Service charge – time to pay up and argue later

Amount of service charge payable

Sara & Hossein Asset Holdings Ltd is the landlord of commercial premises in Liverpool which has been let to Blacks for a number of years. The leases required the landlord to present a certificate of service charge that would be deemed conclusive, save for where there is ‘manifest or mathematical error or fraud’.

Blacks failed to pay the service charge for the periods 2017/2018 and 2018/2019. Blacks claimed that the sums claimed by the landlord were excessive and included sums not due pursuant to the lease and service charge provisions.

The High Court agreed with Blacks’ arguments that the certificate amount was conclusive of the amount the landlord had incurred but not necessarily of the amounts that Blacks were required to pay in service charge. The landlord appealed, arguing that the natural meaning of the service charge provision was that the certificate was conclusive of the amounts incurred and charged to Blacks. The Court of Appeal agreed with the landlord’s arguments and found in their favour. Blacks appealed to the Supreme Court.

The Supreme Court’s decision

The Supreme Court held that the certificate was conclusive of the sums payable by the tenant pursuant to the service charge provision in the lease. However, crucially, they found that the certificate was not conclusive of the underlying liability. This means that if Blacks were concerned about the liability to pay certain items listed in the certificate, they were required by the terms of the lease to make payment and later claim them back from the landlord. The fact the certificate was ‘conclusive’ did not prevent to challenge at the appropriate time.

This pay-now-argue-later process is based on the fact that the lease did not allow the tenant to impose a set-off in relation to the service charge or rent. This is commonplace in commercial leases but does mean that if a set-off is permitted, the pay-now-argue-later approach determined by the Supreme Court may not be applicable.

What does the pay-now-argue-later approach mean for landlords and tenants?

The pay-now-argue-later approach gives the landlord some certainty over cash flow, allowing them to pay for the services used by the tenants. However, it may mean that landlords are faced with more claims seeking to recover sums they do not consider payable, leaving the landlord to pick up the shortfall.

If you would like to find out more information on the topics raised in this ebriefing, please contact Rhys Baker in the property litigation team.

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