Recent judgement on service charges – What does this mean for tenants?

Retailers will be all too familiar with the term “service charge” and tenants will be accustomed to service charge clauses in leases. The important question is, do you fully understand the implications of the service charge clauses in your lease? The recent judgement of Sara & Hossein Asset Holdings Ltd v Black Outdoor Retail Ltd [2023] UKSC 2 highlighted the importance of carefully carving out clauses and ensuring parties understand the implications of clauses within leases they are a party to.

Service charge provisions in a contract will normally contain a clause to the effect that each service charge certificate, or statement of account is conclusive, or final, or binding on the tenant. The above recent case related to the conclusive effect of a clause in a lease providing for the landlord’s certification of the service charge payable by the tenant.

The facts

The most recent judgement came after a string of appeals in this matter.

Blacks Outdoor Retail Ltd (Blacks), a well-known retail brand selling outdoor clothing and goods, leased a commercial premises from Sara & Hossein Asset Holdings Ltd (S&H) since 2013.

Blacks appealed against a decision granting S&H summary judgement on its claim for the service charge. The main crux of the dispute between the parties boiled down to the interpretation of the certification clause in the contract. This clause stated that S&H should provide a certificate “as to the amount of the total cost and the sum payable by the tenant” and this was to be “conclusive” in the absence of “manifest of mathematical error of fraud”.

Blacks refused to pay the service charge for two years on the basis the charge was excessive, and expenses were not properly due. Their position was that certification was conclusive as to the amount of costs incurred by the landlord, but not as to Black’s service charge liability.

S&H sought summary judgement arguing that its certificate as to the sum payable was conclusive save for the permitted defences, being a manifest error, a mathematical error, or fraud. S&H’s construction of the clause deprived Blacks of the recourse to raise a dispute and effectively, making S&H judge in his own case.

The appeal was dismissed, and it was held that the certificate was conclusive as to the amount spent by S&H on services and expenses, but not as to Black’s liability. This was on the basis that it’s not just for S&H to be the judge in his own cause.

When determining disputes on contractual interpretation, courts will consider the contract as a whole, and seek to ensure the interpretation accords with the language of the contract. The court will also seek to identify what the reasonable person, with the knowledge reasonably available to the parties when they entered into the contract, would have understood the language to mean.

The court’s view in this recent case was that in fact, neither parties’ interpretation of the clause was satisfactory. S&H’s position regarding the interpretation of the clause, did not fit with the wider contractual context. If the court were to accept S&H’s interpretation of the clause, this would effectively result in a “pay now, argue never” regime for Blacks. Conversely, Blacks’ position was based on an “argue now, pay later”, regime. It isn’t surprising that the court did not favour either interpretation which offered little protection to one or the other party.

Instead, the court determined that the proper interpretation of the clause was that S&H’s certificate was conclusive as to the service charge payable by Blacks, subject to manifest of mathematical error or fraud, but it was not conclusive as to the liability for the service charge.

The court’s interpretation prevents uncommercial consequences and protects both parties’ interests insofar as S&H were offered assurance that the service charge would be paid without delay, but payment of the sums by Blacks, did not prevent Blacks from proceeding to dispute liability for payment of the service charge at a later date. It was a pay now, argue later provision.

The clause in dispute in the current case is commonplace in commercial leases and the recent judgement reiterates the importance for both tenants and landlords, to ensure the terms of a lease are clear, unambiguous and being correctly interpreted by both parties.

The recent judgement will be welcomed by landlords as it prevents tenants from withholding payment on an assertion of a disputed charge, offering security in terms of payment. While tenants may have previously withheld sums due in the hopes that a dispute could be resolved and the sum reduced, this may no longer be possible (of course, this will depend on the specific wording in individual leases as to whether this applies). Where a tenant does so, the landlord would be entitled to apply to court for summary application. Raising a claim following the payment of the sums will be costly and time consuming for tenants and therefore, tenants may think twice about doing so and would require ensuring they had an arguable claim for doing so.

It may seem all doom and gloom for tenants going forward regarding service charge payments, but the risk can be mitigated where parties to a lease ensure contractual provisions are clearly drafted, unambiguous and understood by both parties. Tenants and landlords should be clear, at the time of entering into the lease, what works are, and are not recoverable under the service charge provisions. When drafting leases, the individual clauses should be carved out and internally consistent with the lease as a whole.

We understand that the drafting of leases can be a complex legal topic and our team at Anderson Strathern have a wealth of experience in drafting and advising on leases.