What does 'conclusive' mean in a commercial service charge dispute?

Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020] EWCA Civ 1521

Background

Blacks Outdoor Retail Limited (Blacks) was the tenant of retail premises located at Chicago Buildings, Whitechapel and Stanley Street, Liverpool L1 6DS. The case concerned the construction of a provision in a commercial lease under which the landlord's certificate of the total cost of services provided under the lease, and the service charge payable by the tenant, was conclusive in the absence of manifest or mathematical error or fraud.

The relevant lease provisions

The relevant lease terms were as follows:

Clause 2.3(d) provided for the payment by the tenant of “the Service Charge calculated and payable at the times and in accordance with Schedule 6”. 

By clause 3.1(a), the tenant covenanted “not to exercise or seek to exercise any right or claim to withhold rent or any right or claim to legal or equitable set-off or counterclaim (save as required by law)”. 

The relevant provisions of Schedule 6 were:

“1. There shall be calculated by the Landlord as soon as practicable after the 31st day of December in each year the total reasonable and proper cost to the Landlord during the calendar year ending on such 31st day of December of the services and expenses specified in Part II of this Schedule (excluding costs and expenses met by the insurers under the policy of insurance effected by the Landlord hereinbefore mentioned)

2. The further rent payable by the Tenant shall be a sum equal to a fair and reasonable proportion of such total cost of the service [sic] and expenses specified in Part II of this Schedule and in the event of the Term commencing or determining during the course of the calendar year in question a corresponding proportion of such sum

3. 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 by 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

6. The contribution payable by the Tenant of the total costs of the services and expenses incurred by the Landlord hereunder shall be the proportion which the net internal area of the Demised Premises bears to the net internal area of the aggregate of all areas of the Building which are let or intend to be let and any dispute between the parties as to the proportion shall be determined by Expert Determination”

The services and expenses for which the landlord was entitled to charge were set out in part IIA and part IIB respectively of Schedule 6. The tenant was not required to pay service charges in respect of “Excluded Costs” which were defined in paragraph 10 of Schedule 6.

The term “Expert Determination” used in paragraph 6 of Schedule 6 was defined in clause 1 of the lease, as involving determination “by an expert who shall be an independent valuer”, to be appointed by the President of the Royal Institution of Chartered Surveyors in the absence of agreement by the parties.

A dispute arose over the amount of service charge payable. The Landlord’s case was that Blacks had fallen into substantial arrears, while Blacks disputed various items claimed and advanced a set-off and counterclaim.

The landlord issued proceedings in relation to the unpaid service charges and the tenant served a Defence and Counterclaim. The landlord made an application for summary judgment relying on the No Set-Off Provision and that service charge certificates which were to be deemed conclusive save for manifest error or fraud.

The decision

Both the Deputy Master and Deputy Judge in the courts below held that the certificate was conclusive as to the cost incurred in providing the services but not as to whether such services fell within the scope of services for which the landlord was entitled to charge under the lease and further that Blacks was entitled to challenge whether certain works could be claimed by the landlord under the service charge, and such challenge could not be dismissed summarily simply on grounds that it had no success.

On Appeal to the Court of Appeal, Lord Justice David Richards stated at paragraph 24 of his Judgment that “it is not the function of contractual construction to save a party from an imprudent term, as Lord Neuberger said in Arnold v Britton [2015] UKSC 36, [2015] AC 1619 at [20], a case concerning service charge provisions in leases. He observed that “The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed”.

The Court of Appeal, reversing the previous courts’ decisions, held that the lease provisions meant what they said and the landlord was entitled to summary judgment on its claim.

What is the real practical effect of this decision?

The Court of Appeal reaffirmed the principle that the purpose of interpretation is to identify what the parties have agreed, not what the court thinks they should have agreed and that parties should remember that when a judge is interpreting he/she will likely avoid any attempts to re-write it to assist an unwise commercial tenant or to penalise an astute commercial landlord. 

The decision serves as a reminder that commercial tenants need to be wary when entering commercial leases and to further remember that words will be given their ordinary meaning and the court will not imply words unless it is necessary.

While each case will be determined on its own facts and the wording of the relevant lease provisions, the decision will nonetheless be welcomed by commercial landlords whose leases contain similar provisions.

If you require assistance with commercial leases or property disputes generally please get in touch with Darryn Harris on [email protected] or Russell May on [email protected].
 

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