by Jackie Buckley February-26-2024 in Property, Commercial Property Finance
A service charge clause is one of the most contentious and frequently litigated clauses in any lease. Tenants often wonder if they can withhold the payment of service charge in circumstances where they have queries or concerns in relation to the payment of a service charge imposed on them by their landlord. It was this very point that was discussed in the UK Supreme Court case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2. Although it is a UK decision, it will be of interest to commercial landlords and tenants alike in this jurisdiction as it centred on a tenants’ right to challenge a service charge sum.
At its essence, service charges in commercial property leases are sums charged by the landlord to the tenant under the lease, in addition to normal rent payments, in return for the provision of services by the landlord to the tenant such as the maintenance of lifts in a building, the provision of security, the upkeep of the common areas etc. Without service charge regimes, shared buildings would just not function. The service charge aims to allow the landlord to recoup some or all their costs from the tenants and is subject to the specific provisions in the individual leases.
Background
In Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2, a dispute arose around a clause in a commercial lease that stated that the landlord’s service charge certificate was deemed to be “conclusive in the absence of manifest error, mathematical error, or fraud”.
Blacks (the tenant) rented commercial retail premises from Sara & Hossein (the landlord) pursuant to two leases dated 2013 and 2018. The leases provided that Sara & Hossein would calculate the total cost of various services and expenses and would give Blacks a certificate setting out the amount of the total cost and the sum payable by Blacks. Sara & Hossein claimed service charge arrears from Blacks for 2017-2018 and 2018-2019 under the leases.
Initially, the Courts held in Favour of Blacks, but the Court of Appeal allowed Sara &Hossein’s claim. However, Blacks appealed this decision to the Supreme Court, arguing that the certificate is conclusive as to the amount of costs incurred by the landlord but not as to the tenant’s service charge liability. It argued that the service charges were excessive and not properly due to be paid under the leases. Sara & Hossein contended that its certification of the sum payable was conclusive, unless it fell within one of the permitted defences of manifest error, mathematical error, or fraud.
Decision
The Supreme Court stated that neither party’s interpretation of the lease provisions was satisfactory. The Court felt that the landlord’s argument was consistent with the wording of the certification provision in the lease but not the wider contractual context. It noted that it suited the landlord’s commercial purpose but produced uncommercial consequences. The implication of the words “subject only to the permitted defences” was akin to a “pay now, argue never” regime.
Alternatively, the Court made the point that the tenant’s case was supported by the internal context of the contract. The tenant’s interpretation avoided the uncommercial consequences of Sara & Hossein’s interpretation, but it undermined the landlord’s need for reimbursement of costs and expenses incurred with minimal delay and dispute. The Court labelled it an “argue now, pay later” regime.
The Court noted that there is an alternative interpretation that avoids all these difficulties. Ultimately, the Court held that the clause in question operated as a 'pay now, argue later' mechanism, upholding the Court of Appeal’s decision to enter summary judgment for Sara & Hossein. This mechanism entitles the landlord to payment without delay and allows the tenant the opportunity to thereafter dispute liability of sums it thinks were improperly charged. The Court felt that the payment of certified sums protects that landlord’s cashflow position and does not preclude the tenants’ right to dispute the payment. In summary, the certification provision should be interpreted as being conclusive as to the “service charge” sum payable by the Tenant” but not as to the underlying liability for the service charge. This interpretation is consistent with the contractual wording, it enables the provisions of the lease to fit and work together satisfactorily and it avoids surprising implications and uncommercial consequences.
Impact
Although this decision clearly lands in favour of landlords, it also benefits other tenants in a development by ensuring the prompt payment of service charge by everyone in the development and ensuring the continuous provision of services for the development, which is in everyone’s interest. While the tenant will be obliged to pay the service charge, the decision does not preclude the tenants’ right to dispute the payment thereafter. However, it is fair to say that it is much easier for a tenant to withhold the payment of a disputed sum rather than trying to reclaim the money paid after the event.
How do the parties to a lease protect themselves? Tenants should ensure that they carry out appropriate due diligence before entering into a lease, particularly on the service charge provisions. Both Landlords and Tenants should operate within the service charge regime set out in their individual leases and avoid the inevitable disputes and expense that will follow if they do not.
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About the Author
Jackie Buckley
Jackie is Head of the Property team at Hayes solicitors. She is a highly experienced adviser to clients in the banking, public and retail sectors on all aspects of the sale, purchase, leasing, development and financing of properties. She has extensive experience of advising landlords and tenants in insolvency situations and has advised in recent high profile examinerships.