Avoiding “both the Scylla and the Charybdis”…
Tim Brookes, Legal Director in our property disputes team, explains the decision in the recent Supreme Court case involving Blacks Outdoor Retail Limited and its liability to pay service charges.
The appeal in Sara & Hossein Asset Holdings Ltd -v- Blacks Outdoor Retail Ltd concerned the binding effect of a clause providing for the landlord’s certification of the service charges payable by the tenant. The landlord contended that, in the absence of “manifest or mathematical error or fraud” its certificate as to the total costs and expenses it had incurred, and the sum payable by the tenant, was conclusive. Blacks’ counter-argument was that the certificate was conclusive as to the amount of costs incurred by the landlord but not as to the tenant’s liability.
In the final two years of its occupation Blacks challenged S&H’s claim for service charges of £407,842.77 (a marked increase on previous years’ service charges of approximately £55,000) claiming that works had been included which were outside the scope of the service charges (including improvements), and that costs had become inflated due to historic failures to repair. S&H issued a claim for summary judgment. The Deputy Master was not prepared to allow S&H to be the “judge in [its] own cause” and held that the certificate was conclusive as to the costs it had incurred but not as to Blacks’ liability. On appeal to the High Court, the Deputy Judge agreed, holding that S&H’s certificate was not conclusive as to the question of whether the costs incurred as a matter of principle fell within the scope of the service charges payable by Blacks. The Court of Appeal differed, ordering Blacks to pay the outstanding service charges on the basis that the effect of the landlord’s certificate was clear, and that it was not the court’s role to rescue a party from a bad bargain by means of contractual interpretation.
The Supreme Court had to wrestle between S&H’s interpretation that its certificate was conclusive both as to the costs it had incurred and the service charges payable by Blacks (a “pay now, argue never” regime), and Blacks’ argument that the provisions in the service charges regime which excluded certain costs and entitled it to request copies of supporting invoices and receipts within 12 months, meant that the landlord’s certificate was not conclusive as to items included within the service charges (an “argue now, pay later” regime).
Charting the course through
Declaring that “neither party’s interpretation is satisfactory” the majority of the Supreme Court’s view was that the landlord’s certificate was conclusive as to the amounts payable by Blacks, and so S&H was entitled to summary judgment. However, other provisions in the leases (such as the detailed dispute mechanism for the less important issue of the assessment of the proportion of the premises that the tenant occupied) meant that Blacks retained the right to challenge the calculation of the service charges and could therefore issue its own subsequent claim in respect of items incorrectly charged – a “pay now, argue later” regime. The leases’ “no set-off” clauses prevented Blacks from delaying payment by disputing items of the service charges claimed, but did not preclude it from bringing a counterclaim following payment.
Much more specific wording would need to have been incorporated in the leases if such a draconian effect were intended – “in interpreting a contract one starts with the presumption that neither party intends to abandon any remedies which arise by operation of law and that clear words are necessary to do so” [paragraph 48 of the judgment].
The Supreme Court’s decision shifts the litigation burden from landlords to tenants, but its “iterative approach…is consistent with the contractual wording, it enables all the provisions of the leases to fit and work together satisfactorily and it avoids surprising implications and uncommercial consequences” [paragraph 57 of the judgment].
We agree that that is a workable conclusion, and it avoids the harshness of the landlord’s own administrative function of the calculation of the service charges being truly definitive in its own favour. “No set-off” clauses are almost universal nowadays, and the presumption that a landlord’s calculation of service charges is binding save in case of manifest error is also very common. However, the courts are not readily going to forego their jurisdiction to rule on liability under a lease (i.e. the parties “arguing later”), even if the bargain they have to interpret is potentially on terms that one of the parties might wish it were not (Arnold -v- Britton ).
It isn’t unusual for landlords, as in this case, to look afresh at the state of their building’s common parts when the risk of having to relet is in the offing. Tenants facing steep increases in service charges are recommended to look at them closely, and to take prompt legal advice as to whether the sums demanded are lawful, and then building surveyor / QS advice as to whether they are appropriately costed.