Service Charge Certification: Supreme Court hands down far-reaching decision on conclusiveness of certification (Sara & Hossein Asset Holdings Ltd (a company incorporated in the British Virgin Islands) v Blacks Outdoor Retail Ltd – 2023)

The Supreme Court has recently handed down its decision in this key case which discusses whether certification of service charge – and by extension, certification in other property and commercial-related cases – is conclusive in determining liability.

The background

In Sara & Hossein Asset Holdings Ltd (a company incorporated in the British Virgin Islands) v Blacks Outdoor Retail Ltd [2023], Blacks was a retailer which held a lease of retail premises from the landlord S&H under two leases dated 2013 and 2018.

S&H was required to supply an annual certificate to Blacks, setting out service charge sums payable by Blacks. Under the terms of the leases, the certificate was to be conclusive, save for manifest or mathematical error or fraud. Blacks claimed that service charges demanded for 2017-18 and 2018-19 were excessive, included items that were unnecessary and not properly due, and refused to pay charges for these years. S&H issued proceedings to recover outstanding service charges, seeking summary judgment and arguing that, under the terms of the leases, the certificate was conclusive as to the sums payable.

Blacks’ argument was that the certificate was only conclusive as to the sums incurred by the landlord but not as to Blacks’ liability to pay such sums. The High Court dismissed S&H’s application, but the subsequent appeal was allowed by the Court of Appeal and summary judgment entered in favour of S&H. The application was remitted to the High Court in order to determine whether Blacks had recourse to any counterclaims. Blacks appealed to the Supreme Court.

The decision

The Supreme Court dismissed Blacks’ appeal against the grant of summary judgment, although Blacks may nevertheless pursue a claim in the High Court relating to its liability to pay the disputed service charges.

In its judgment, the Supreme Court found, in fact, that neither party had satisfactorily interpreted the leases’ certification provisions.

S&H’s arguments

• S&H argued that the certificate was conclusive in determining Blacks’ service charge liability, but the Supreme Court found that this interpretation was inconsistent with other lease provisions which stated that the amount of service charge to be paid by the tenant was in part dependent on the proportion of the total premises rented by the tenant under each lease.

Calculation of such proportion could be disputed by the tenant via a lease mechanism, which would therefore change the service charge proportion payable. Further, the tenant enjoyed rights under the lease to inspect receipts and other documentation for a period of up to 12 months following production of the certificate. As a result, the certificate could not be entirely conclusive.

• Under this interpretation, Blacks would only be inspecting documentation to identify fraud; potential manifest or mathematical error would require much more investigation. These defences contained in the leases did not include ‘arguable’ error; it could be assumed that, upon interpreting contract terms, neither party intended to disregard remedies arising by operation of law in the lease drafting, which would require clear terms to be included as such.

Blacks’ arguments

• Blacks argued that the certificate was conclusive as to the costs incurred by the landlord but not as to the sums actually payable. The Supreme Court found that this was inconsistent with the ordinary interpretation of the certification provisions, and found favour with S&H’s argument that permitting the tenant to challenge its due payment of service charge conflicted with the landlord’s commercial interest in recovering costs with minimal difficulty.

The Supreme Court’s ruling

The Supreme Court found an interpretation whereby the certificate supplied by S&H was conclusive in determining the sums payable by Blacks, subject to the permitted defences of fraud, manifest or mathematical error. S&H would be able to recover service charge payments without undue delay, thereby providing comfort for S&H – and other landlords – on its cash flow and liabilities.

Blacks was nevertheless entitled to dispute liability for payment later, which protected the inspection rights enjoyed by the tenant and enabled Blacks – and other tenants – to bring claims in respect of service charge liability.

The Supreme Court’s judgment adopted a common ‘pay now, argue later’ approach which gave effect to all terms contained in the leases without impacting on commercial practices.

As a result, the appeal was dismissed but Blacks was entitled to pursue its counterclaim for liability in the High Court.

Advice and action for landlords

This Supreme Court decision carries industry-wide impact in how certification provisions operate commercially. The conclusive nature of the certification provision in the leases in this case are common, and the Supreme Court rejected the Court of Appeal’s verdict whereby a tenant would be unable to dispute service charge costs following production of a ‘conclusive’ certificate by its landlord.

This decision provides a degree of comfort and balance on both sides. For landlords, once a certificate is issued, payment is due from the tenant in order to protect the landlords’ cash flow and to help it meet its own liabilities. For tenants, they remain able to raise a counterclaim in order to challenge service charges paid on grounds including:

1. Works were not repair works as defined in relevant repair covenants;
2. Costs of works increased as a result of failure by the landlord to keep premises in good repair; and
3. Excluded costs were not properly charged.