“Pay now, argue later” is ultimately the decision of the Supreme Court in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd. Lord Hamblen (with whom Lord Hodge, Lord Kitchin and Lord Sales agreed) gave the majority opinion of the court, with Lord Briggs dissenting. In this post, Sophie Campbell, as Associate in the litigation team at CMS, comments on the decision, handed down on 18 January 2023.
Sara & Hossein Asset Holdings Ltd (“S&H”) was the landlord and Blacks Outdoor Retail Limited (“B”) was the commercial tenant of retail premises in Liverpool. B entered into two identical leases with S&H, the first in 2013 and the second in 2018.
The dispute arose over the non-payment of a service charge by B in 2019. B had paid its rent and other charges due under the lease, but refused to pay the service charge on the basis that the charge was excessive and included expenses outside of the terms of the lease. The amount that B previously paid by way of service charge was £55,000, whereas the service charge certificate issued in January 2019 was for £400,000.
Both leases included identical provisions in respect of the service charge owed by B to S&H. The relevant section of the lease was schedule 6, with paragraph 3 being the key provision:
“3. The Landlord shall on each occasion furnish to the Tenant as soon as practicable after such total cost and the sum payable by the Tenant shall have been ascertained 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 as certificate shall be conclusive”.
S&H commenced proceedings against B, with B serving a defense and a counterclaim in response, averring that some of the works included in the service charge certificate were unnecessary. B also argued that the works did not fit the definition of repair works as set out in the repairing covenants in the lease.
At first instance, S&H’s application for summary judgment was dismissed. S&H sought summary judgment on the basis that, on the proper construction of the lease, the service charge certificates issued by it were conclusive. Deputy Master Bartlett disagreed with S&H’s position and dismissed its application.
S&H then appealed to the High Court, in which Kelyn Bacon KC (now Bacon J) found that the certificate was only conclusive as to the amount of the service charge incurred (absent misrepresentation, error or fraud). However, the issue of whether the charge was one that fell within the scope of the service charge provisions was open for determination.
The Court of Appeal disagreed with this approach. In considering the wording of paragraph 3 of schedule 6, David Richards LJ was not persuaded by the High Court’s view that it consists of two distinct parts. Richards LJ found that these elements were unable to be separated. The Court of Appeal confirmed that it could understand a landlord’s rationale for including such a clause, and for the clause to be treated as conclusive. It would avoid long and drawn-out disputes over whether the works included in the service charge certificate were those which the tenant was responsible for. Ultimately, the Court of Appeal found that S&H were entitled to summary judgment.
Parties’ Submissions to the Supreme Court
In its submission, B sets out the various steps that a landlord would have to take to categorize the services and expenses that make up the service charge. These are:
- Identify the services and expenses provided by the landlord;
- Identify the total costs incurred by the landlord; and,
- Identify the sum payable by the tenant.
The final step, submitted B, involved taking off any costs that did not fall within the scope of the services listed in the lease – taking off any “excluded costs”, and calculating the“fair and reasonable proportions” of those costs that the tenant would then be liable for. B stated that any of these individual steps may give rise to a disagreement and therefore require further investigation. If the Supreme Court were to favor S&H’s submission, in B’s view this would make the landlord a “judge in his own cause” and the tenants would be bound by any decision that the landlord made, without the opportunity to make representations.
B also submitted that S&H’s case was inconsistent with the terms of the lease, specifically the dispute mechanism, the tenant’s right of inspecting repairs, and that the certificate may not be conclusive as to whether the proportion payable by the tenant is fair and reasonable.
S&H submitted that the commercial purpose of the service charge certificate is to oblige a tenant to pay certain costs to the landlord, when the landlord has already incurred those costs pursuant to its own obligations under the leases. The provisions allowing the tenant to raise the permitted defences, and not other defences, are in line with this interpretation. If B was entitled to dispute all elements of the service charge certificate process, there would, S&H submit, be no point in the leases stating the permitted defences.
Supreme Court’s Decision
In considering the parties’ submissions, the Supreme Court saw weight in S&H’s submission that to allow a commercial tenant to challenge a service charge certificate in these circumstances would “undermine the commercial principle” in allowing a landlord to recover the costs that it has incurred without an unreasonable delay. However, B’s submission that this interpretation did not sit comfortably with the other provisions in the lease was also found to have substance. The Supreme Court considered that, in particular, it was inconsistent with the dispute mechanism that was provided for in schedule 6 if the lease.
In fact, the Supreme Court ultimately considered that neither party’s approach to the interpretation of the provision was satisfactory. Instead, the court found favor in a third approach, which avoided the difficulties inherent in the submissions of S&H and B. The Supreme Court focused on giving effect to the words “sum payable by the tenants”. The result of this interpretation is that the sum payable in terms of the service charge certificate is indeed due by the tenant under schedule 6 of the lease. However, payment does not prevent the tenant from challenging its liability later and utilizing the tenant inspection rights available to it. Lord Hamblen neatly summarized this position at  states:
“In summary, 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 is entitled to bring a claim seeking repayment of a cost which he contended had been improperly charged.”
S&H was therefore granted a summary judgment, but it was recognized that this decision did not preclude B from pursuing its counterclaim.
Lord Briggs, dissenting, was of the view that the appeal should have been dismissed in its entirety. It was not possible, in Lord Briggs view, to find anywhere in the lease provision to suggest that “should be conclusive” to mean that ultimate liability for the service charge may be challenged by the tenants at a later date. The correct interpretation would have been that of S&H’s (albeit Lord Briggs recognized that neither interpretation advanced by either party made absolute commercial sense).
This somewhat tenant-friendly decision means that while a commercial tenant may have to pay up in the first instance, the existence of the service charge certificate does not preclude the tenant from being able to dispute the amount at a later date. This judgment will be of particular interest to commercial tenants and landlords alike, especially given the rarity in which these types of cases make it to the Supreme Court.
While the judgment may seem tenant-friendly, it will be open to landlords to attempt to draft around the decision, considering that it was based so specifically on the particular interpretation of schedule 6 in the wider context of the lease in question.
From a contractual interpretation perspective, it is interesting that the Supreme Court adopted a third approach, one that had not been submitted by either party. This appears an attempt to find a middle ground between parties’ positions, and risks (as highlighted by Lord Briggs in his dissent) entering the territory of “mending the parties’ bargain”. As such, this decision may have far reaching consequences on the law of contractual interpretation, and practitioners should live to the potential impact of these.