Service charges – Pay now, argue later

Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd

The Supreme Court has provided clarification on a common service charge mechanism in commercial leases, determining whether a landlord’s end of year service charge certificate is conclusive and the end of the matter or not. 

The decision results in a “pay now, argue later” provision.  The certificate and service charge is not immune from challenge but the tenant is required to pay any balancing service charge within the timescales set out in the lease and, if it considers the service charge was incorrect, subsequently bring a claim for a repayment.

In what is a common set up for a commercial lease, the landlord would provide services and at the end of the year produce a certificate of the costs incurred (the tenant paying any shortfall if payments on account during the year were insufficient to meet the service charge). The lease provided that, except for manifest or mathematical error or fraud, the certificate was conclusive.

The literal meaning of the words in the clause indicated that the certificate was binding (except for manifest or mathematical error or fraud) and that the tenant had no right to challenge it. But the Court had to weigh up other important provisions of the lease, particularly the tenant’s ability to inspect documents evidencing the landlords spend on items which made up the service charge after the certificate was produced and the service charge dispute resolution mechanism built into the lease.  

The Supreme Court’s interpretation of the lease is that (save for manifest or mathematical error or fraud) the landlord’s certificate is conclusive of what balancing payment the tenant is to pay within the timeframe specified in the lease. However, the tenant is not precluded from subsequently challenging the certificate (it isn’t limited to challenges based on manifest or mathematical error or fraud).

The specific wording of the lease will always determine the position. However such wording is commonly found in commercial leases and provides clarity for many landlords that payment must be made without a long delay or dispute – but it is not game, set and match on the issue.

https://caselaw.nationalarchives.gov.uk/uksc/2023/2  

It is a form of “pay now, argue later” provision, a contractual arrangement which is commonly found.

https://caselaw.nationalarchives.gov.uk/uksc/2023/2
Subcribe to news and views