15th February 2023

service charges has potential implications for commercial landlords and tenants

Thrings Property litigation change in the law for landlords

A recent decision by the Supreme Court relating to a dispute over service charges has potential implications for commercial landlords, tenants and their advisers. Here’s what you need to know:

The dispute

The case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd related to a dispute over service charges between a landlord (S&H) and tenant (Blacks).

The case involved more than £400,000 in service charges for two service charge years. It centred on the interpretation of wording in the leases for two premises, in Liverpool and London.

The leases required Blacks to pay a quarterly service charge to S&H and at the end of each service charge year, there would be a balancing payment set out by S&H in a certificate.

Blacks disputed the amount the certificate stated as payable, and withheld payment.

The Supreme Court was asked to decide:

  • Was the certificate “conclusive” in stating how much costs the landlord had incurred and – crucially – how much the tenant must pay?
  • Could the tenant withhold payment – or must they “pay now, argue later”?

The wording of the leases

In relation to the first point, the lease stated that S&H were obliged to provide a “certificate as to the amount of the total cost and the sum payable to the tenant” and added that “in the absence of manifest or mathematical error or fraud, such certificate shall be conclusive”.

To the second point – whether the tenant could withhold payment – the wording in the lease stated that Blacks could not withhold the payment of rent or service charges or claim a set-off or counterclaim.

Previous court rulings

S&H brought the dispute before the courts seeking summary judgment (whereby a claim is decided without a full trial). S&H argued that a certificate was conclusive in relation to both the costs incurred and the amount payable by Blacks.

  • At an initial hearing and first appeal, the High Court decided that a certificate was conclusive in relations to costs incurred by S&H – but not conclusive regarding the amount payable, which was a matter for the courts to decide.
  • S&H appealed that decision and the Court of Appeal found in their favour, deciding that on the wording of the lease provisions, a certificate was considered to be conclusive in relation to the costs incurred and the amount payable.

Blacks appealed the Court of Appeal’s decision and so the case came before the Supreme Court.

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What was decided by the Supreme Court?

The Supreme Court’s decision was that the correct interpretation of the lease provisions in this case was that:

  • The certificate was conclusive in relation to the sum payable by the tenant
  • The certificate was NOT conclusive of their underlying liability for the service charge.

In other words, Blacks could not withhold payments of the amount stated on the certificate. However, they could pay and then pursue separate proceedings disputing the liability.

In effect – the tenant should “pay now and argue later’.

What are the implications of the decision for landlords?

Landlords in similar circumstances will find that although cash flow is preserved, there could be an ongoing prospect of a challenge and claim for repayment from the tenant.

Crucially, it appears that the type of certification clause encountered in this instance no longer provides certainty or precludes expensive litigation.

To minimise the scope for future challenge under existing lease arrangements, advice should be sought on what works/costs fall within the service charge provisions. In relation to future lettings, landlords should review their standard leases to seek to limit a tenant’s ability to challenge the figures and resist payment

What are the implications of the decision for landlords for tenants?

Tenants under similarly worded lease provisions face having to pay service charge demands in full, as well as the potential costs of a subsequent dispute/court proceedings.

Struggling tenants (who will already start off on the ‘back foot’) may not have the means to assert any legitimate challenge to their landlord’s demands for payment.

When taking a new lease, tenants and their advisers should pay close attention to the service charge regime and consider how it will work in practice. Tenants should be very wary of similar certification clauses and seek to preserve the ability to withhold payment where there are arguments over the correct sum payable.

For further advice The Thrings Property Litigation Team is experienced in reaching resolution in property disputes, often without recourse to court proceedings, and with an excellent track record when cases do go to Court. Contact us for more information.

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