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01 Feb 2023

Service charges – pay now, argue later?

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How conclusive is a service charge certificate?

The scenario

You own a large property portfolio with a mixture of retail and office units.

A couple of your retail properties are looking a bit tired and could use some work. With the leases for those properties set to end in the next few years, you'd like to get on with the works now.

The leases

The leases of the units are drafted in a fairly standard form and provide for you to repair and maintain the structure of the building and to provide services. In the usual way, the tenants are obliged to pay a service charge to cover your repair and maintenance costs. So, why not just go ahead with the works and push the costs on to the tenants through the service charge?

The service charge certificate

You know that your planned works will increase the service charge by more than 700% on the previous year. But you've checked the lease and it says that you're entitled to issue a service charge certificate telling the tenant how much service charge it must pay for the year, and that your certificate will be "conclusive in the absence of manifest or mathematical error or fraud". So, within reason, you can do what you like, without fear of challenge, right?

Conclusive?

Wrong.

This issue was looked at in detail by the Supreme Court in the recent case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd.

The court explained that the service charge certificate is not conclusive regarding the tenant's underlying liability for the service charge.

When read as a whole, the lease would not make sense if the landlord could be the judge and jury in their own cause.

The lease contained several limitations on the landlord's ability to simply charge what it pleased. For example, the landlord had to provide services "in accordance with the principles of good estate management" and the tenant was only liable for a "fair and reasonable proportion" of the total service cost. In addition, the tenant had rights to inspect the landlord's receipts and invoices. Those sorts of rights and limitations could lead to legitimate disagreements that would need careful scrutiny and those sorts of disagreements would rarely amount to "manifest" errors. So, to give effect to the true purpose of the lease, the tenant needed the ability to properly challenge the landlord's assertions as to the correct amount of the service charge.

But it's not all good news for tenants, nor all bad news for landlords.

The good news

Whilst issuing a service charge certificate doesn't prevent a later challenge from a tenant, the court was clear that the certificate was conclusive as to the sum that the tenant needed to pay straight away to comply with the terms of the lease.

Indeed, if tenants don't pay the sums as stated in the certificate, landlords can apply to court for summary judgment – a much swifter way to achieve recovery than a full court case.

Practically this is a significant benefit for landlords. The tenant cannot simply hold off paying up whenever it disagrees with charges; it must pay them first and then it has to decide whether to take the risk and make the effort to establish a claim. That reduces the likelihood of frivolous counter claims by tenants and protects the landlord's cashflow needs.

The moral

Given the risk of later challenge, if in doubt, it pays to take advice as to what works are recoverable under the service charge provisions in a lease. Whilst the tenant may be obliged to "pay now", it can still "argue later" so, don't fall into the trap of thinking that you will be able to self-certify that everything is recoverable without fear of challenge.

Service charge recovery can be a tricky area from both a practical and a legal perspective. A lot will depend on the precise facts and circumstances of the case and the wording of the lease. Our expert team would be delighted to help you navigate around the potential traps and to ensure that you have clear leases in place.

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