Service Charges in Commercial Leases – Pay Now, Argue Later

The implications on service charges following the Supreme Court ruling in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd

Background

• The tenant (“Blacks”) was required to make quarterly payments on account of service charge to the landlord (“S&H”), with a balancing payment to be made following the landlord’s certificate;
• Blacks’ service charge bill was substantially higher than the previous year;
• A dispute arose and S&H commenced arrears proceedings

What the lease said

• S&H: “shall … furnish to [Blacks] … a certificate as to the amount of the total cost and the sum payable by [Blacks] and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive” (“Certificate Clause”)

Blacks did not argue manifest or mathematical error or fraud (“the Permitted Defences”)

• A covenant by Blacks “… not to exercise or seek to exercise any right or claim to withhold rent or any right or claim to legal or equitable set-off or counterclaim (save as required by law)” (Set Off Clause)

High Court

The High Court held that S&H’s certificate was conclusive in relation to the costs incurred in providing the services, not as to whether items properly fell within the service charge.

Court of Appeal

The Court of Appeal held that S&H’s certificate was conclusive in relation to: a) the costs incurred in providing the services and b) the services properly falling within the service charge.

S&H was granted summary judgement but Blacks appealed.

Supreme Court

• S&H’s summary judgement was upheld and Blacks’ appeal was
• The Supreme Court upheld the “pay now, argue later” regime – a landlord can enforce payment of the service charge sums it certifies as being due under the Certificate Clause;
• The tenant cannot offset any amounts against the sum which is certified by the landlord, save in relation to the Permitted Defences;
• Payment of the sums due under a certificate does not prevent a tenant from disputing the liability for such payment afterwards (for example, claims in relation to “excluded costs” – most leases list items that are “excluded” from the service charge)

COMMENT

The decision helps landlords’ cashflow but leaves financially vulnerable tenants in a difficult position – having to pay upfront and then issue a claim later on to dispute amounts already paid if they disagree. Equally, financially squeezed landlords will not want the costs of dealing with claims from those tenants who do bring challenges post-certification.

Tenants should ensure that leases permit proper inspection rights, so that they can check invoices and records to verify if items are correctly included within the service charge. Tenants may argue more for service charge caps and more extensive exclusions.

It is not clear how the decision impacts on sinking funds.

Watch this space….

If you would like any help with your service charge queries, we can help. Please contact Associate Kate Kurtz on katekurtz@kuits.com.