Louise Campbell, partner in commercial property at law firm Moore Barlow, examines the lessons of a Supreme Court judgement on commercial lease service charges
In January, the Supreme Court handed down judgment in the case of Sara & Hossein Asset Holdings Ltd vs Blacks Outdoor Retail Ltd. Blacks had been withholding service charge payments from Sara, arguing that they were excessive.
The court ordered Blacks to pay the service charges immediately. It did not, however, prevent them from pursuing a counterclaim to dispute the charges at a later date.
This case is interesting for a couple of reasons. It sets a “pay now, argue later” precedent for disputes of this kind, with important implications for landlords and tenants. It also demonstrates the importance of a well-written, clear lease regarding service charges.
A close look at the service charges case
Service charges are billed by landlords to tenants for repairs, maintenance, insurance and general costs of managing a property. Typically, they are billed separately from the rent throughout the year.
In this case, Blacks rented commercial retail premises located in Liverpool from Sara. Under the terms of the lease, Sara had to provide Blacks with an annual certificate detailing the total service charge for the year payable by Blacks with details of the costs incurred. The lease provided that this certificate would be “conclusive” in the absence of “manifest mathematical error or fraud.”
For two service charge years, however, Blacks withheld these payments. The company argued that the charges were excessive due to a number of unnecessary expenses. Sara sought summary judgement for the outstanding payment. In their opinion, there was no sign “of manifest mathematical error or fraud” in this case and so they believed that the certificate was conclusive and that Blacks were not entitled to withhold the payment for the disputed sums as the lease did not provide for this.
Blacks did not contend that there was a manifest or mathematical error or fraud – they were simply disputing various items included within the service charge and wanted to withhold the payment rather than pay and seek to recover it. Their argument regarding the certificate was that it is only conclusive to the amount spent but not their liability to pay the sum set out in the certificate.
The ensuing dispute lasted from 2019 to 2023, eventually reaching the Supreme Court, the ultimate judgment of which lay somewhere in between the two sides’ interpretations. Blacks was, in the court’s opinion, obliged to pay the service charges immediately and in full – they could not withhold payment in respect of items they did not agree with. However, if the lease allows for it, following such payment, the tenant can then dispute the amount.
The lessons of the case
This sets a precedent with important implications for commercial landlords and tenants.
Regarding active leases, tenants should be extra wary of withholding payment. The basic assumption should be that they are expected to pay the charges first and dispute them afterwards, as withholding service charge payment carries a significant litigation risk. Any tenant wishing to dispute a service charge would be wise to seek legal advice regarding the best approach.
On the flipside of that, landlords should now feel confident in seeking summary judgements for unpaid service charges. However, they should be conscious of the fact that tenants can dispute these payments later on.
Crucially, the case highlights the issue of imprecise agreements on service charges. Long, expensive legal battles do not benefit either party and can be avoided if the original terms of the lease are robust and tailored to fulfil the needs and concerns of both parties. When drafting a lease, it is important to draft terms which can minimise the risks of these conflicts developing.
Avoiding arguments
With the economic challenges facing the UK, cashflow is massively important to landlords and businesses. Unpaid service charges can cause landlords serious financial problems, and tenants already struggling with inflation and rising bills will be particularly poorly inclined to pay excessive charges.
In this context, long battles are not likely to help either party. Efficient mechanisms for agreeing service charges, which can be handled outside of the courts, will be in everyone’s best interest. Where disagreements do occur, the assumption should be that the tenant has to pay the charges before disputing them, and tenants need to be aware that this is the default position and landlords are unlikely to accept different terms.
Louise Campbell
Partner
Moore Barlow
Tel: +44 (0)23 8071 8000
