Buy Now, Argue Later: Unsatisfactory Compromise Or Fair Decision?
Businesses and commercial landlords ought to note a Supreme Court ruling on liability under service charge clauses in commercial leases that, while arguably fair, isn’t particularly satisfactory for any party. Service charge clauses in a commercial lease can be complex, and prompt uncertainty and potential challenges if they are considered unfair or unreasonable.
Service charges are necessary allowing the landlord to recoup the costs of managing and repairing the premises in addition to rent. What this looks like in practice may not be as straightforward as it may appear from the lease at face value. A ruling on the issue – particularly significant coming from the Supreme Court – illustrates the challenge in striking a commercial balance while approaching how service charge clauses should be interpreted1.
The correct interpretation of service charge clauses requires applying the normal contractual rules of interpretation to determine the parties’ intentions. That is to say, what would the reasonable person holding the background information available to the parties when they entered the contract, understand the contract to mean?
What’s the background?
The tenant – Blacks, the outdoor goods and clothing retailer – was landed with a service charge bill eight times higher that the previous year’s charges. It argued that the charge was excessive and included unnecessary items and expenses falling outside the lease terms.
However, the lease expressly said the landlord's certificate of the total amount payable by the tenant was conclusive. The question for the court was: is that certificate conclusive under the lease provisions?
Pay now, argue later
The court considered the natural and ordinary meaning of the certification provision.
The landlord’s case was effectively ‘pay now, argue never’ – an approach which would produce “surprising and uncommercial consequences”. On the other hand, Blacks’ argument undermined the landlord’s need for reimbursement with minimal delay and dispute; it was effectively “argue now, pay later”.
The SC reached a compromise: a “pay now, argue later” regime. The certification provision was conclusive as to the service charge payable by the tenant - but not as to the underlying liability for the service charge.
This gave effect to the words “sum payable by the tenant” and protected the landlord’s cashflow concerns. But it also allowed the tenant to bring an arguable challenge against the landlord. The landlord was entitled to summary judgment but Blacks could continue with disputing its liability.
What does this mean?
Any business taking on rented premises need to be certain as to the meaning and practical implications of the service charge clause. For instance, where a landlord’s certificate is to be considered conclusive of the service charge levied – a tenant ought to ensure it has sufficient funds in reserve in case it is sent a larger-than-expected service charge bill in future years.
The current position (depending on the actual wording of the lease in question) is that the tenant must pay the full bill; but can then dispute the amount and potentially claim a refund.
In the case of new lease terms, care must be taken in negotiating and drafting the service charge provisions, particularly where the landlord insists on a clause stating that a service charge certificate is conclusive of the amount owed.
The key takeaway is: exercise caution when agreeing service charge provisions and be fully aware of your liabilities. If in doubt, take specialist advice from commercial solicitors.
1Sara & Hossein Asset Holding Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2
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