In recessionary times, service charges can be a hotly contested issue so landlords will be pleased by the Supreme Court’s recent decision in Sara Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023]. The case concerned whether the retailer, Blacks, had the right to challenge the service charge certificate issued by the landlord, S&H and on which the landlord relied to claim £400,000 worth of service charge.

Using fairly common drafting, the lease provided that the certificate issued at the end of the service charge financial year was deemed to be conclusive “as to the amount of the total cost and the sum payable by the tenant” unless there was “manifest or mathematical error or fraud”. Blacks believed that some of the works did not fall within the meaning of the relevant repairing covenants and that the costs were excessive. Blacks argued that the certificate was conclusive only as to the amount of costs incurred by S&H but not as to Blacks’ liability. Under the lease the tenant had the right to inspect service charge receipts and invoices which must mean that it could dispute the level of charges before it had to pay them (the “argue now, pay later” approach).  

There had been conflicting decisions on interpretation in the lower courts, with the Court of Appeal favouring the landlord’s argument that the lease wording meant that the certificate determined both the costs incurred and the amount payable by Blacks, unless one of the narrow permitted defences (fraud or manifest error) applied (the “pay now, argue never” argument).

In an attempt to protect the interests of both the landlord and tenant, the Supreme Court adopted a third interpretation of “pay now, argue later”.   This approach preserves the landlord’s cashflow and the ability to recover costs without delay, but at the same time enables tenants to challenge the amount of service charge and pursue a counterclaim if appropriate.

As ever, the decision turned on the wording of the specific lease in question, but it is still a reminder of the need to think carefully about the effect of commonly encountered phrases/terms used in commercial leases.  In this case, Lord Briggs gave the only dissenting judgment, favouring a literal interpretation of the lease and arguing that it is not the role of the court to re-write a bad bargain. This was in line with previous case law. Such an approach would have prevented Blacks from raising any challenge to the £400,000 service charge bill.    

Based on the Supreme Court’s decision, where this type of wording applies, the onus will now be on tenants to take legal action to recover any erroneously charged amounts, which may be a deterrent if the sums in dispute do not merit the legal fees. Well-advised tenants will no doubt want leases drafted to reflect the “argue now, pay later” approach. This may be unrealistic but at the very least leases should be clear on a tenant’s right to challenge the service charge and when they can do so.