The Supreme Court recently considered the effect of a clause requiring the landlord to provide a service charge certificate setting out the amount of the total cost and the sum payable by the tenant of commercial premises, which was to be conclusive in the absence of manifest or mathematical error or fraud. This is a common iteration of commercial service charge machinery.

However, does it surprise you to find that the certificate was not in fact conclusive? The majority in the Supreme Court found that the clause operated as a “pay now, argue later” mechanism. It entitled the landlord to summary judgment for the tenant’s proportion of the service charge, but the tenant remained entitled to review the service charge accounts and raise any challenges to the payment. The challenges were not limited to manifest or mathematical error or fraud.

The case we’re talking about is Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2. Blacks Outdoor Retail Ltd (“Blacks”) was the tenant of commercial retail premises. Blacks refused to pay service charges amounting to over £407,000 on the basis that they were excessive and included unnecessary items and expenses that were not properly due under the terms of the leases. The landlord issued proceedings, relying on the conclusive nature of the certificate, unless Blacks could establish one of the permitted defences of manifest error, mathematical error or fraud. Blacks did not have any grounds for the permitted defences but argued that the “conclusive” element of the certificate only related to the amount of costs incurred by the landlord, not to their liability for service charge. Both parties had various successes in the lower courts and its interesting to note that the Supreme Court was divided in its judgment.

The judgment is less surprising when you drill down into the detail of the service charge provisions. Blacks also had detailed rights to inspect the landlord’s receipts, invoices and service charge accounts for up to 12 months after the certificate was presented. If the landlord was right that the certificate was conclusive once served, these rights would be largely superfluous and that was inconsistent with the drafting. Also, the proportion of service charge payable by Blacks was based on a proportion of their floor area compared with the whole premises. Again, this is a very common mechanism in multi-let commercial premises and could vary over the course of the lease (for example, if the landlord converts previous let space into common parts). Perhaps less convincingly, the majority considered this potential variation to be inconsistent with a conclusive certificate. The dissenting judge, Lord Briggs, preferred the landlord’s position: the certificate was conclusive except for the permitted defences, for which the tenant retained its rights of inspection.

Service charges can be ripe for dispute in commercial leases, which can become complex and costly. The landlord’s objective is full recovery (or as close as possible) to ensure a clear income stream, whilst the tenant wants checks and balances to avoid overpaying for items which fall outside their remit. Whenever a dispute arises, the starting point is the drafting of the lease itself. The courts have consistently found that service charge disputes are a matter of contractual interpretation and should not be treated differently.

So, where does this leave landlords who want to grant leases where they have the power, conclusively, to determine the amount to be paid by the tenant and minimise risk of dispute/ non-payment? It can be done, although very clear words need to be used to abandon the tenant’s remedies which arise by operation of law. Consistency across the lease is crucial.