In these times of escalating costs, people are scrutinising payments that they are being asked to make. Service charge contribution is currently an area where tenants are paying close attention as to how their money is being spent. This can inevitably lead to discussion between Landlord and Tenant as to the reasonableness of the services being provided and their associated costs. However tempting it might be, for a tenant, to withhold payment of a disputed service charge, a recent court case has held that this would not be a wise course of action.
Why you shouldn’t withhold payment?
Judgment has been handed down by the Supreme Court in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd relating to payment of service charges due under the Lease.
Blacks rented commercial retail premises from Sara with the Lease containing the standard provision that Sara was to provide Blacks with a certificate at the end of each service charge year setting out the service charge sum payable by Blacks as tenant. The Lease provided that the Landlord should provide a certificate “as to the amount of the total cost and sum payable by the Tenant” and that this was to be “conclusive” in the absence of “manifest or mathematical error or fraud” – a standard clause.
How the dispute arose
Blacks refused to pay the service charge for two service charge years on the grounds that it was excessive and included unnecessary expenses and items which were not properly due under the Lease.
Sara issued proceedings and sought summary judgment for the outstanding amount. Their argument? The certificate provided was conclusive unless there had been a manifest error, a mathematical error or fraud, none of which applied here.
Blacks opposed this argument stating that the certificate was conclusive as to the amount of costs incurred by the Landlord but not as to Blacks liability for the service charge.
The Supreme Court held that neither argument was quite correct and settled somewhere in the middle. Sara’s reliance on the word ‘conclusive’ was somewhat at odds with the other provisions in the lease including provisions for the referral of disputes and for Blacks to examine invoices etc. If Sara’s interpretation was correct, then these rights only existed for Blacks to investigate fraud which couldn’t be right and made these provisions largely superfluous. Blacks assertion that the certificate was only conclusive to Landlord’s costs and not to the sum payable by the Tenant also didn’t stack up as the natural and ordinary meaning of the certification provision provided that the certificate is conclusive both as to the amount of the total cost and the sum payable by the tenant. Also, the ability to challenge the service charge payment undermines the commercial purpose of enabling the Landlord to recover costs and expenses with minimal delay and dispute.
The courts interpretation
The court provided an alternative interpretation to avoid both of these problems. Their interpretation was that the certificate is conclusive as to what is required to be paid by Blacks following certification subject to only to the defences of error, fraud etc. Sara will therefore receive their service charge payment without delay or dispute. However just because they have paid this sum, doesn’t shut the door on Blacks from later disputing the sum involved and the liability for payment. Therefore, whilst Blacks appeal was dismissed and they are to make the required payment, Blacks can still now pursue a counterclaim.
How this affects a tenant
The key takeaway from this judgment is that the Tenant is to ‘pay now, argue later’ and that all of the wording within the Lease relating to service charges and disputes need to be considered in the round when agreeing lease terms.
Next steps when entering into a lease
Therefore, if you are considering entering into a lease, we recommend that legal advice is sought to ensure that you are able to question the service costs.
For those who already lease premises, it would be imprudent for you to withhold payment of disputed service charges and you should consider taking legal advice if you do wish to dispute those charges.
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