Q&A: When is service charge ‘fair and reasonable’?

Vibuhti Parmar and Admas Habteslasie tackle a common query on service charge liability Question I am the tenant of commercial premises. Under my lease, the service charge payable by me is required to be a fair and reasonable proportion of the total cost of services and expenses incurred by the landlord. The landlord is required to provide me with a certificate as to the amount of the total cost and the sum payable by me, and this certificate is described as “conclusive” in the absence of “manifest or mathematical error or fraud” under my lease. My landlord has issued me with a certificate, but I consider the amount claimed is not a fair and reasonable proportion. Can I refuse to pay the amount in the certificate? Answer If the lease describes the certificate as conclusive as to the amount payable by you, then you must pay the amount requested and cannot refuse to do so, subject to any exceptions set out in the lease itself. However, you remain entitled to later dispute liability for the amount claimed and paid by issuing proceedings. Explanation This issue was recently considered by the Supreme Court in its judgment in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2; [2023] EGLR 16, a dispute arising from a commercial lease of retail premises in Liverpool. The tenant was Blacks. The lease contained a provision as follows: “The landlord shall on each occasion furnish to the tenant as soon as practicable after such total cost and the sum payable by the tenant shall have been ascertained a certificate as to the amount of the total cost and the sum payable by the tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive.” The lease also provided for no set-off or counterclaim against the sum certified. The tenant had refused to pay the service charge for two years, on the basis that it considered the amount claimed in the landlord’s certificate to be excessive and to include unnecessary items and expenses which were not properly due under the terms of the lease. The tenant argued that the certificate was conclusive as to the costs incurred by the landlord, but not in respect of the tenant’s liability to pay such costs.  The landlord, in contrast, had argued the certificate was conclusive as to the tenant’s liability to pay such costs, subject to the permitted defences, ie of manifest or mathematical error or fraud. The landlord therefore sought summary judgment for the outstanding sums. The court at first instance and the High Court accepted the tenant’s arguments. The landlord appealed to the Court of Appeal, which held that the certification provision was conclusive and summary judgment was entered in the landlord’s favour. On appeal by the tenant, the Supreme Court rejected both parties’ interpretation of the lease provision in relation to the question of whether the provision precluded the tenant from disputing liability. The Supreme Court instead concluded by a four-to-one majority on a “middle ground” between the landlord and the tenant’s arguments, in that the scheme under the lease ought be understood as a “pay now, argue later” scheme.  In other words, in the absence of clear wording to the contrary, the landlord’s certificate was conclusive as to what was required to be paid by the tenant (subject to the expressly permitted defences).  However, the certification procedure did not preclude the tenant from later disputing the underlying liability for that payment under the provisions of the lease.  The Supreme Court considered that the purpose of the certification procedure was to avoid causing a significant delay in payment, which could affect the landlord’s cash flow, and that its interpretation preserved that purpose while maintaining the tenant’s right to dispute the sums payable. The defined exceptions of fraud or mathematical error were self-explanatory. Manifest errors were “oversights and blunders so obvious and obviously capable of affecting the determination as to admit of no difference of opinion”. Vibuhti Parmar is an associate at Charles Russell Speechlys LLP and Admas Habteslasie is a barrister at Landmark Chambers Image © Scully/imageBROKER/Shutterstock