Service Charge in Commercial Leases: The Pay Now, Argue Later Approach

The Supreme Court has handed down its decision in Sara & Hossein Asset Holdings Ltd (a company incorporated in the British Virgin Islands) v Blacks Outdoor Retail Ltd [2023] UKSC 2. 

In this property litigation case, the landlord brought a claim against the tenant for an outstanding service charge that was due and payable under a commercial lease. The tenant argued that the sums claimed were excessive and the works that the landlord had carried out were unnecessary. The tenant refused to pay the service charge for 2017-18 and 2018-19, which amounted to £407,842.77.

The landlord argued that according to the lease terms, the tenant could only challenge the service charge if there was “manifest or mathematical error or fraud” with the landlord’s certificate.

The lease provided that:

• The tenant was to pay “a fair and reasonable proportion” of the total service cost.
• The landlord was to deliver a certificate each year “as to the amount of the total cost and the sum payable by the tenant”. This was to be conclusive save for “manifest or mathematical error or fraud”.
• The tenant had the right to inspect the landlord’s receipts, invoices and other evidence relating to a service charge.
• Any right for tenants to set off or counterclaim was prohibited.

The landlord had produced a certificate and made a summary judgment application to recover the sums demanded in the certificate.

While this case concerned a certification provision within a commercial lease, both the parties and the Supreme Court proceeded on the basis that the lease stood to be interpreted as any commercial agreement.

Lord Briggs stated that, in his view, ‘the structure of the service charge regime in the leases and the ordinary meaning of the words used are irreconcilable with the majority’s judgment. There is no reason why the provision for a dispute mechanism concerning proportion adjustment should mean that the landlord’s certificate is not conclusive as to all other aspects of the tenant’s service charge liability’.

This is another example of the Court balancing the relationship between the landlord and tenant. This outcome could lead to an increase in tenants challenging their commercial service charges and therefore increasing uncertainty for landlords meaning landlords and their agents may adopt a more robust approach concerning any arrears. Tenants should not withhold service charges as a challenge; after the decision on this case, the correct course of action is to make payment and then lodge a complaint at a later date.