Court could not accept the respondent’s “pay now, argue never” proposal as it offered the tenant no right of recourse, nor was it inconsistent with parts of the lease.
- On the other hand, Blacks’ “argue now, pay later” regime was in keeping with the lease but failed to account for the commercial risk assumed by S&H.
Accordingly, the Supreme Court struck a middle-ground whereby the sum payable under the certification provision is indeed conclusive and payable immediately, but does not prevent the tenant from subsequently disputing its liability to pay such a sum.
In this sense, the Supreme Court’s solution was to “pay now, argue later”.
This judgment represents unwanted news for landlords relying on similarly worded certification provisions, for they now face the possibility of tenants challenging and litigating for sums that were previously payable without any realistic prospect of a dispute. If such a provision exists, the tenant will likely have to pay and satisfy any demand first and then seek to challenge the landlord’s determination. This may result in a new wave of commercial service charge disputes.
Should you need advice in relation to a service charge dispute, or indeed any property or trusts related dispute, please do not hesitate to contact our partner Shams Rahman or any member of the Property and Trusts Litigation team.
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