27/01/2021

Service charge disputes are not uncommon; they frequently occur in relation to the amount a landlord is charging for works, the cost of supplying services and even the extent and coverage of insurance.  To reduce the ability to dispute the sums claimed, most leases will include a clause stating that the service charge certificate provided by the landlord is conclusive and binding on the tenant (unless an obvious error or fraud is involved).

So how effective are these clauses which prevent a tenant from challenging the sums due?  We look at the recent Court of Appeal decision in Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020] which has provided clarity on this point.

Facts of the case

Blacks, the well-known outdoor clothing and equipment retailer (B) held two leases of a shop in Liverpool granted by its landlord Sara and Hossein (S).  The leases contained identical service charge clauses which stated:

  • that S would provide a certificate as to the amount of the total cost and the sum payable by B and in the “absence of manifest or mathematical error or fraud such certificate shall be conclusive”.
  • B could not 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)”.

In 2019, S brought a claim against B for substantial arrears of service charge and B responded with a detailed set-off and counterclaim.

The High Court held that the service charge certificate was “conclusive” with regard to the costs incurred by S, but not conclusive as to whether the particular works fell within the scope of the service charge and hence whether B was obliged to pay for them.

S appealed to the Court of Appeal and argued that the High Court was wrong to find that the service charge certificate was not conclusive as to the works within the scope of the service charge.  In addition, S claimed that B could only dispute that the works fell within scope by way of a counterclaim.  However, the no set-off provision in the leases meant that a counterclaim could not be used by B as a defence to S’s claim.

Court of Appeal decision

The Court of Appeal overruled the High Court and held that S’s service charge certificate was conclusive in respect of two elements:

(1) the amount of the total cost incurred, and

(2) the itemised sums payable by the tenant.

It is not possible to separate these two elements as the certificate could not be conclusive only in respect of the second element.  If they were to be separated, then the lease should have made that point clear by including express drafting to that effect or a necessary implication.  Unless B could prove “manifest or mathematical error or fraud” (which it did not) then the certificate was binding.  S was therefore entitled to summary judgment on its claim for the amount owing.

Practical points

Commercial property landlords will be relieved by the decision; the reason landlords include these conclusive certification clauses in their leases, is to avoid the risk of expensive and complex disputes over the service charge provisions.

Although these clauses are commonly seen, this case illustrates the danger of including “standard wording” without considering the circumstances.  A well-advised tenant should seek to amend these clauses, for example in a lease without a service charge cap (as in this case), agreeing that a landlord’s certificate is conclusive as to the sums charged may not be advisable.  Other amendments a tenant can make include the provision of wider grounds to dispute the service charge certificate, or consider an expert determination clause in the event of a dispute.

Tenants will be less pleased with the outcome of this case, but whether a landlord or tenant, this case highlights that careful thought should always be given to service charge provisions.

 

For more information on this topic, please contact David Hobbs, Partner.

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