Conclusive Certificates in Service Charge Regimes

Summary

The Supreme Court in a majority judgment in Sara & Hossein Asset Holdings v Blacks Outdoor has provided guidance on some often found wording in service charge provisions.  

The case concerned the extent of the conclusive effect of a clause in a lease providing for the landlord’s certification of the total costs of the service charge and the sum payable by the tenant.

Background

Blacks was the tenant of retail premises in central Liverpool.  Blacks’ leases contained provisions in relation to the services to be supplied by S&H and the service charges to be paid by Blacks.  The provision at the root of the dispute stated:

“The landlord shall … furnish to the tenant as soon as practicable after such total cost and the sum payable by the tenant shall have been ascertained a certificate as to the amount of the total cost and the sum payable by the tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive” (the Certification Provision).

The parties disputed how much service charge was owed under the lease after S&H served a service charge certificate for over £400,000 for the year 2017-18.  This was significantly more than in previous years, the figure for 2016-17 having been £55,000.

Blacks argued that the proper construction of the Certification Provision meant that it was conclusive as to the amount of costs incurred by S&H in providing services, but not as to the sum that Blacks had to pay.   

The lower courts agreed and found that it was unlikely that the parties would have intended that the landlord should be “judge in his own cause” by being able to certify, without challenge, the amount payable.

However, the Court of Appeal agreed with S&H and took the view that a natural construction of the Certification Provision would not allow for the two elements ((i) the amount of the total cost; and (ii) the sum payable by the tenant) to be separated.  Therefore the certificate was conclusive as to both the amount of the total cost of the services and the sum payable by the tenant.

The Supreme Court’s judgment

The Supreme Court’s view was that neither party’s construction of the Certification Provision was satisfactory and had uncommercial consequences.

S&H’s construction that the certificate is conclusive, subject only to certain permitted defences of the absence of manifest or mathematical error or fraud, was described as a “pay now, argue never” regime.

Conversely, Black’s construction that the certificate is conclusive only as to the amount of the costs incurred but not as to the sum payable was seen as an “argue now, pay later” regime.

The Supreme Court’s view was that instead there was a “pay now, argue later” interpretation that applied.  As such, the certificate was conclusive as to the total costs of the Services supplied by S&H and what was required to be paid by Blacks following certification.  However, it was not conclusive as to Blacks’ liability for the service charge.  This suited S&H’s commercial interests in being paid with minimal delay or dispute and yet did not preclude Blacks from subsequently pursuing a claim in respect of its liability for the payment.  Giving judgment Lord Hamblen concluded:

“In summary, the certification provision should be interpreted as being conclusive as to the service charge sum payable by the tenant but not as to the underlying liability for the service charge. The tenant is entitled to bring a claim seeking repayment of a cost which it is contended had been improperly charged. It is a form of “pay now, argue later” provision, a contractual arrangement which is commonly found. Adopting an iterative approach, this interpretation is consistent with the contractual wording, it enables all the provisions of the leases to fit and work together satisfactorily and it avoids surprising implications and uncommercial consequences.”

Conclusion – what this means

Like all cases, the decision turns on its own facts, but wording providing for conclusive certificates being issued by landlords is regularly encountered in service charge provisions.

This decision will be welcomed by landlords in leases with similar certification provisions as the construction of a “pay now, argue later” regime protects their cashflow position and does not seek to save the tenant from a commercially imprudent term.  As for commercial tenants in a similar dispute over service charges, whilst they will need to pay the certified amount up front, this decision does not preclude them from pursuing a claim in relation to its underlying liability.

Please feel free to get in touch with Rob Shaw or George McGrady if you would like to discuss this article or have any queries, or speak to your usual DLA Piper contact.