News | June 18, 2020

Conclusively inconclusive charge statement

It’s not often we mention summary judgment decisions in QIA but the case of Sara & Hossein Asset Holdings Limited v Blacks Outdoor Retail Limited [2020] EWHC 1263 (Ch) has more than one interesting aspect to it.

First, a reminder about summary judgment.  If your case is so strong that it speaks for itself, it’s possible to ask the court to make a quick decision, without the need for a full trial.  If the court agrees, you win the case quickly and without the normal expense: an alluring prospect.  The landlord lost a case for summary judgment in 2019 but appealed that decision.

What, then, makes a suitable case for summary judgment? In Blacks, the main issue was unpaid service charge due under the lease of their shop in Liverpool.  In this case the service charge had leapt from about £55,000 to £400,000 a year after it had become clear that Blacks would be terminating their lease. The service charge wording reported by the court is entirely unremarkable and will be familiar to many of those reading this article. Service charge was due on account based on an estimate of costs prepared by the landlord. At the end of the year final accounts were to be drawn up and a balancing payment made.  In particular the lease provided that:

“the landlord shall on each occasion furnish to the tenant as soon as practicable … 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.”

Given that the landlord’s certificates were stated by the lease to be conclusive as to the correctness and recoverability of the service charges, the landlord claimed summary judgment for arrears of just over £400,000.  Tenants do not generally fail to pay such a large amount of service charge debt for no reason, but if there is a decent defence, the case isn’t suitable for summary judgment.  The landlord anticipated the tenant’s complaints by relying on another standard clause in the lease, which was the tenant covenant “not to exercise or seek to exercise any right or claim to… legal or equitable set off or counterclaim”.

You may feel that with two such perennial clauses to rely on, the landlord had a good case. However, when the court considers an application for summary judgment, it must look at the defence as well.  The crucial question is whether the defence has a realistic (as opposed to a fanciful) degree of success. The court must decide this without conducting a mini-trial.

The tenant’s defence fell into two categories. First, it challenged the service charge on the basis that some of the works charged for were not necessary, or were not repair, or that the cost was increased because the landlord had previously failed to keep the premises in repair.  Essentially, the case was that these were not properly “service charge” items at all – but if the landlord’s certificate is truly conclusive, this is not a claim that can succeed.  Secondly, the tenant set out some landlord breaches of covenant for which the tenant counter-claimed.  These included claims that the landlord had not progressed the works with reasonable speed, had left up scaffolding for too long, had carried out some unnecessary works and some works which were not repair work.  These claims wouldn’t have been blocked by the certificate but by the covenant against set off or counterclaim.

The judge noted that the parties had been discussing these issues for a year before the landlord sued. He felt this showed the tenant hadn’t invented a list of complaints as a reaction to a writ – in judicial language, “these were not spurious points”.

As with all landlord and tenant disputes, the judge looked at the wording of the lease itself.  The tenant’s share of the service charge was based on the percentage of the lettable area of their shop, compared to the whole property benefitting from the services. Disputes about the percentage were to be referred to an independent valuer acting as an expert.  By contrast, the service charge and certificate were worked out by the landlord himself – there was no requirement on the landlord to use a professional surveyor or indeed anyone with any qualifications at all. The effect of this is that if the landlord was not fraudulent and managed to get the arithmetic right, he would be the judge of his case that the service charge was correct.

Both at the first trial and this appeal, the judge felt there was a fundamental distinction between assigning matters which might potentially be disputed to an independent expert, and giving one party to a contract the power to determine conclusively whether that party has complied with its own obligations in the contract. In practice the service charge certificates were prepared by managing agents, but the landlord’s barrister was forced to admit that they were doing this as landlord’s agent, rather than as independent experts.

The other issue for the court was the clause preventing set off. If the costs weren’t part of the service charge at all, then the set off clause didn’t kick in. The two issues were inextricably tied together.

Both of these meant that it was impossible to say the tenant had no realistic prospect of success at a full trial. For that reason the landlord did not obtain the prompt and cost-effective decision it had hoped for, even the second time around.

What are the wider points to draw from this matter? First, summary judgment is harder to get than you might think. If you try and fail, costs are higher and the full trial is delayed. Second, all is not lost if you are faced with standard form wording which seems to go against you.  In order to understand a lease, you have to read the whole document and consider what it means as a whole. Third, courts are aware that parties entrust some decisions to an independent expert, but in practice courts are very reluctant to decide that the law has no role at all. Finally, service charges remain a constant source of conflict between landlords and tenants.  The service charge code was developed to reduce conflict. If it had been followed by this landlord, the case might never have been brought to trial.