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  UKSC 2. In a majority judgment given by Lord Hamblen, the Supreme Court dismissed appeal of Blacks Outdoor Retail Ltd (Blacks) against the grant of summary judgment, but noted that this does not preclude the possibility of Blacks pursuing a counterclaim in the High Court for the underlying liability for disputed service charge payments. Morayo Fagborun Bennett and Brie Stevens-Hoare KC, barristers at Gatehouse Chambers, and Usman Roohani, barrister at 4 New Square, appeared on behalf of the Appellant and provide comment on the judgment.
This important case cuts across property, commercial and other disputes concerned with certification and conclusiveness clauses. The clause in this commercial lease, requiring a tenant to pay service charge as certified by its landlord, is one in common form. The Supreme Court rejected the startling conclusion reached by the Court of Appeal, whereby a tenant, once a certificate as to its liability had been provided by the landlord, would never be able to argue that the landlord had incorrectly included an expressly ‘excluded cost’, say, for improvements or works arising from the landlord’s own negligence.
The decision provides much needed clarity on the interplay between the set-off provisions and certification provisions commonly found within leases and other commercial agreements. Crucially, it also clarifies the scope of the manifest error exception, often found within such agreements. The decision will be welcomed by those acting for tenants and will hopefully result in parties avoiding costly litigation, as some appropriate balance has been restored.
As now permitted by the Supreme Court, Blacks intends to pursue a counterclaim challenging (and thereby seeking to recover) the service charge that it has paid, on various grounds including (i) that certain works were not repair works within the meaning of the relevant repairing covenants, (ii) that the cost of certain works was increased by past failures on the part of the landlord to keep the premises in good repair in breach of the landlord’s covenants and (iii) that certain costs were not properly charged as being excluded costs (as defined within the lease).
Blacks Outdoor Retail Ltd (Blacks) rented commercial retail premises from Sara & Hossein Asset Holdings Ltd (S&H) under two successive leases dated 2013 and 2018 (the leases). The leases stated that S&H as landlord should provide a certificate each year setting out the service charge sum payable by Blacks as tenant. The relevant clause stated that the landlord should provide a certificate as to the amount of the total cost and the sum payable by the tenant and that this was to be conclusive in the absence of manifest or mathematical error or fraud (the certification provision). Blacks refused to pay the service charge for the years 2017-18 and 2018-19, which amounted to £407,842.77, claiming that the service charge was excessive and included unnecessary items and expenses that were not properly due under the terms of the leases. S&H issued proceedings and sought summary judgment for the outstanding service charge, arguing that under the certification provision S&H’s certificate as to the sum payable was conclusive subject only to the defences that there had been 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 certificate was conclusive as to the amount of costs incurred by the landlord, but 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.
By a majority the Supreme Court dismisses Blacks’ appeal against the grant of summary judgment but holds that this does not preclude Blacks from pursuing a counterclaim in the High Court in relation to its underlying liability for the disputed service charge payments. Lord Hamblen gives the lead judgment, with which Lord Hodge, Lord Kitchin and Lord Sales agree. Lord Briggs gives a dissenting judgment.
The majority of the Supreme Court held that neither party’s proposed interpretation of the certification provision was satisfactory.
S&H’s case was that its certificate was conclusive as to Blacks’ service charge liability, subject only to the permitted defences. Whilst that fit well with the wording of the certification provision, it was inconsistent with other provisions of the leases [44, 46]. Under the leases, the amount of service charge payable depended partly on the proportion of the overall premises that the tenant rented under the agreement. The leases contained a detailed dispute mechanism in relation to the assessment of that proportion, which could alter the amount payable by the tenant (the proportion adjustment). The certificate could not, therefore, be entirely conclusive as to the sum payable by Blacks [40, 48, 54]. S&H’s interpretation also did not fit well with Blacks’ rights to inspect S&H’s receipts, invoices and other evidence relating to the service charge for up to 12 months after the certificate was provided. If S&H’s interpretation were correct, the only purpose of these detailed inspection rights would be to identify the rare case of fraud, since identifying the other permitted defences of manifest or mathematical error would be possible without extensive investigation. Any arguable issue identified on inspection could not be pursued by Blacks, meaning the lengthy and detailed inspection rights would be largely superfluous [33, 40, 48].
There were, moreover, many potentially arguable issues which may arise as to liability for service charges under the leases. The permitted defences are narrow and do not include an arguable error, however well founded the allegation of error may ultimately prove to be [30-34]. It would be surprising for the parties to agree that arguable issues as to liability could be determined conclusively by the landlord, as judge in their own cause, without any opportunity for the tenant to challenge the determination or even to make representations [37-39, 48]. It is a ’pay now, argue never’ regime. It is well established that in interpreting a contract one starts with the presumption that neither party intends to abandon any remedies which arise by operation of law and that clear words are necessary to do so .
Blacks’ case was that the certificate is conclusive only as to the landlord’s costs and not as to the sum payable by the tenant. However, this interpretation contradicted the natural and ordinary meaning of the certification provision that the certificate was conclusive both as to the ‘amount of the total cost’ and ‘the sum payable by the tenant’ . There was also force in S&H’s submission that allowing Blacks to challenge payment of the service charge undermined the commercial purpose of enabling the landlord to recover costs and expenses with minimal delay and dispute [43, 47]. It is an ‘argue now, pay later’ regime.
The majority found that there was an alternative interpretation that avoided these difficulties. That interpretation was that S&H’s certificate was conclusive as to what was required to be paid by Blacks following certification, subject only to the permitted defences. S&H was thereby assured of payment of the service charge without protracted delay or dispute, meaning its cashflow position was protected . However, payment of the certified sum did not preclude Blacks from later disputing liability for that payment. This gave full effect to Blacks’ inspection rights and entitled Blacks to pursue arguable claims as to service charge liability . It is a ‘pay now, argue later’ regime, a contractual arrangement which is commonly found. Adopting an iterative approach, this interpretation was consistent with the contractual wording, it enabled all the provisions of the leases to fit and work together satisfactorily and it avoided surprising implications and uncommercial consequences .
The majority therefore dismissed the appeal but held that this did not preclude Blacks from pursuing its counterclaim .
Lord Briggs dissented. In his view, the structure of the service charge regime in the leases and the ordinary meaning of the words used were irreconcilable with the majority’s judgment . There was no reason why the provision for a dispute mechanism in relation to proportion adjustment should mean that the landlord’s certificate was not conclusive as to all other aspects of the tenant’s service charge liability . Blacks’ inspection rights provided it with reasonable access to relevant documents in order to identify manifest errors, mathematical errors or fraud. The existence of those rights did not indicate that S&H’s certificate was not conclusive as to service charge liability . Service charge disputes commonly result in complex and costly litigation. It was not uncommercial that S&H should have insisted on limiting the available grounds for litigation to the permitted defences . Lord Briggs would therefore have accepted S&H’s proposed interpretation of the certification provision, meaning the certificate would be conclusive as to Blacks’ service charge liability .
References in square brackets are to paragraphs in the judgment.
First published for LexisNexis.