How Can Landlords Minimise Disputes In Their Service Charge Recovery And Avoid The Conclusively Inconclusive Certificate?

• Law Firm: Herbert Smith Freehills
• Subject Matter: Real Estate and Construction, Landlord & Tenant - Leases
• Author: Mr Matthew Bonye, Graeme Robertson and Shanna Davison
• Published date: 31 January 2023

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...