Share it

In this post, Sophie Campbell, an Associate in the litigation team at CMS, previews the decision awaited from the Supreme Court in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd.

Background

Blacks Outdoor Retail Ltd (“B”) was the tenant of commercial premises in Liverpool. B had leased the premises since 2012 and in 2016, Sara & Hossein Asset Holdings Ltd (“S&H”) was assigned the lease.

The case concerned two leases and the service charge provisions therein. The Supreme Court had to consider whether the construction of the provisions and whether S&H’s service charge certificate was payable by B and conclusive.

The Leases

Both leases included identical provisions in respect of the service charge owed by B to S&H. The relevant provisions of the lease were contained in schedule 6 and provided that:

“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 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.”

S&H served a service charge certificate on B in January 2019 for £400,000 in terms of paragraph 3 of schedule 6. This was comparatively higher than the previous service charge certificate that S&H had served on B. The previous certificate had only been for £55,000. Proceedings were then raised against B in April 2019 for unpaid service charge for the years 2017 to 2018 and 2018 to 2019.

Following this, B served a defence and counterclaim on S&H setting out that some of the works included in the service charge certificate were unnecessary. B also claimed that the included works did not fit the definition of the repair works as set out in the repairing covenants of the lease. The counterclaim further sought to set-off liability by demonstrating that S&H had failed to carry out the works with reasonable speed and failed to remove scaffolding after the works were completed.

Thereafter, S&H applied for summary judgment arguing that the proper construction of the lease meant that the service charge certificates issued by it were conclusive, and that as a result, B was unable to rely on the defence it sought to advance.

At first instance, Deputy Master Bartlett dismissed S&H’s application. S&H then appealed.

High Court’s decision

In the High Court, Kelyn Bacon KC (now Bacon J) was persuaded by B’s counsel. Kelyn Bacon KC found that, in respect of the terms of paragraph 3 of schedule 6, the certificate was only conclusive as to the amount of the service charge incurred (absent misrepresentation, error or fraud). Whether or not the cost was something that fell within the scope of the service charge provisions under the lease remained open for determination and the certificate was not conclusive in that respect.

The High Court’s decision was influenced by the terms of paragraph 6 of schedule 6 and the reference to expert determination. Kelyn Bacon KC held that the existence of the dispute resolution mechanism was incompatible with the view that the service charge certificate prepared by the landlord was conclusive.

Court of Appeal’s decision

The Court of Appeal disagreed with the approach of Kelyn Bacon KC. David Richards LJ was not persuaded by the view that paragraph 3 of schedule 6 comprised of the two distinct elements. Instead, the Court of Appeal took the view that based on the ordinary meaning of the language used in schedule 6, those two elements were unable to be separated.

The Court of Appeal found that the High Court had been influenced by the idea that if the service charge certificate was found to be conclusive, the landlord would be the “judge in his own cause.” In recognising this, the Court of Appeal stated that a clause such as this would be one in which a tenant should consider carefully before entering into. However, with reference to the decision in Arnold v Britton [2015] UKSC 36, the court considered that it is not its job to rescue a tenant from an “imprudent term” in a lease.

In considering the wording of paragraph 3 of schedule 6, the court confirmed that it could understand why a landlord might be inclined to include such a term in a lease, and for it to be treated as conclusive. This would avoid long and drawn-out disputes over whether works included in the service charge certificate were those which the tenant was responsible for.

Ultimately, the Court of Appeal disagreed with the approach adopted by the High Court and found that S&H were entitled to summary judgment. The Court of Appeal was not asked to opine on whether B’s’ counterclaim could proceed considering its decision. David Richards LJ remitted the counterclaim to the Chancery Division.

Comment

It remains to be seen whether the Supreme Court will be influenced by David Richards LJ’s construction of schedule 6 of the lease, with judgment expected in the first few months of next year. But, given how common these types of clauses are in commercial leases, both landlords and tenants will be readily awaiting the decision of the Supreme Court.