Supreme Court Lays Down the Law on Commercial Property Service Charges

Many commercial leases appear to confer on landlords a wide and unilateral power to calculate and demand payment of service charges. An important Supreme Court ruling, however, indicates that they may not enjoy quite such a whip hand in future.

A substantial commercial tenant was served with certified service charge demands totalling over £400,000. In refusing to pay, it asserted that they were excessive and included items and expenses that were not properly due under the terms of its leases. The landlord, however, pointed to a clause in the leases which stated that the certified bills were 'conclusive' subject only to the defences that there had been a manifest error, a mathematical error or fraud.

The tenant argued that the true meaning of the certification clause was that the bills were conclusive as to the amount of costs incurred by the landlord, but not as to the tenant's liability for service charges. The Court of Appeal, however, preferred the landlord's more natural interpretation of the clause and it was awarded summary judgment in the full amount of the disputed service charges.

By a majority, the Supreme Court dismissed the tenant's appeal against that ruling. Crucially, however, it found that the tenant was not precluded from pursuing a counterclaim in relation to its underlying liability for the disputed service charges.

The Court found neither side's interpretation of the certification clause satisfactory. The landlord's argument that the certified bills were, subject to the listed defences, conclusive as to the extent of the tenant's liability fitted well with the wording of the clause. However, that reading was inconsistent with other provisions of the leases which, amongst other things, conferred a right on the tenant to inspect receipts, invoices and other documents on which the demands were based.

It would also, the Court noted, be surprising if the landlord were unilaterally entitled to conclusively resolve issues in relation to liability for service charges without the tenant having any opportunity to make representations. That would amount to a 'pay now, argue never' regime. On the other hand, the tenant's interpretation of the certification clause conflicted with its natural and ordinary meaning.

The Court found that an alternative interpretation of the clause was possible which would avoid such difficulties. It accepted that the certified bills were conclusive and that the tenant was required to pay them, subject to the permitted defences. That reading of the certification clause would enable the landlord to recover service charges without protracted delay or dispute, thus protecting its cashflow.

However, the Court went on to find that, on a true reading of the certification clause, the tenant was not precluded from later disputing liability for any service charge payments made. Such an interpretation gave full effect to the tenant's inspection rights and entitled it to pursue arguable claims in respect of service charge liability. The Court noted that its reading of the certification clause gave rise to the type of 'pay now, argue later' regime that is commonly found in commercial contracts.