Commercial leases usually contain a “no set-off provision” which prohibits tenants from making deductions from rents due. As the term “rents” often includes estimated service charges, no set-off provisions often also apply to the payment of quarterly instalments of service charges. In such cases, no set-off provisions are often also complemented by “conclusive evidence clauses” within the service charge provisions themselves, which allow a landlord or its surveyor to conclusively determine the final amount of service charge due: ie in practice, but not always, after the quarterly instalments of estimated service charge have been paid.
The recent Supreme Court decision in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2; [2023] PLSCS 13 concerned an appeal by a tenant, the retail chain Blacks, against a Court of Appeal decision which had granted the landlord, Sara & Hossein, summary judgment on a claim for arrears of service charge. In this case, Blacks had not paid quarterly instalments of service charge (as it should have) but, by the time of the appeal, S&H nonetheless sued only on a “conclusive evidence clause”. That clause, on its face, allowed S&H to certify both the total cost and the sum payable by Blacks for service charges, and provided that a landlord’s certificate would be conclusive as to both of those things in the absence of manifest or mathematical error or fraud (“the permitted defences”).
The case history
The Supreme Court decided by a majority (Lord Briggs dissenting) that the Court of Appeal was right to give summary judgment on S&H’s claim, but that Blacks was entitled to pursue its counterclaim: in other words, that the certification provision was a “pay now, argue later” clause.
S&H’s case was that once S&H had certified service charge as due, then unless Blacks could show that S&H’s certificates were vitiated by manifest or mathematical error or fraud (which Blacks had not done in either its amended defence or counterclaim), the certificates could not be challenged at all: so in the light of the no set-off clause in the lease, S&H was entitled to summary judgment for service charge arrears. Blacks, meanwhile, argued that S&H’s certificates could not be conclusive as to Blacks’ actual liability for the service charges.
S&H’s analysis had previously been rejected by both a deputy master and a deputy judge. According to the deputy master, certificates were conclusive as to “routine accounting matters” but not as to whether particular works fell within the landlord’s obligations. The deputy judge, meanwhile, drew a distinction between “the amount” of a cost, which S&H could conclusively certify, subject to the permitted defences, and the question of whether the cost had been properly incurred in the first place, which, she held, it could not certify ([2020] EWHC 1263 (Ch); [2020] PLSCS 98).
By contrast, the Court of Appeal held that the certificates were conclusive as to two elements: the amount of the total cost and the sum payable by the tenant. The question of whether a cost had been properly incurred in the first place could not be separated out: there was no express term to that effect and no basis for implying one. The Court of Appeal therefore held that S&H was entitled to summary judgment on its claim for unpaid service charges, while Blacks’ counterclaim would be remitted to the Chancery Division to determine what, if any of it, survived ([2020] EWCA Civ 1521; [2021] EGLR 7).
A question of interpretation
In the Supreme Court, Lord Hamblen (with whom the majority agreed) adopted the approach to contractual interpretation set out in Wood v Capita Insurance Services Ltd [2017] UKSC 24, [10]-[15], noting that interpretation was a “unitary exercise which involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its implications and consequences are investigated”.
Lord Hamblen considered that the “natural and ordinary meaning” of the certification clause supported S&H’s case; however, under other terms of the lease, factors such as landlord’s negligence or unreasonableness, or failure to follow “principles of good estate management”, were relevant in assessing the tenant’s liability for service charge. On S&H’s interpretation, S&H would be “judge in its own cause” on those issues, subject only to the permitted defences. Blacks’ construction would answer those points; however, it sat unhappily with the (clear) words of the certification clause itself and would have denuded S&H of protection to its cash flow.
In the light of this, Lord Hamblen adopted a third approach. He held that the certification provision was a “pay now, argue later” clause. The Court of Appeal had been right to determine that S&H’s certificates were conclusive as to S&H’s claim, and S&H was entitled to summary judgment on that without a stay of execution. However, Blacks was permitted to raise any arguable counterclaim, the burden being on Blacks to pursue and establish it.
Lord Briggs, in a vigorous dissent, concluded that the majority’s interpretation, though it might be “the plainly commercial solution”, had not been advanced by either party and was not open to the court. He considered that the majority’s analysis involved three elements: the landlord’s costs, the sum payable by the tenant and the tenant’s underlying liability. The majority had held that the certificates were conclusive as to the first and second, but not the third.
However, Lord Briggs, like the Court of Appeal, thought that on the actual language of the leases there were only two elements: the landlord’s costs and the sum payable by the tenant. Without one of the permitted defences, the certificates were conclusive as to both. He noted that the court was required “to choose between genuinely available constructions, rather than mending the parties’ bargain”, and concluded that the “pay now, argue later” interpretation was not available to the court on the wording of the leases.
Going forward
Cases such as this involving the interpretation of a legal document hinge on language, context and construing the document “as a whole”, so some caution needs to be exercised in extrapolating general principles. That said, the courts do generally show a willingness to follow interpretations previously adopted by the higher courts in standard-form contracts: AIB Group (UK) plc (formerly Allied Irish Banks plc and AIB Finance Ltd) v Martin and another [2001] UKHL 63; [2001] PLSCS 268.
While commercial leases are not standard-form contracts, the conclusive evidence clause which was the subject of this appeal is, itself, in a common form. As such, it seems likely, save in relatively exceptional circumstances, that the lower courts, when faced with the same or similar clauses to the one in this appeal, will probably follow the approach to interpretation adopted by the majority in the Supreme Court and award summary judgment on a claim for unpaid, certified service charges.
While tenants will still have a right to counterclaim against their landlords, the extent to which tenants will exercise that right in practice, given the costs and time involved and ultimate uncertainty as to outcome, is probably dubious. Traditionally, there have been two key benefits for tenants in contesting service charges by way of legal proceedings: preserving cash flows and obtaining some leverage (by withholding payment) to negotiate a discount on sums claimed. However, those benefits will no longer be conferred on tenants as landlords now have near certainty that they should be granted summary judgment on such claims, assuming there is no manifest or mathematical error or fraud.
For lawyers, the case also has potentially far-reaching implications. The majority in this case were prepared, as a matter of pure interpretation (ie without relying on an implied term), to go some way from the specific wording of the provision, and from both of the parties’ rival cases, to reach an interpretation which acts as a de facto commercial solution to the issue at hand. It remains to be seen whether this greater emphasis on context over text will herald a renewed shift in the way that the courts interpret contractual documents to a more “purposive” approach (ie looking beyond the words to the purpose behind them), but it does tentatively suggest that may now be the case.
Commercial consequences and points for practitioners
Tenants faced with the same or a similar certification provision to the one ruled on in this appeal are now likely, in practice, to pay service charges prior to a claim being issued by their landlord, given that, without manifest or mathematical error or fraud, summary judgment would almost certainly be awarded on any defence that tenants advance to such a claim. That provides welcome certainty for landlords, as well as obvious cash flow advantages. It also means that tenants are, in practice, more likely to pay, rather than contest liability for, outstanding service charges. In new leases, tenants would be well advised, as many have done since the Court of Appeal decision two years ago, to resist “conclusive as to sum payable” wording when negotiating their leases. Conversely, landlords who wish to seek a conclusive certification provision, which is wholly conclusive as to liability (ie a “pay now, argue never” provision), will need to ensure that is unambiguously set out in the lease.
Richard Fowler is a barrister at Maitland Chambers, Richard Bartle is a partner and Joseph Parnis is a senior associate, both in the property resolution team at Pinsent Masons LLP – they acted for S&H, the successful respondent, in the appeal
