A recent Supreme Court decision dealt with the interpretation of a standard commercial service charge provision. Landlords and tenants will be interested in the Court’s finding that a certification provision in a service charge created a “pay now, argue later” position rather than allowing the landlord to treat the certification of a financial year’s service charge as conclusive.
The facts
The case was Sara & Hossein Asset Holdings Limited v Blacks Outdoor Retail Limited [2023]. The retail chain Blacks had received a service charge bill which was more than 700% higher than the previous year. Blacks had not paid the quarterly on account instalments of the estimated service charge. The lease contained a provision stating that the landlord was to provide 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 landlord argued that the clause did what it appeared to do at face value and it allowed the landlord to certify both the total costs of its expenses and the sum of service charge payable by Blacks. Blacks was permitted defences in that if there was manifest or mathematical error or fraud then Blacks could challenge the service charge. Blacks had not sought to use these permitted defences. Instead, Blacks argued that whilst the certificate could be conclusive as to the amount of expenditure that the landlord had incurred, it could not be conclusive as to Blacks’ actual liability for service charge. The landlord should not be allowed to be “judge in his own cause”.
The findings
The judge at first instance had agreed with Blacks that the certificate was conclusive as to accounting matters and the amount of the costs incurred but was not conclusive as to the question of whether the costs themselves fell within the scope of the service charge provisions of the lease and whether they could be properly recovered through the service charge. The judge at first appeal agreed with this analysis.
The Court of Appeal disagreed. It found that the clause could be clearly and plainly understood and the effect was that the certificate was conclusive as to the amount of the total cost and the sum payable by the tenant. There was no express term which distinguished the sum payable by the tenant from its liability under the lease. The Court of Appeal held therefore that the landlord was entitled to summary judgment on its claim for unpaid service charges. The Court found that the lease provisions were successful in limiting the tenant’s ability to resist payment. The landlord needed the regular cashflow coming from a conclusive service charge regime for it to provide the services.
The decision of the Supreme Court was to find a third way between the landlord’s argument that the service charge was a “pay now, argue never” (apart from the permitted defences) regime and Blacks’ argument that it was an “argue now, pay later” regime. The Supreme Court’s interpretation was that the provision was a “pay now, argue later” clause. The certificate was conclusive as to the landlord’s claim, and the tenant had to pay it as the landlord was entitled to summary judgment for any failure to pay. However, Blacks could subsequently raise any arguable counterclaim if it was able to establish one.
The Supreme Court argued that the lease contained several provisions that would have been inconsistent with an ability of the landlord to be a judge in its own cause, for example the obligation on the landlord to provide the services in accordance with the principles of good estate management, the tenant only being liable for a fair and reasonable proportion of the overall expenditure, and the right to inspect the landlord’s receipts and invoices.
Analysis
The judgment is a mixed bag for landlords and tenants. The good news for landlords is that in dealing with clauses like this, then in the absence of a tenant raising an argument that there has been manifest error or fraud, summary judgment should be available to a landlord making a claim for unpaid sums. This will be a quick way for the landlord to recover monies which will help the landlord with its cashflow. Tenants will not be able to engineer leverage by withholding payment to negotiate discounts. They will not be able to raise frivolous claims. They will have to pay and then consider carefully as to whether they can establish a counterclaim.
For tenants there is the good news that even if any issues do not amount to there being “manifest errors”, the tenant will still have a right to counterclaim later against the landlord if they wish to challenge elements of the service charge which have been passed on to them. Whether the tenant can challenge will depend on the precise wording of the service charge provisions within the lease. The landlord will not simply be able to put anything through the service charge without fear of any comeback.
Finally, this case is of interest from a legal perspective as the majority in the Supreme Court were prepared to interpret the lease in a highly “purposive” way. There was a dissenting judgment from one of the judges who said that the other judges’ interpretation was not supported by the actual language of the clause itself. Lord Briggs thought that the correct interpretation was that the clause was a “pay now, argue never” regime where if the tenant could not use one of the permitted defences the landlord’s certificate was conclusive as to both the total of the landlord’s costs and the sum payable by the tenant. He said that the majority’s interpretation was not open to the Court as it had not been advanced by either party and the Court was required “to choose between genuinely available constructions, rather than mending the parties’ bargain”. The judges were moving away from the actual wording of the lease and reaching a commercial interpretation based on reading the lease as a whole. This is not the usual way that Courts interpret contractual documents and it will be interesting to see if it sets a precedent.
Key points
- Landlords may wish to seek less ambiguous wording in future leases so that it is clear that the certification of the service charge is truly conclusive as to the tenant’s liability.
- Tenants will wish to try to water down any wording about certification being conclusive.
- Tenants with similar wording in their leases are in practice going to have to pay up or risk summary judgment.
- They may however be able to raise any claims even after paying.