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Commercial service charges: "pay now, argue later"!

A recent Supreme Court decision has intervened in a commercial service charge dispute and overturned decisions reached in the lower courts whereby a 'conclusive certificate' clause would be conclusive as to the sums payable by the tenant. 

In this case (Sara & Hossein Asset Holdings Ltd v. Blacks Outdoor Retail Limited [2023] UKSC 2), the tenant, Blacks Outdoor Retail Limited, disputed service charges covering two periods in the region of £408,000. Under the terms of its lease, Blacks had up to 12 months to inspect receipts, invoices and other documentation supporting the service charge. Blacks argued that the service charge (which were claimed for works carried out by the landlord) were excessive and the works were unnecessary. The landlord argued that, under the terms of the lease, Blacks could only challenge the service charge where there was "manifest or mathematical error or fraud" with the landlord's certificate, otherwise it would be conclusive. 

The landlord sought summary judgment on the sums requested within the certificate and the lower courts found in its favour. However, by a majority of four to one, the Supreme Court offered an alternative explanation - the lease was neither a “pay now, argue never” regime, as contended by the landlord, nor was it an “argue now, pay later” regime, as Blacks had argued. Instead, the Supreme Court held that the landlord's certificate was conclusive as to the amount payable by Blacks; however, once paid, Blacks could later challenge its liability to pay. To argue otherwise would mean undermining the landlord's cash flow as it would not be reimbursed in a timely manner for costs it had incurred. This approach would also give effect to the 12 month inspection provision. 

Whilst it remains to be seen how this decision will influence commercial landlord and tenant relationships going forward, the outcome could well lead to more tenants challenging commercial service charges at a later date, which in turn could mean greater uncertainty for landlords. 

Commercial service charges are not subject to the same level of statutory regulation as residential service charges and the terms of the lease will be crucial in any given case, as it was here. However, in a case with a similar service charge mechanism, the take away is that the tenant should pay now, and argue later. 

The majority finds that there is an alternative interpretation that avoids these difficulties. That interpretation is that S&H’s certificate is conclusive as to what is required to be paid by Blacks following certification, subject only to the permitted defences. S&H is thereby assured of payment of the service charge without protracted delay or dispute, meaning its cashflow position is protected. However, payment of the certified sum does not preclude Blacks from later disputing liability for that payment.

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