A 'pay now, argue later' approach to service charges endorsed by Supreme Court

The Supreme Court held that a landlord's service charge certificate was conclusive as to the sum payable by the tenant, but the certificate was not conclusive as to the tenant's underlying liability for the service charge. In other words, the tenant was required to pay the sum but entitled to dispute it later.

Slightly unusually, the Court’s decision was a hybrid of the parties’ respective positions.

• The landlord argued for an “pay now, argue never” approach - saying the certificate was conclusive as to the tenant’s service charge liability subject to certain permitted defences (manifest or mathematical error or fraud).
• The tenant argued for a “argue now, pay later” regime - the certificate was conclusive only as to the landlord’s costs and not as to the sum payable by the tenant.
• The Supreme Court favoured the Court of Appeal’s approach which was consistent with the contractual wording and avoided both surprising implications and uncommercial consequences.

Landlords and managing agents may now adopt a more robust approach to recovery of service charge arrears. Tenants should think carefully about withholding service charge payments as a form of challenge. Instead, the appropriate course of action seems to be making payment under protest and lodging complaints at a later date. Tenants may be encouraged to challenge service charges after payment, which could result in lengthy and costly disputes arising.

Sara & Hossein Asset Holdings Ltd (a company incorporated in the British Virgin Islands) v Blacks Outdoor Retail Ltd [2023] UKSC 2

The Appellant (“Blacks”) was the tenant of commercial retail premises of which the Respondent (“S&H”) was the landlord under two successive leases dated 2013 and 2018 (the “Leases”).

The Leases provided that:

• Blacks was to pay a "fair and reasonable proportion" of the total service cost.
• S&H was to deliver a certificate each year “as to the amount of the total cost and the sum payable by the tenant” and that this was to be “conclusive” save in instances of “manifest or mathematical error or fraud” (the “Certification Provision”).
• Blacks had rights to inspect S&H’s receipts, invoices and other evidence relating to the service charge.
• Any right for Blacks to set-off or counterclaim was prohibited.

Blacks refused to pay the sums set out in the certificates claiming that the service charge for the years 2017-18 and 2018-19 (which amounted to £407,842.77) was excessive and not properly due.

S&H issued proceedings and applied for summary judgment for the unpaid service charge, on the basis that under the Certification Provision S&H’s certificates were conclusive as to both the costs incurred and the sums payable by Blacks, subject only to the defences that there had been either a manifest error, a mathematical error or fraud (the “Permitted Defences”).

Blacks argued that the true meaning of the Certification Provision was that S&H’s certificates were conclusive only as to the amount of costs incurred by the S&H, not as to Blacks’ liability for service charge.

S&H’s application for summary judgment was dismissed by a Deputy Master in the High Court. A Deputy Judge of the High Court dismissed S&H’s first appeal.

The Court of Appeal allowed S&H’s second appeal and entered summary judgment in S&H’s favour, remitting to the High Court the question of what, if any, counterclaims Blacks could pursue.

Supreme Court Decision

A 4:1 majority of the Supreme Court upheld the grant of summary judgment and held that the correct interpretation is that S&H’s certificates are conclusive as to what is required to be paid by Blacks following certification, subject only to the Permitted Defences. Therefore, ensuring the landlord prompt payment of the service charge without delay or dispute. But payment of the certified sum does not prevent the tenant from later disputing liability for that payment.

This “pay now, argue later” approach is consistent with the contractual wording and gives full effect to Blacks’ inspection rights and entitles Blacks to dispute its service charge liability.

Further, a counterclaim is not precluded by the provisions prohibiting set-off. Therefore, the Supreme Court’s approach enables all the provisions of the Leases to work together satisfactorily without leading to uncommercial consequences.

It is important to note that this case turned on the precise wording of the Leases, but the drafting is not uncommon. There is scope for both landlords and tenants to be dissatisfied with this decision.

Dissenting Judgment

Interestingly, Lord Briggs dissented and his interpretation was in line with S&H’s proposed interpretation. In his view the existence of a dispute mechanism relating to an adjustment proportion need not preclude the certificate from being conclusive as to the service charge liability. Instead Blacks’ inspection rights are intended to allow the tenant reasonable access to relevant documents in order to identify manifest errors, mathematical errors or fraud and not to raise any other disputes. 

Given that service charge disputes often result in complex and costly litigation, Lord Briggs emphasised that S&H would not have been uncommercial by insisting on limiting the available grounds for litigation to only the Permitted Defences.