Service Charge Dispute In The Supreme Court

The UK Supreme Court has ruled against a retail tenant in an ongoing service charge dispute with its previous landlord. The decision is expected to have major implications for commercial landlords and tenants. While the tenant's final appeal has been dismissed, the court's decision creates an opportunity for other tenants to challenge or recover amounts imposed by their landlords in similar cases.

The Supreme Court rules that a tenant disputing a verified service charge levied by their landlord must first pay the charge in full. They also stated that any arguments against the charge, except for fraud claims or obvious mistakes, could be raised later in the legal process.

The right to set off against service charges is quashed

According to the Supreme Court, a landlord's service charge certificate was binding regarding the tenant's specific amount to pay. However, the certificate did not establish the tenant's overall responsibility for the service charge. In simpler terms, the tenant was obliged to make the payment but retained the right to challenge it later.

The history of the case

The dispute in question is a case between landlord Sara & Hossein Asset Holdings Limited (S&H) and former tenant Blacks Outdoor Retail Limited (Blacks) regarding interpreting a certification provision in their lease agreement for retail premises in Liverpool. The court's ruling, outlined in a 22-page document, focused on the relevant clause stating that S&H should provide a certificate specifying the total cost and the amount payable by the tenant.

This certificate would be considered conclusive, except in "manifest or mathematical error or fraud."

S&H argued that this provision aligned with commercial reality, allowing them to promptly collect service charges for the provided services and avoid lengthy and costly litigation to recover expenses related to maintaining the premises. On the other hand, Blacks contended that the certificate issued by S&H was only conclusive regarding S&H's costs, not the actual amount they were required to pay. They argued that their ability to challenge the determined amount under the "manifest or mathematical error" defense was too limited.

What Triggered The Dispute And The Subsequent Court Case

Blacks had failed to pay the service charge for 2017/18 and 2018/19, with the service charge for the 2017/18 period alone amounting to over 400,000. However, Blacks claimed that the sums in the certificates were extreme and included sums not due under the leases. The High Court had supported Blacks interpretation of the service charge provisions that the certificate was conclusive only regarding the amount of costs incurred by Sara but not as to Blacks service charge liability. It allowed Blacks to challenge the demand, and Sara appealed the judgment.

The Court of Appeal granted the appeal and issued a summary judgment in Sara's favor. They determined that the interpretation of the service charge provisions indicated that the certificate served as conclusive evidence for the total costs and the specific amount owed by Blacks.

The Supreme Courts Stand

In a majority ruling of four to one, the Supreme Court concluded that a landlord's certificate regarding the "total cost and the sum payable by the tenant" was conclusive in determining the specific amount to be paid by the tenant. However, the court also clarified that the certificate did not establish the underlying liability for the service charge.

The judgment delivered by Lord Hamblen on behalf of the majority emphasized the clause did not function as a "pay now, argue never" but rather as a "pay now, argue later" provision. As the tenant, the Blacks had an obligation to pay their service charge debt while still retaining the opportunity to counterclaim for reimbursement of any costs they believed were wrongly charged. The Supreme Court also made it clear that, due to the lease's absence of a set-off provision, it is unlikely that any request to suspend the payment claim while awaiting the resolution of the counterclaim would be granted.

In his dissenting note, Lord Briggs stated that he failed to find any language within the lease supporting the interpretation of "pay now, argue later." He pointed out that if such an intention existed between the parties, it could have been stipulated in the lease agreement.

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