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

The UK Supreme Court has released (18 January 2023) its judgment in the case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd, with a majority ruling in favour of the landlord, dismissing the tenant's appeal against the Court of Appeal's grant of summary judgment.

The 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 deemed to be "conclusive" of the sums payable by the tenant. The Supreme Court held that neither party's proposed interpretation of the SCC to date had been correct and confirmed an alternative interpretation that the SCC was conclusive as to what is required to be paid by the tenant following certification. The landlord is therefore assured of payment of the service charge without protracted delay or dispute (protecting its cashflow).

'Pay now, argue later'

However, the judgment struck a balance between landlord and the tenant by confirming that payment of the certified sum does not preclude the tenant from later disputing liability for that payment. This was referred to as a "pay now, argue later" regime.

This affirmation of the Court of Appeal's to decision to grant summary judgment will be welcome news to landlords, confirming that they are, subject to the relevant lease provisions, entitled to their money upfront. It should also provide some comfort to tenants, as even where the service charge provisions provide that the landlord can self-certify the sums payable by the tenant, they may still have chance to "argue later" about whether or not they are liable for those costs.

However, this does put tenants in the unenviable position of having to reclaim money paid: a weaker bargaining position than if they were entitled to withholding payment pending resolution of the dispute.

Dispute background

The defendant, Blacks Outdoor Retail Limited, was the tenant of a commercial premises in Liverpool, under two successive leases dated 2013 and 2018. In 2016, Sara & Hossein Asset Holdings Limited, was assigned both the leases and became Blacks' landlord. S&H served the SCC in January 2019 for approximately £400,000, which was comparatively higher than the previous SCC that had been served on Blacks (being £55,000). Consequently S&H issued a monetary claim in April 2019 against Blacks for failure to pay the service charge pursuant to the lease for the years 2017 to 2018 and 2018 to 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 and "in the absence of manifest or mathematical error or fraud such certificate shall be conclusive". In reliance on this clause, S&H applied for summary judgement stating that the certificates issued were conclusive and, in any event, the lease contained a clause preventing the set-off of any rent or the right to counter-claim under the lease.

Blacks argued that the certificates were not conclusive of its service charge liability as some of the works did not fall within the meaning of the relevant repairing covenants or were unnecessary, and therefore fell outside of the remit of the service charge.

Summary judgement was refused on the basis that the SCC could not be conclusive as to the sums owed. S&H subsequently appealed this decision in the High Court.

High Court judgment

The High Court agreed that the parties could not have intended for the landlord to be able to decide conclusively "the issues of law and principle that might arise in the course of determining the service charge payable". The judge decided that the provision for the certificate to be conclusive applied only to routine accounting matters and did not apply to the question of whether certain costs correctly fell within the remit of the service charge. In other words, the certificate was conclusive as to the costs incurred in providing the services, but not with regards to whether such services correctly fell within the scope of the service charge payable under the lease.

It was also decided that, while the "no-set off" provision in the lease did prevent Blacks from bringing a counter-claim, Blacks was not prevented from bringing a defence to the claim. Blacks was therefore entitled to challenge whether certain items could be claimed through the service charge in defence of its liability.

The summary judgement appeal was dismissed in May 2020 but S&H were subsequently granted permission to appeal this decision.

Court of Appeal overturned decision

On 13 November 2020, the Court of Appeal overturned the High Court's decision. The court decided that the SCC was conclusive as to:

• the identification of the services properly falling within the service charge, and 
• the total costs incurred in respect of those services (unless vitiated by manifest or mathematical error or fraud, none of which were alleged by Blacks). 

Contrary to the High Court's decision, the court did not believe that the two elements could be separated, with the certificate being conclusive only as to the second element. The judge advised tenants to "consider very carefully before agreeing a lease in these terms" and relied on Lord Neuberger's comments in Arnold v Britton to make the point that it was not the function of contractual construction to save a party from an imprudent term. The court's role is to identify what the parties have agreed and not what the court thinks that 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 service charge.

S&H was therefore granted summary judgement for its service charge claim. Blacks appealed this judgement to the Supreme Court.

Supreme Court affirmed decision 

On 8 November 2022, the Supreme Court heard the case and released its judgment on 18 January 2023, which affirmed the decision of the Court of Appeal with regards to summary judgment and dismissed Blacks appeal.

However, it also disagreed with the Court of Appeal in respect of the interpretation of the relevant provisions. It deemed S&H's interpretation – that the SCC was conclusive as to all issues in dispute – only made sense in respect of the certification provision itself and not with the other provisions of the leases. In particular, it was deemed inconsistent with the detailed dispute mechanism in relation to the proportion of the service charge payable and the rights for Blacks to inspect receipts and invoices. These provisions would be rendered superfluous if the SCC was deemed wholly conclusive.

In respect of Black's asserted case – that the SCC is conclusive only as to the landlord's costs and not as to the sum payable by the tenant – the Supreme Court ruled that this was contradictory with the "natural and ordinary meaning of the certification provision that the certificate is conclusive both as 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 as to what was required to be paid by the tenant following certification, subject only to certain permitted defences within the service charge provisions. The Supreme Court described this as a "pay now, argue later" regime and held that this interpretation is consistent with the contractual wording and enables all the provision of the lease to fit and work together satisfactorily, and it avoids "surprising implications and uncommercial consequences".

Osborne Clarke comment 

This is a slightly surprising judgment from the Supreme Court. While affirming the Court of Appeal decision, the judgment grappled further with contractual interpretation to land at an alternative interpretation on the conclusiveness of the SCC.

Although Blacks' appeal was dismissed, it was held that this does not preclude Blacks from pursuing a counterclaim in the High Court in relation to its underlying liability for the disputed service charge payments; essentially, preserving their "argue later" rights, which should give hope to tenants.

For landlords this demonstrates that they should not be dissuaded from seeking summary judgment for sums due and should not allow tenants to set off or withhold payments of service charges. Landlords are almost always entitled to the money to be paid upfront, but should bear in mind that the sums received could be open to challenge later by the tenant at a later date.

It is important that landlords and tenants have clear wording that reflects the parties intentions within the lease and understand exactly how the service charge is calculated and whether the landlord's determination is conclusive or if there is scope for a challenge.