Property Litigation: Conclusive Certification Clauses are not always conclusive

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High Court case offers a warning to Landlords demanding service charges – Conclusive Certification Clauses are not always conclusive

Key Contact: Jennifer Butcher

Author: William Rees

The High Court has clarified the interpretation of two clauses commonly found in commercial leases, being the “conclusive certification” clause and a “no set off” clause. In doing so, the High Court confirmed that in some circumstances a tenant is able to challenge service charges demanded under a Landlord’s certificate even if the terms of a lease provide that the certificate will be ‘conclusive’.

The High Court case of Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020] EWHC 1263 (Ch) (19 May 2020) concerned Sarah and Hossein Asset Holdings (Landlord) and well known outdoor clothing and equipment retailer Blacks Outdoor Retail (Tenant).

The Landlord, in accordance with usual practice, provided a yearly certificate detailing the Tenant’s service charge liabilities. The drafting of the conclusive certification clause within the lease set out that “In the absence of manifest or mathematical  error or fraud”, the certificate was “conclusive”. The no set off clause further precluded the Tenant from exercising any right of set off. These being common provisions of a commercial lease.

Having been produced with the Landlord’s certificates detailing the service charge liabilities, the Tenant failed to pay two years’ worth of sums claimed by the Landlord. The Landlord issued proceedings. The Tenant defended its position, arguing that some of the service charge sums claimed by the Landlord fell outside of the scope of the parties’ contractual relationship and thus the Tenant was not liable to pay. The Tenant further relied on the no set off clause.

The Landlord sought summary judgment relying on its interpretation on the conclusive certification clause as being strictly conclusive and therefore not open to challenge by the Tenant. However the Landlord was unsuccessful in achieving summary judgment on its interpretation at both first instance and in the High Court.

The High Court clarified that certificates produced in accordance with the standard drafting of conclusive certification clauses (i.e. there being no manifest or mathematical error or fraud), are conclusive as to the amount of costs incurred. However, importantly, the certificate is not conclusive of whether the costs referred to in the certificate are caught in scope of the Landlord and Tenant’s contractual relationship. This means that Tenants are able to dispute the contents of a certificate.

In construing the no set off clause, the High Court clarified that the Tenant was precluded from using the clause to not pay the service charge where the service charge was properly due. However, in the event where liability was disputed (as in this scenario), the Tenant’s liability would be determined by the outcome of that dispute.

Whilst this case was decided on the specific wording of the lease, it case has important implications for commercial Landlords and Tenants. It will be welcome news to Tenants, clarifying that they may still have rights of recourse against Landlords should a Tenant dispute the contents of a ‘conclusive’ service charge certificate provided by a Landlord. Conversely, the case will likely be a disappointing outcome for many commercial Landlords, who may now feel that they are provided with less certainty and protection from their conclusive certification clauses than they may have previously thought they were afforded.

For more information, please get in touch with our Litigation team.

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