A service charge is usually payable by a commercial tenant where the premises form part of a larger building or estate owned by the landlord, for example a shopping centre. It is not uncommon for a lease granted in these circumstances to include a service charge provision which requires the landlord to issue a certificate to the tenant at the end of the service charge year setting out the costs the landlord has incurred and asking the tenant to pay the costs or a proportion of those costs in accordance with the tenant’s obligations under the lease.
In the case of Sara & Hossein Asset Holdings Limited v Blacks Outdoor Retail Limited (2023) the lease said that the Sara must provide Blacks with a certificate each service charge year, setting out the total cost and sum payable by Blacks. The provision went on to say that in the absence of manifest mathematical error or fraud, Sara’s certificate was, conclusive evidence of the amount Blacks must pay.
Blacks claimed that the sums set out in Sara’s certificates for the years 2017/18 and 2018/19 were excessive and included costs not covered by the service charge provisions in the lease. On that basis Blacks withheld payment and built up service charge arrears of over £400,000.
Sara issued a claim against Blacks in the High Court. The High Court agreed with Blacks’ argument that the certificates issued by Sara were conclusive as to the costs incurred by Sara, but not conclusive in terms of Blacks’ liability to pay those costs. In other words Blacks argued that they were not obliged to pay until the dispute concerning the amount certified by Sara had been resolved.
Sara appealed to the Court of Appeal. The Court of Appeal took a different view to the High Court and held that the certificate was conclusive as to the costs incurred and the sums which Blacks must pay.
Blacks appealed to the Supreme Court. The Supreme Court decided Sara’s certificate was conclusive as to the costs incurred and the sum payable by Blacks but not conclusive evidence of Blacks underlying liability. Commercial service charges are rarely reviewed by the Supreme Court and the result of this decision meant that Blacks were obliged to pay to Sara the amounts set out in the certificate; however Blacks were not precluded from seeking reimbursement of payments made in respect of costs which had not been properly charged. In other words, instead of a “pay now, argue never” outcome, based on the wording of the lease, the Supreme Court took a “pay now, argue later” approach.
In reaching the above decision, the Supreme Court sought to strike a balance between the interests of a landlord who wishes to recover payment without delay so as to protect cash flow, whilst still giving the tenant the opportunity to challenge the certificate. The Supreme Court’s decision is based on the particular wording of the Sara lease. The Court took into account the interplay between the different parts of the lease including the detailed provision for expert determination of the service charge and the tenant’s right to inspect documents on which the certificate was produced. The interaction between these provisions gave potential to alter the amount payable by the tenant meaning that the amount certified was not fixed and unchangeable and was therefore open to challenge by the tenant after payment had been made.
From a tenant’s perspective, although the Supreme Court has sought to strike a balance, having to pay upfront a large sum of money to the landlord where the amount charged is in dispute will have an impact on the tenant’s cash flow. Furthermore the tenant is faced with potential litigation costs. If the tenant is unable to agree with the landlord the amount overpaid and which is to be reimbursed the tenant may have to apply to the Court for assistance in recovering the amount in dispute. The Court process is expensive and the tenant may also face a lengthy delay in obtaining reimbursement of any overpayment.
Currently, there is no specific legislation regulating service charges for commercial property. The parties to a commercial lease are therefore free to negotiate the service charge provisions and agree an appropriate mechanism for when payment is due. A tenant will no doubt wish to soften the payment arrangements to reduce the scope for the landlord to rely on the above decision which, depending on the wording of the lease entitles the landlord to obtain payment of the amount certified without delay. Ultimately the wording of the lease will depend on the parties’ respective bargaining positions but landlords need to be aware of the risk of a challenge by tenants after payment has been made. Landlords and managing agents will no doubt wish to ensure that so far as possible the amounts certified correctly reflect the tenant’s liability for service charges so that costly litigation can be avoided.
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