Service Charges – Pay Now, Argue Later

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Service Charges – Pay Now, Argue Later

Key Contact: Jennifer Butcher

Author: Rachel McCulloch

The case of Sara & Hossein v Blacks

The Supreme Court has recently handed down judgment in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023], finding, by majority, in favour of the landlord and dismissing the tenant’s appeal.

Background

Well-known retailer, Blacks Outdoor Retail Ltd (“Blacks”) was the tenant of a commercial premises in Liverpool, with its landlord being Sara & Hossein Asset Holdings Ltd (“S&H”). Under the lease, Blacks was required to pay a service charge, the amount of which would be set out in an annual certificate provided by S&H. A service charge is a fee payable by a tenant for services provided by the landlord under a lease.

The lease stated that the sum in the annual certificate setting out the service charge due would be “conclusive” unless there was a “manifest or mathematical error or fraud”. Blacks would be responsible for paying a “fair and reasonable proportion” of the total service cost.

For two years, S&H charged Blacks a total of around £400,000 under the service charge. Blacks refused to pay the full amount, arguing that it was excessive, the works the service charge related to were unnecessary, and expenses were not properly due under the terms of the lease.

S&H issued proceedings, its argument being the sum in the annual certificate was the sum payable by Blacks, and they could only challenge it if there was a manifest or mathematical error or fraud. On the other hand, Blacks argued the certificate was conclusive only to S&H’s costs, and not the amount payable by Blacks.

S&H applied for summary judgement which was dismissed. An appeal was made to the High Court which was dismissed, but the Court of Appeal allowed S&H’s second appeal and entered summary judgement in S&H’s favour (i.e. that the sum in the certificate was payable by Blacks). However, the Court of Appeal left the question of what counterclaims (if any) Blacks could bring, to the High Court.

Blacks appealed against the summary judgement to the Supreme Court.

Supreme Court Decision

By a majority of 4:1, the Supreme Court dismissed Black’s appeal against the summary judgement. They disagreed with both parties’ interpretation and found that S&H’s annual certificate was conclusive to the sums payable by Blacks, and therefore Blacks was required to pay it upfront. However, payment of this sum did not prevent Blacks from later challenging its liability to pay and it would not be prevented from pursuing a counterclaim i.e. the pay now, argue later principle.

Pay now, argue later is an established principle, particularly in construction adjudication cases. It means that a party must pay the required sum and then if they wish to challenge it, they can do so at a later date. Applying this principle in the case of commercial service charges means where a tenant wishes to dispute the amount of the service charge, they must still pay the full amount due in the first instance, and dispute it later if they feel they have been wrongly charged.

What does this mean for landlords and tenants?

With costs rising in all areas, the decision, in this case, is likely to be good news for landlords who will be able to rely on service charge sums being paid upfront by tenants, providing certainty of payments and helping to secure cash flow.

If tenants attempt to set off or withhold payments of service charges, landlords should consider seeking summary judgment to claim the sums due, or consider other remedies which may be available in the lease or in law.

However, landlords should be aware that even if a tenant has paid a service charge outright, there is a risk that the tenant will challenge it at a later date, which may bring uncertainty as to whether the landlord will have to refund some of the sums paid.

There are also benefits from a tenant perspective, as they will have the right to look at the sums paid and dispute the service charge at a later date. However, tenants may be in a weaker position because they will not be able to withhold payment, and there is a risk they will not be able to afford to raise a dispute in respect of the sums already paid.

Getting in contact with Acuity

If you are a landlord or tenant dealing with any service charge dispute, or if you wish to discuss the points raised in this article, please contact our Property Litigation Team and we will be happy to help.

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