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 (SCC) 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? In this alert we will look at the recent Supreme Court decision in Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd  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 in the High Court against B for substantial arrears of service charge and B responded with a detailed set-off and counterclaim.
The High Court held that the SCC 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 SCC 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 the 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 SCC was conclusive in respect of two elements:
- the amount of the total cost incurred; and
- the itemised sums payable by the tenant.
The court’s view was that 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 by 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. B appealed to the Supreme Court (UKSC).
Supreme Court decision
The UKSC affirmed the Court of Appeal’s decision and dismissed B’s appeal. The UKSC agreed that the SCC was conclusive as to the sum payable by B (both the amount of the total cost incurred and the itemised sums payable by the tenant) as this is consistent with the contractual wording and “avoids surprising implications and uncommercial consequences”.
However, the UKSC disagreed with the Court of Appeal’s interpretation of the underlying liability of S. The UKSC implemented a “pay now, argue later” approach to reconcile the rights of both landlord and tenant so that:
- B is required to pay the sums due under the SCC to S. This will prevent any adverse effect on a landlord’s cash flow and will avoid a situation where a tenant may refuse payment whenever a charge is disputed; but
- B may take further action in the High Court to seek repayment of any costs B believes to have been improperly charged.
The UKSC concluded that S was right to apply for summary judgment in the Court of Appeal, but that the no set-off provision in the lease does not prevent B from pursuing a counterclaim in future.
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 without court proceedings, or consider an expert determination clause in the event of a dispute.
Tenants will be less pleased with the outcome of this appeal, because although tenants maintain a right to take action as necessary, this could be unrealistic for many who lack the funding and resources to mount a challenge against their landlord. Irrespective of whether you are a landlord or a tenant, this case highlights that careful thought should always be given to service charge provisions.
This article was co-written by Louise Ducasse, Trainee Solicitor.