commercial leases: service charges (legal update)

A lease of commercial premises will typically require a tenant to pay service charges to the landlord (or the landlord’s managing agent). These charges typically cover the costs incurred by the landlord (or its agents) in providing certain services, such as the maintenance of common parts of the building, or the estate upon which the leased property is situated.

A landlord (or more likely the landlord’s surveyor) will usually provide a certificate to the tenant at the of the financial year itemising the costs incurred by the landlord.

A tenant may expect to be able to challenge certain items on the certificate but typically a lease will state that the ‘landlord’s certificate is final and binding’.

That was the issue in the case of Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2.

In Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd, the Supreme Court held that the landlord's service charge certificate was conclusive as to the sum payable by the tenant, but the tenant was entitled after payment to dispute its liability. The certificate was not conclusive as to the tenant's underlying liability for the service charge.

The Supreme Court has upheld by a 4:1 majority the grant of summary judgment to the landlord (L) of commercial premises for unpaid service charge, but on a different basis to the Court of Appeal so that the tenant (T) can pursue its counterclaim.

T covenanted to pay a "fair and reasonable proportion" of the total service cost. L would provide a certificate of the total cost and the sum payable for each service charge year which was "conclusive in the absence of manifest or mathematical error or fraud". T had rights to inspect L's receipts, invoices and other evidence relating to the service charge. The lease prohibited any right to set-off or counterclaim. T did not pay two years' service charge. L issued proceedings to recover the service charge.

L argued that its certificate was conclusive as to both the costs it incurred and the sum payable, subject only to T's permitted defences. T argued that the certificate was conclusive only as to L's costs and not as to the sum payable by T.

The Supreme Court held that neither interpretation was correct; the correct interpretation was that L's certificate was conclusive as to the sum payable by T following certification, but not as to T's underlying liability for the service charge. This ensured L obtained prompt payment of the service charge, but did not prevent T from later disputing its liability to pay. This "pay now, argue later" approach gave full effect to T's inspection rights and any arguable disputes. The no set-off provision did not prevent a counterclaim. Its purpose was to prevent T from holding up payment, but not to extinguish a counterclaim.

This case turned on the precise wording, but the drafting is common.

Both landlords and tenants are likely to be dissatisfied with this decision. From the landlord’s perspective the door is open for tenants to challenge service charges and the landlord’s word is not final. From the tenant’s perspective, whilst it can challenge the landlord’s demand for service charges, unless there is a clear, contractual, route mapped out in the lease, there could be a fight all the way to Court to resolve the matter.

The moral of the story is that agreeing the provisions in the lease at the start is, as always, incredibly important.