Supreme Court says 'Pay Now, Argue Later' in service charge dispute
Supreme Court says ‘Pay Now, Argue Later’ in service charge dispute
Service charges can be ripe for dispute in commercial leases, which can become complex and costly. The landlord's objective is full recovery, or as close to it as possible, to ensure a clear income stream. Meanwhile, the tenant will want to avoid overpaying for items which fall outside their remit.
Sara Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd  UKSC2, is a hotly contested service charge dispute centred around whether the tenant had the right to challenge a service charge sum. In this instance, the relevant clause in the lease stated that the landlord's service charge certificate was deemed to be 'conclusive in the absence of manifest error, mathematical error, or fraud'.
Under the terms of its lease, the tenant had up to 12 months to inspect receipts, invoices and other documentation supporting the service charge. The tenant refused to pay service charges of over £400,000 on the basis that they were excessive and included unnecessary items and expenses that were not properly due under the terms of the lease.
The landlord's position: 'Pay now, argue never'
The landlord argued that the only possible literal interpretation of the service charge clause was that the tenant could only challenge the sums on the limited grounds set out in the lease, namely 'manifest error, mathematical error, or fraud'. The landlord asserted that this was the only commercially sensible interpretation. It protected the landlord from being entangled in lengthy disputes over the amount due, whilst already having incurred liabilities to third parties for services.
The tenant's position: 'Argue now, pay later'
The tenant argued that a literal reading of the clause didn’t fit with the other clauses in the lease. They also emphasised the dispute resolution mechanism in the lease. This allowed them to refer a dispute arising over the 'proportion' of service charge payable to an expert for determination, suggesting that the certificate was not in fact 'conclusive'. The Supreme Court coined this the 'argue now, pay later' approach but cautioned the cash flow implications this interpretation would have for the landlord.
Held: 'Pay now, argue later'
The Supreme Court held that neither party's interpretation was satisfactory and instead, the majority found that the clause operated as a 'pay now, argue later' mechanism. It entitled the landlord to payment without delay and allowed the tenant the opportunity to dispute liability later if it felt it had been improperly charged. The challenges were not limited to manifest or mathematical error, or fraud.
With rising costs impacting both commercial property owners and occupiers, this latest decision offers landlords some degree of comfort from a cash flow perspective. It also gives tenants the reassurance that paying the service charge does not prevent them from disputing it at a later stage. It does, however, put tenants in the unenviable position of having to reclaim money paid. This is an arguably weaker bargaining tool than if they were entitled to withhold payment pending resolution of the dispute.
Tenants should think practically before entering into a commercial lease, especially around sticking points such as the service charge. In the first instance, tenants should review the lease to understand exactly what the service charge covers. Landlords should be aware that tenants can request disclosure of the service charge accounts for the previous three years from the landlord. A transparent dialogue will not only highlight the anticipated costs but should avoid complex disputes surrounding the service charge moving forward.