Landlord and tenant – Service charges – Certification – Respondent landlord claiming service charges allegedly due from appellant tenant – Respondent applying for summary judgment – Deputy master refusing application – Judge upholding decision – Court of Appeal allowing second appeal – Appellant appealing – Whether landlord’s certificate of total cost of services conclusive as to cost incurred in providing services – Appeal dismissed (by a majority)
The respondent was the landlord of retail commercial premises at Chicago Buildings, on the corner of Whitechapel and Stanley Street in Liverpool. The appellant was a large retail chain which leased the premises.
Under the lease, the appellant covenanted to pay the yearly rent reserved and not to exercise any right or claim to withhold rent or any right or claim to legal or equitable set-off or counterclaim. The lease provided for any dispute, as to the proportion of the total costs of services and expenses payable, to be settled by expert determination.
Pursuant to paragraph 3 of schedule 6 of the lease, at the end of the service charge year the respondent was required to furnish a certificate of the appellant’s total liability for the year. In the absence of manifest or mathematical error or fraud, that certificate was conclusive.
The respondent served a service charge certificate for the year ended 30 September 2018, certifying that more than £400,000 was due. The appellant objected that those charges were excessive and not properly due.
The respondent brought proceedings to recover the service charges and applied for summary judgment. A deputy master refused the application and the deputy judge upheld that decision: [2020] EWHC 1263 (Ch); [2020] PLSCS 98.
The Court of Appeal allowed the respondent’s second appeal and entered summary judgment on the claim for the certified service charges: [2020] EWCA Civ 1521; [2021] EGLR 7. The appellant appealed.
Held: The appeal was dismissed (by a majority, Lord Briggs dissenting)
(1) The respondent contended that its certification of the sum payable was conclusive subject only to the permitted defences. The appellant contended that certification was conclusive as to the amount of costs incurred by the landlord but not as to the tenant’s service charge liability.
The natural and ordinary meaning of the certification provision supported the respondent’s case. The fundamental difficulty with the appellant’s interpretation was the need to give meaning and effect to the words “and the sum payable by the tenant”. The certificate was stated to be conclusive both as to the “amount of the total cost” and as to “the sum payable by the tenant”. On the appellant’s interpretation it was only conclusive as to the former.
There was force in the respondent’s submission that allowing the appellant to challenge payment of the service charge undermined the commercial purpose of enabling the landlord to recover the costs and expenses it had incurred without significant delay or dispute. That was the evident aim of a contractual scheme of conclusive certification subject to only limited permitted defences.
(2) There was substance in the appellant’s contention that the respondent’s interpretation was inconsistent with other provisions of the lease and the internal context of the contract. In particular, it did not fit well with the detailed dispute mechanism in relation to the proportion adjustment, as to which the certificate was not “conclusive”, nor with the lengthy inspection rights given under paragraphs 8 and 11 of part I of schedule 6.
Moreover, any manifest or mathematical error would be discoverable under a paragraph 8 inspection. On the respondent’s case, the only purpose of having the more detailed inspection rights under paragraph 11 was for the rare case of fraud. There was also force in the appellant’s case that, where there were so many potentially arguable issues, in relation to both out-of-scope costs and excluded costs, it would be surprising for the parties to agree that they could be determined conclusively by the landlord without representation or recourse. It was well established that in interpreting a contract one started with the presumption that neither party intended to abandon any remedies which arose by operation of law and that clear words were necessary to do so.
(3) Adopting an iterative approach, neither party’s interpretation was satisfactory. The respondent’s case fitted well with the wording of the certification provision but not the wider contractual context. It suited the landlord’s commercial purpose but produced surprising and uncommercial consequences. Subject only to the permitted defences, it was a “pay now, argue never” regime. Conversely, the appellant’s case was supported by the internal context of the contract but not the certification of the “sum payable by the tenant”. It avoided the uncommercial consequences of the respondent’s interpretation but undermined the landlord’s need for reimbursement of costs and expenses incurred with minimal delay and dispute. It was an “argue now, pay later” regime.
There was an alternative interpretation that avoided all those difficulties. It gave effect to the words “sum payable by the tenant” and protected the landlord’s cashflow concerns. It also allowed the tenant to contest arguable claims as to service charge liability and avoided the contextual inconsistencies and uncommercial consequences of being unable to do.
(4) Accordingly, 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 was entitled to bring a claim seeking repayment of a cost which it was contended had been improperly charged. It was a form of “pay now, argue later” provision, a contractual arrangement which was commonly found.
Adopting an iterative approach, that interpretation was consistent with the contractual wording. It enabled all the provisions of the lease to fit and work together satisfactorily and avoided surprising implications and uncommercial consequences.
Therefore, the Court of Appeal was right to enter summary judgment for the respondent. However, that did not preclude the appellant from pursuing its counterclaim.
(Per Lord Briggs dissenting) The structure of the service charge regime in the leases and the ordinary meaning of the words used were irreconcilable with the majority judgment. It assumed that paragraphs 3 and 5 of schedule 6 were just mechanisms to preserve the landlord’s interim cash flow and said nothing about the final service charge liability, if the tenant disputed it on any ground. It assumed that the lease created a separate underlying liability to pay service charges which was untouched (in terms of finality) by those paragraphs.
Brie Stevens-Hoare KC, Morayo Fagborun Bennett and Usman Roohani (instructed by Gateley plc of Manchester) appeared for the appellant; Richard Fowler (instructed by Pinsent Masons LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd
