Welcome to the second of our RED Alerts of 2023.
Also featuring in this month's update:
Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2
Summary
By a majority judgment of 4 to 1, the Supreme Court has dismissed a tenant's appeal against the decision that a service charge certificate which is expressed in the lease as being "conclusive" save in the case of mathematical or manifest error or fraud is conclusive as to both the total cost and the tenant's liability to pay. However, after deciding that nether party's construction of the relevant provision in the lease was correct, the Supreme Court concluded that a "pay now, argue later" interpretation was preferable.
The facts
Blacks was the tenant of a retail premises in Liverpool. Under the terms of its lease, the landlord, Sara & Hossein Asset Holdings Ltd (S&H) was required to produce a certificate of the service charge sums payable at the end of each calendar year. This certificate was expressed to be "conclusive" unless there was a manifest or mathematical error or fraud.
When presented with a service charge certificate which was almost eight times higher than in previous years, Blacks withheld payment and sought to challenge the charges listed. S&H issued an application for summary judgment on the basis that Blacks' defence did not fit within the narrow exceptions of mathematical or manifest error or fraud and, as such, it could not dispute the certificate.
Court of Appeal decision
You can find a more detailed review of both the High Court and the Court of Appeal's decisions in our previous article here. However, in summary, the Court of Appeal sided with S&H on the basis that on the ordinary language of the clause, the certificate was to be conclusive as to both the total cost and Blacks' liability. This conclusion was reached notwithstanding that it would "make the landlord judge in his own cause" as it is not the role of the Court to save the tenant from an imprudent term.
Supreme Court decision
When appealing to the Supreme Court, Blacks continued to submit that the certificate was not conclusive as to its liability to pay the service charge. In contrast, S&H argued that, unless Blacks was able to demonstrate that one of the narrow defences provided for in the lease applied, they could not dispute the certificate and were required to pay. This was on the basis that any challenge to the certificate would result in significant delay in the recovering of the costs and expenses the landlord had occurred therefore undermining the commercial purpose of the provision.
The majority of the Supreme Court (with Lord Briggs dissenting) was not satisfied that either of these interpretations were a satisfactory construction of the Lease. On the one hand, the four judges concluded that the landlord's argument was not consistent with the wider context of the lease. In particular, the majority noted that the lease conferred the right on Blacks to dispute the apportionment as well as to review receipts, invoices and other evidence relating to the service charge. On the other hand, it was accepted that Black's interpretation did not accord with the natural and ordinary meaning of the certification provision.
In light of these difficulties, the Supreme Court forged an alternative path and found that a "pay now, argue later" interpretation would be the most appropriate in the circumstances. In accordance with this approach, the certificate would be conclusive as to the sum payable by Blacks following certification. However, Blacks retained the right to later dispute liability for that payment and was therefore entitled to pursue its counterclaim.
Our comment
The Supreme Court's novel approach in this case seeks to reconcile the arguments put forward by both parties whilst also emphasising the importance of considering the wider context of the lease when interpreting a specific clause. The judgment will certainly bring a degree of comfort to landlords whose cashflow remains protected from delays caused by disgruntled tenants withholding payment or drawn-out counterclaims. However, we could now see a rise in challenges to landlords' determinations which may introduce an element of uncertainty. Looking at it from the other perspective, many tenants will welcome the Supreme Court's blessing to mount a challenge to the recoverability of the charges sought by the landlord. Nevertheless, the high costs of such claims can act as a deterrent to tenants, many of which are still suffering financial hardship following the pandemic, and so the full impact of the judgment remains to be seen.
One key takeaway which still rings true is the importance to each party of ensuring that the service charge provisions are clearly drafted and accurately reflect their intentions.
