The Supreme Court has decided in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2; [2023] PLSCS 13 that a landlord’s certificate as to the service charge payable by its commercial tenant is conclusive as to what the tenant is required to pay, subject to error or fraud, but payment of the certified sum does not preclude the tenant from later disputing liability for that payment.
The decision, dismissing the tenant’s appeal from the judgment of the Court of Appeal, is pragmatic, but, as the dissenting judgment of Lord Briggs highlights, inconsistent with the lease provisions.
Background
Blacks rented retail commercial premises in Liverpool from S&H under consecutive leases dated 2013 and 2018. The tenant was to pay rent and “a fair and reasonable proportion” of the total cost incurred by the landlord in providing the services and expenses set out in Schedule 6 to the leases.
At the end of each service charge year the landlord was required to furnish to the tenant “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”.
Blacks refused to pay service charges of almost £408,000 for the years 2017-18 and 2018-19, claiming the charges were excessive and included items which were not properly due under the leases.
S&H’s application for summary judgment failed, as did a first appeal: the certificate was conclusive only as to the amount spent by S&H on services and expenses but not as to Blacks’ liability, since it was unlikely the parties would have intended the landlord could decide conclusively significant issues of law and principle in determining the service charge payable.
The Court of Appeal disagreed and entered summary judgment for S&H. The natural meaning of the crucial words in the certification provision meant the certificate was conclusive as to the amount of the total costs and the sum payable by the tenant.
The law
A contract must be interpreted as a whole and objectively. What would a reasonable person with all the background knowledge have understood the language to mean? Interpretation is a unitary exercise involving an iterative process of checking suggested interpretations against the contract provisions and investigating the implications and consequences (Wood v Capita Insurance Services Ltd [2017] UKSC 24).
The meaning of “mathematical error” and “fraud” is clear. A “manifest error” is one that is obvious or easily demonstrable without extensive investigation (Amey Birmingham Highways Ltd v Birmingham City Council [2018] EWCA Civ 264). An arguable error will be insufficient. Both parties were sophisticated commercial entities and the leases were formal documents prepared by solicitors. Cashflow was an important consideration for the landlord.
The decision
S&H’s argument that its certificate was conclusive as to Blacks’ service charge liability subject to the permitted defences – a “pay now, argue never” regime – while consistent with the certification provision, was inconsistent with other lease provisions. The sum payable was based on the proportion of the premises occupied by the tenant for which there was a detailed assessment mechanism which might alter the sum due.
Blacks was also entitled to inspect receipts, invoices and other evidence for up to 12 months after the certificate was provided. If S&H was correct, such rights would be superfluous, save for identifying any of the permitted defences. The permitted defences were in any event very narrow and it would be surprising if the parties had agreed that arguable issues as to liability could be determined conclusively by the landlord as “judge in his own cause”.
Blacks’ argument that the certificate was conclusive only as to the landlord’s costs and not as to the sum payable by the tenant contradicted the meaning of the certification provision that the certificate was conclusive both as to the “amount of the total cost” and “the sum payable by the tenant”.
The majority of the Supreme Court found an alternative interpretation consistent with the contractual wording that avoided surprising implications and uncommercial consequences: the “pay now, argue later” regime. The certificate was conclusive as to what the tenant was required to pay following certification subject only to the permitted defences but the tenant was not precluded from later disputing liability for that payment. S&H was thereby assured of payment of the service charge without protracted delay or dispute, but full effect was given to Blacks’ inspection rights.
The purist view
Lord Briggs dissented. The majority view was the plainly commercial solution which reconciled the parties’ opposing interests in relation to the proper determination and prompt payment of service charges. However, a more commercial alternative to the uncommerciality of contractual words was only possible if there was some basis in the language of the contract as a peg to support that alternative (Arnold v Britton [2015] UKSC 36; [2015] EGLR 53). The court does not have carte blanche to make up a solution of its own.
The structure of the service charge regime clearly pointed to the pay now, argue never regime for which S&H argued, unless some other construction could be found which mitigated or removed the conferring of conclusive certification powers on the landlord subject only to narrow grounds of challenge. Blacks’ construction failed to do so but the pay now, argue later solution did not do so either.
Louise Clark is a property law consultant and mediator
