15 January 2021
RED alert - Winter 2021 – 2 of 7 Insights
The Court of Appeal has ruled that, where a lease provides that a service charge certificate is "conclusive", it will be conclusive as to both the amount due from the tenant, whether or not the certified charges were properly incurred in accordance with the terms of the lease. As a result, in such circumstances tenants are prevented from challenging the certificate, save for where there is evidence of mathematical or manifest error or fraud.
This case concerned a retail premises in Liverpool which had been occupied by Blacks Outdoor Retail Ltd (Blacks) since 2012, pursuant to the terms of a two commercial leases, one incorporating the terms of the other by reference. Sara & Hossein Asset Holdings Ltd (S&H) was the landlord under the lease.
The service charge terms in the lease provided that, at the end of each calendar year, the landlord was obliged to calculate the "total reasonable and proper cost" of the services incurred during that year and to provide the tenant with a certificate of such sums payable. This certificate was stated to be "conclusive", absent any manifest or mathematical error or fraud.
In January 2019, S&H issued Blacks with the service charge certificate for the 2017-2018 year which was significantly higher than in previous years. The charges demanded were not paid and S&H issued proceedings to recover the sums due. In its defence, Blacks sought to challenge the charges listed in the certificate on a number of grounds, including that they related to unnecessary works or repair works which were superfluous to the landlord's repairing covenants in the lease.
S&H then issued an application for summary judgement, on the basis that, as the lease provided that the certificate was conclusive, Blacks was precluded from defending the claim on any grounds other than mathematical or manifest error or fraud, which both parties accepted had not occurred.
At first instance, the Deputy Master rejected S&H's application for summary judgement on the basis that the certificate was conclusive only as to the amount payable and not whether the costs claimed had in fact been properly incurred. The Deputy Master held that, to conclude otherwise would entitle the Landlord to act as "judge in his own cause" and to conclusively determine points of law or principle without challenge.
This reasoning was supported on appeal to the High Court who held that it would be inconsistent with the contractual mechanism to refer a dispute on the proportion of the service charges payable by the tenant to expert determination if the headline figure was to be conclusively determined by the landlord.
S&H appealed to the Court of Appeal who allowed the appeal. In particular, the Court of Appeal held that the wording providing that the landlord's certificate is conclusive "as to the amount of the total cost and the sum payable by the tenant", is clearly dividable into two distinct elements:
The Court of Appeal concluded that, when considering the clause's ordinary language, the only way that these two elements could be separated would be with the inclusion of express wording to that effect or a necessary implication (neither of which applied to the lease in question).
Whilst the Court of Appeal understood the High Court judge's concern that such an interpretation would allow the landlord to effectively "act as judge", it emphasised that, in interpreting the contractual provisions, the Court is required to identify what the parties have agreed and not to save the tenant from an imprudent term.
Given that the service charge wording in Blacks' lease is commonplace in the service charge provisions in many commercial leases, the Court of Appeal's decision will be welcomed by landlords, especially in light of the uncertainty created by the current COVID-19 pandemic. However, it acts as a stark reminder to tenants and prospective tenants that the Court will not interfere and save them from a bad bargain. Close attention must therefore be paid to the detail of the service charge provisions in each lease and how those provisions will operate in practice.
Of course, whilst this case sets an important precedent, the impact on each individual landlord and tenant will depend on the specific terms of the lease in question. As a result, the Court of Appeal's decision may not necessarily prevent all tenants from challenging service charges in similar circumstances. Blacks are also seeking to appeal the Court of Appeal's decision, so watch this space!
by Saleem Fazal
by Emma Dooley
by Emma Dooley