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The Supreme Court has upheld a summary judgment against a tenant in respect of payment of service charge where the demand was referred to in the lease as being “conclusive" once certified by the landlord - but also held that this does not prevent the tenant from then bringing a counterclaim in relation to its underlying liability.  

The tenant is therefore required to pay immediately, and then challenge disputed elements of the costs.  

The original dispute arose when Blacks Outdoor Retail Ltd refused to pay its 2017-18 and 2018-19 service charge relating to a property in Liverpool, claiming that the sums that had been demanded were excessive, and that some items and expenses listed were not properly due. 

The lease required the landlord, Sara & Hossein Asset Holdings Ltd (S&H), to provide Blacks with a certificate each year setting out the service charge that was payable. That certificate was stated to be “conclusive” in the absence of manifest or mathematical error or fraud – not an unusual provision in a lease of this type.

S&H issued proceedings, and brought an application for summary judgment, on the basis that the certificate was conclusive as to Blacks’ liability to pay the sum demanded.

The application was dismissed in the High Court and on first appeal, but upheld by the Court of Appeal. In a decision released on 18 January 2023, the Supreme Court, by a majority decision, allowed the application for summary judgment – meaning Blacks must pay the service charge as demanded in the certificate – but held that Blacks can then counterclaim for repayment of the sums it claims are excessive or not properly due.

Accordingly, it seems that the court was willing to find a middle ground between the parties’ positions, so that the landlord was able to recover costs with minimal delay, while allowing the tenant the opportunity to then challenge elements of the payment.

The reasoning is based on the view that: “from the landlord’s perspective, there is a world of difference between the tenant being able to hold up payment whenever charges are disputed and the tenant being required to pay first and then to have to take the initiative to initiate and establish a claim,” [para.55 of the judgment]. 

The decision also relies on the interplay between the wording of different parts of the service charge schedule in the lease, in particular detailed provision for expert determination of the proportion adjustment that the tenant is required to pay, and an entitlement for the tenant to inspect documents on which the certificate was produced. Both had the potential to alter the amount payable by the tenant, meaning that its liability was not set in stone.  

From a landlord’s perspective, this means cashflow is protected and tenants must think twice before incurring litigation fees unless they are confident that there is a strong arguable case that the charges are wrong. 

On the other hand, tenants, and in particular, retail tenants, for whom cashflow is extremely important, will no doubt be unhappy with having to pay first, and take action to recover sums later and at the risk of legal costs.

Where a landlord can require payment in the first instance, and be immediately entitled to payment, it will be a brave tenant that takes on the litigation risk and consequential costs without a clear case that the charges are incorrect. Whilst this case does not extinguish the right to bring a counterclaim, commercially it strongly limits the situations in which it will be worth doing so. 

It is interesting to note the dissenting opinion of Lord Briggs. 

Whilst based on the same principles and arguments and agreeing that the decision is a “plainly commercial solution which reconciles the parties’ opposing interests,” [61], Lord Briggs instead follows Arnold v Britton and holds that the court is not there to re-write the parties’ agreement or find an alternative interpretation to the positions put forward by each side. 

In Lord Briggs’ view, the lease was correctly interpreted by the landlord and the conclusivity related to the liability for the sum payable by the tenant, meaning that the tenant would not subsequently be entitled to challenge the amounts claimed.

It is perhaps some comfort to tenants then that the majority decision allowed Blacks to retain a right to counterclaim, but it means the tenant has to incur the cost and risk of taking a claim to court.

As always, the decision rests on its facts and the wording of lease. 

 

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