Out-Law News 4 min. read

Supreme Court backs ‘pay now, argue later’ regime in property service charge dispute

Commercial landlords are entitled to timely payment of service charges which they self-certify are conclusive of the amount owed by tenants under the terms of their lease, but tenants have a right to subsequently challenge their liability for that payment, the UK Supreme Court has ruled.

The court confirmed that a ‘pay now, argue later’ regime is an appropriate mechanism for balancing the respective interests of commercial landlords and tenants in cases where service charge certificates are certified by the landlord itself, rather than by a third party, and considered conclusive as to the amount of service charge that a tenant has to pay under a commercial lease.

The Supreme Court’s ruling (22-page / 277KB PDF) on the matter was delivered in a case involving a dispute between landlord Sara & Hossein Asset Holdings Limited (S&H) and its former tenant of retail premises in Liverpool, Blacks Outdoor Retail Limited (Blacks), over the interpretation of certification provision in the lease agreement between the businesses. Pinsent Masons acted for S&H in the case.

The relevant clause provided that S&H should provide a certificate “as to the amount of the total cost and the sum payable by the tenant” and that this was to be “conclusive” in the absence of “manifest or mathematical error of fraud”.

S&H submitted that this provision accorded with commercial reality, enabling it to collect timely payment of service charges for services provided under the agreement and to avoid long and costly litigation in order to recover costs incurred in servicing the premises.

However, Blacks argued that the certificate issued by S&H was conclusive only as to S&H’s costs and not as to the sum payable by it. It said the scope it had to challenge the amount payable as determined by S&H under the ‘manifest or mathematical error’ defences was too limited.

All but one of the Supreme Court justices who ruled on the case determined that it was appropriate to interpret the certificate provision a third way. They considered that it would be wrong if S&H was able to act as “judge in its own cause”, but said that under Blacks’ arguments, S&H would be deprived of “the intended benefit of preserving its cash flow from the serious inroads inherent in having to pay for services up front while only recovering full payment after potentially lengthy dispute”.

Lord Hamblen said: “The certification provision should be interpreted as being conclusive as to the service charge ‘sum payable by the tenant’ but not as to the underlying liability for the service charge. The tenant is entitled to bring a claim seeking repayment of a cost which it is contended had been improperly charged.”

“It is a form of ‘pay now, argue later’ provision, a contractual arrangement which is commonly found. Adopting an iterative approach, this interpretation is consistent with the contractual wording, it enables all the provisions of the leases to fit and work together satisfactorily and it avoids surprising implications and uncommercial consequences,” he said.

Property disputes expert Richard Bartle, who led the Pinsent Masons team that acted in the case, said: “The decision of the Supreme Court provides higher authority, or at least strong guidance, on how conclusive-evidence clauses such as the one in this case will be applied. This now means that landlords, or their surveyors, with an equivalent right to self-certify the amount of service charge payable by a tenant should be successful on an application for summary judgment on arrears of service charges in the county court or High Court, even if the tenant has a counterclaim which may reduce, or, in theory, totally eradicate its liability. It also provides guidance on how such clauses will be interpreted outside of the landlord-and-tenant context, as the formulation which appears in commercial leases is also used in various other commercial contracts.”

Joseph Parnis of Pinsent Masons, who also acted in the case, said: “In practice, most tenants faced with certification provision such as the one in this case are now likely to pay service charges prior to a claim being issued by their landlord, given that summary judgment will almost certainly be awarded on any defence that tenants advance to such a claim. However, and again, where the wording in this lease or similar wording appears in the certification provision, a tenant will still have a right to counterclaim against its landlord. That said, the negotiating position of the landlord will be substantially improved if the service charges have already been paid, as the terms of the negotiation will, in effect, centre on what rebate the tenant is entitled to.”

In considering the case, the Supreme Court assessed the meaning of the concept of ‘manifest error’. The judges agreed that its precise meaning may depend on the particular contract and context in which the term is used, but referred to a long line of case law to elaborate further on its general meaning.

Most notably, they endorsed case law from the Court of Appeal that a ‘manifest error’ is considered to be “one that is obvious or easily demonstrable without extensive investigation”.

The judges said that another Court of Appeal case provides guidance on what is meant by ‘obvious or easily demonstrable’. In that case, the court said manifest errors were “oversights and blunders so obvious and obviously capable of affecting the determination as to admit of no difference of opinion”.

In terms of what was is meant by something being demonstrable ‘without extensive investigation’, the Supreme Court considered that this may depend on the context. They said that unless the contract makes it clear that only the certificate can be considered, extrinsic evidence will be admissible, adding that in most cases an “investigation limited in both time and extent” will be appropriate – deeper investigations have to be “viewed with some circumspection”, they said, and cannot depend on “a full blown trial”.

Bartle said: “Given that the concept of ‘manifest error’ appears in many different legal contexts and is common term in many commercial contracts, it is perhaps surprising that there has been no authority at the highest level on what it means in practice until now. This decision of the Supreme Court now provides that authority and in particular shows that permitted defences of ‘manifest or mathematical error or fraud' are, indeed, narrow, and that arguable errors, however well founded the allegation of error may ultimately prove to be, will not be sufficient to fall within that very narrow remit.”

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.