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Legal: UK Supreme Court ruling favours landlord in service charge dispute

Royal Courts of Justice - London

The case involved Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd and revolved around a service charge certificate (SCC) issued by the landlord (SHAH), and the question of whether this was considered to be "conclusive" (meaning final) for the amount due.

Service charge disputes in both residential flats and commercial leases are not uncommon. They usually occur when tenants dispute the amount of the bill when the landlord is charging for works carried out, such as repairs to the building structure, services provided, such as grounds maintenance, and common parts cleaning, or charges for buildings insurance.

Tenants sometimes resent paying for repairs to items that don't directly affect them, for example repairs other units in the block, while landlords often have no real incentive to keep costs down. But in any multi-occupied block, repairs must be dealt with centrally otherwise they simply would not get done, and in some instances and the property as a whole would soon start to deteriorate.

What are service charges?

These are amounts charged (usually annually) by a landlord to a tenant under their lease. The charges are in addition to the rent. Following the principles of a full repairing and insuring lease (FRI) they pass on the landlord's costs to a tenant in order to recoup, usually all of the landlord's costs in respect of managing a property. The landlord therefore gets a clear return on its investment.

A small single occupied property occupying one site may have very limited need for services to be provided by the landlord, apart from occasional repairs and insurance costs. But a major retail, office or mixed-use complex with grounds may have multiple shared facilities and significant associated costs of maintenance.

RICS standards and guidance to Service Charges in Commercial Property

Sinking fund

As part of the service charge arrangement within a commercial lease, the tenant usually agrees to pay either into a sinking fund (to build up reserves for major works) or simply pay the actual costs annually.

Disputes often arise over what's being charge for, the amount of the charges and questions over insurance costs. To minimise a tenants' ability to dispute the amounts claimed, and drag out the arrears each year, leases will often include a clause stating that a 'service charge certificate'� provided by the landlord is 'conclusive and binding'� on the tenant, unless there's an obvious error or fraud is involved.

The effectiveness of the these service charge certificate clauses was tested recently in this case, the Court of Appeal decision in Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020], and subsequently at the Supreme Court appears to bring something of a resolution.

Background to this case

Blacks is a retail outlet selling outdoor clothing and equipment. It held two leases of a shop in Liverpool granted by its landlord Sara and Hossein Holdings Ltd. Both these leases contained the same service charge clauses which said the landlord would provide a certificate as to the amount of the total cost and the sum payable by the tenant. In the absence of 'manifest or mathematical error or fraud'� such certificate shall be 'conclusive'�. It also stated that the tenant had no right 'to withhold rent or any right or claim legal or equitable set-off or counterclaim (save as required by law)'�.

Set-off and counter claim

In 2019 the landlord brought a claim against the tenant for substantial arrears of service charges, to which the tenant responded with a detailed set-off and counterclaim.

When it came to the High Court it held that the service charge certificate was 'conclusive'� with regard to the costs incurred by the landlord, but that it was not conclusive as to whether the particular works fell within the scope of the service charge. Therefore there was a question as to whether the tenant was obliged to pay the charge.

The landlord then appealed to the Court of Appeal arguing there that the High Court was wrong in its findings, and that in fact the service charge certificate was conclusive to the works which it claimed, and was fully within the scope of the service charge.

The landlord claimed that the tenant could only dispute if works fell within scope by way of a counterclaim. However, the no set-off provision within the leases meant that a counterclaim could not be used by the tenant in defence of the landlord's claim.

The Court of Appeal

The Court of Appeal then overturned the High Court's decision and held that the landlord's service charge certificate was conclusive in respect of both the total cost incurred, and the itemised sums listed by the landlord and payable in full by the tenant.

The conclusion the Court of Appeal came to was that it was not possible to separate these two elements: the total cost and the itemised sums, and the certificate could not be a conclusive one. If these two elements were to be separated, the Court thought, then the lease should have made it clear that this was to be the case.

So, without the tenant being able to prove 'manifest or mathematical error or fraud'� the certificate was binding on the tenant who was liable to pay the full amount claimed.

The Supreme Court

The next stage was the appeal to the Supreme Court. The court considered the case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd as to whether the tenant Sara & Hossein had the right to challenge the service charge sum where, as in this case, the landlord's service charge certificate (SCC) was deemed to be "conclusive".

On 18 January 2023 the Supreme Court released its judgment with a majority ruling in favour of the landlord. It dismissing the tenant's appeal against the Court of Appeal's grant of summary judgment.

The Supreme Court held that neither party's interpretation of the service charge certificate had been correct and came up with an alternative interpretation. It said that the service charge certificate was conclusive as to what was required to be paid by the tenant following certification. The landlord, it said, was assured of payment of the service charge 'without protracted delay or dispute'� in order to protect its cash flow.

However, the Supreme Court judgement went further: to clarify the issue for landlord. The judgment was made to strike a balance between landlord and the tenant by confirming that by paying the full service charge certificate sum, the tenant was not precluded from at a later date disputing liability for that payment. This interpretation the Court referred to as a "pay now, argue later" regime.

Commercial landlords are likely to welcome the judgement, relieved that when they issue a service charge certificate claim, subject to the provisions of the lease, the amount is conclusive and due on demand.

Tenants can also take comfort from the ruling that though landlords can self-certify the sums payable, landlords may still need to justify this and "argue later" about whether or not their tenants are liable for all of those costs.

The lessons

This case highlights the importance of careful lease drafting ensuring that rather than relying on standard lease clauses, these should be tailored to the specific circumstances. For any substantial letting, landlords should always use the services of an experienced property lease drafting solicitor. Prospective tenants would also be well advised to scrutinise these clauses before taking on a lease.

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