Pay now, argue later: Service Charge in the Supreme Court

By Emily D’Eyncourt Harvey

Solicitor

Family Law

08 February 2023

Article Insights

In recent Supreme Court decision Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2 it was held that a Tenant must pay the sum due under a Landlord’s service charge certificate, but that this does not preclude the Tenant’s ability to challenge the sum payable later.

In 2016-2017 the Tenant was charged £55,000 by way of service charge. In 2017-2018, the Landlord certified that over £400,000 was payable. The Tenant did not pay and subsequently vacated the premises in 2019. The Landlord issued proceedings to recover the outstanding service charge.

This matter reached the Supreme Court, where the Court of Appeal’s judgement was upheld.

Pay now, argue never

The Landlord argued that the certification provision in the lease must be understood in the context of its commercial purpose and function: to impose an obligation on a tenant to pay a particular sum by way of service charge in circumstances where the Landlord will, most likely, have already incurred this cost. The Landlord advocated that the commercial reality must be taken into consideration. It would clearly be disadvantageous for a landlord to incur costs (potentially substantial costs) in servicing a premises only to then be drawn into lengthy litigation in order to recover those costs.

The Supreme Court had sympathy with this argument and were wary of undermining the commercial need for a Landlord to be able to recover expenses incurred without delay or dispute.

However, this did not fit with other provisions of the lease. A detailed dispute resolution mechanism in relation to the proportion of the service charge payable existed in the lease, as did a Tenant right to inspect receipts and documentation.

Argue now, pay later

The Tenant argued that the Landlord’s certificate was conclusive as to the amount of costs incurred by the Landlord, but not as to the sum payable by the Tenant.

The Tenant asserted that in determining the sum payable, arguable disputes and a need for investigation are likely to arise. For instance, was a service provided in accordance with the principles of good estate management? Was a repair reasonable and proper? As a dispute resolution mechanism was provided in the Lease, the Tenant argued that the intention could not have been that the Landlord would be the sole judge in their own cause.

Pay now, argue later

The Supreme Court held that neither party’s interpretation of the lease was satisfactory. The answer lay in protecting the cashflow concerns of a Landlord, while allowing a Tenant to contest arguable claims as to liability.

Therefore a landlord’s certificate is conclusive as to the sum payable by the tenant, subject only to the permitted defences contained in the lease (here, manifest or mathematical error, or fraud). No set off against the certified sum is permissible. The landlord is to receive prompt payment of the service charge, without dispute. At the same time, this does not negate the tenant from thereafter disputing their liability for the payment. The tenant is entitled to pursue arguable claims, however the burden will fall to the tenant to bring and establish these claims.

Moving forward, this means that tenants must pay the service charge sum certified by their Landlord where there are certification provisions in a lease. A tenant can then subsequently challenge that sum. To adopt the phrase coined by the Supreme Court; tenants must pay now and argue later.

Our Commercial Property team at Taylor Walton regularly advises both Landlords and Tenants on leases and are well equipped to advise on key provisions, such as service charge clauses, to ensure our client’s needs are met. If you would like to contact one of our Commercial Property team please drop us an email or call us at either Luton 01582 731161 or St Albans 01727 845245.

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