Service Charge – “Pay now, argue later”

The Supreme Court has handed down an important judgment in a service charge dispute [Sara Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC2] concerning the construction of a provision which is widely used in commercial leases, which stated that the landlord's service charge certificate would be “conclusive in the absence of manifest error, mathematical error, or fraud”.

The landlord sought summary judgment for unpaid charges of £400,000.

To illustrate how difficult this issue was to determine, the High Court found in favour of the tenant; the Court of Appeal found in favour of the landlord. The case was then appealed to the Supreme Court.

The landlord argued that the certificate was conclusive and applied not only to the total costs incurred, but also to the identification of the services in the charge, save for the very limited circumstances described (manifest or mathematical error, or fraud). In other words – pay now, argue never.

The tenant argued that the true meaning of the clause was that the landlord's certificate was only conclusive as to the amounts incurred, but not as to its liability for the charge. Therefore, it should be entitled to challenge the landlord's inclusion of certain costs at the outset. In other words - argue now, pay later.

The Supreme Court found a middle path to take – pay now, argue later.

The court decided that the correct interpretation was that the landlord’s certificate was conclusive as to the sum payable by the tenant following certification, but not as to the tenant's underlying liability for the service charge. This assured the landlord of payment without delay but allowed the tenant the opportunity to dispute liability later if it felt it had been improperly charged.

There was a detailed dispute mechanism in the lease relating to the proportion of the service charge payable and the rights for the tenant to inspect receipts and invoices. If, as the landlord argued, the service charge certificate was wholly conclusive, then these provisions would have been made superfluous.

There was a standard “no set-off” clause in the lease, but the Supreme Court held that this did not prevent the tenant making a counterclaim.

So, the landlord got its summary judgment for immediate payment, but the tenant was allowed to counterclaim subsequently as to the amount charged.

On the one hand, this looks like a neat solution that gives the landlord the certainty of immediate payment but allows the tenant to argue for a rebate if circumstances justify.

On the other hand, it could mean cash-strapped tenants have to pay exorbitant charges they can’t afford on demand and then incur the further expense of litigating them after payment, that is if they can even afford to do so.

Meanwhile landlords, many of whom are also under considerable financial pressure, might be able to insist on payment following the issue of their service charge certificate, but potentially face the prospect of a rebate being awarded tenants later on.

Tighter lease drafting up front might be one way to avoid such uncertainty, but there will inevitably need to be a degree of compromise whenever the issue is addressed.

When paying the service charge, in cases such as this it would be advisable for tenants to make their payments on a without prejudice basis and to reserve the right to challenge the demand subsequently.