Settling service charge disputes: Pay now, argue later

Settling service charge disputes: What did the Supreme Court decide?

As mentioned above, the case concerned the relatively common provision that the landlord was to provide a certificated demand as to service charge payable by the tenant, and that this was to be “conclusive” in the absence of “manifest or mathematical error or fraud”.

The landlord argued that the clause meant that its landlord’s certificate is conclusive as to what the tenant must pay, except only if there is a manifest error, a mathematical error or fraud. The landlord therefore sought to rely upon the wording of the lease to adopt a ‘pay now, argue never’ approach.  The tenant argued that the clause meant that the certificate was conclusive that the landlord had incurred the costs, but that it was not conclusive as to whether a proportion of them was properly payable by the tenant.  The tenant’s ‘argue now, pay later’ approach would enable it to withhold payment pending completion of the mechanism, within the lease, for service charge dispute resolution.

The Supreme Court didn’t agree with either party. It concluded that the clause meant:

• the certificate was conclusive as to the amount that the tenant was required to pay to the landlord in the time period required by the lease (so as to keep the annual service charge collection cycle on track); but
• the tenant was entitled to challenge, thereafter, whether it was actually liable to pay the sums demanded. (If the tenant was successful in that challenge, the landlord would be obliged to refund any sums that had not been properly chargeable.)

Legal and practical advice for resolving service charge disputes, following Sara & Hossein v Blacks

The Supreme Court’s majority decision represents a commercial solution to one of the most common of service charge disputes.  The judgment seeks to balance the interests of the landlord and tenant, and to provide a workable application of otherwise potentially conflicting lease provisions [2]. It gives meaning to a clause (that, of course, the tenant had accepted on completion of the lease), ensuring that the landlord isn’t out of pocket in relation to sums it had already incurred, but it also allows the tenant to raise a subsequent service charge challenge.

The court did not like the idea that, under the landlord’s case, the landlord would have been the judge in its own cause, having sole authority on whether service charge sums were reasonable or properly due.  However, somewhat controversially, and as the dissenting judgment notes, the ‘pay now, argue later’ solution is arguably an “imaginative creation” [3] in the majority decision. It is an approach that the parties could have agreed expressly in the wording of the lease, but actually did not.

As to the practical effects of this case, there is the clear and obvious cash-flow benefit for landlords, as tenants will no longer be able to justify withholding payment of service charge sums which have been conclusively certified and demanded in accordance with lease provisions.  An indirect benefit for landlords is that, when faced with the decision to issue service charge challenge proceedings, and the elements of litigation- and cost- risk that that entails, tenants are now more likely to embark upon service charge disputes only in the strongest of arguable cases.

Following Sara & Hossein v Blacks, landlords will need to use much more explicit language than the common wording which was the subject of this case if they want to achieve the ‘pay now, argue never’ position. That may be quite difficult to do, and will depend heavily on the parties’ respective bargaining positions, as this majority judgment is likely to be seen as the accepted, reasonable position. Tenants seeking to obtain/maintain rights to dispute service charge items will be able to point to this decision to assist their lease negotiations.

Service charge disputes: How Walker Morris can help

Walker Morris’ Real Estate Litigation specialists are experienced and expert in all aspects of commercial service charge disputes.  Whether in relation to pre-emptive, strategic risk management, or in relation to the management and resolution of a service charge dispute that has already arisen, Walker Morris will be able to provide tailored advice and assistance on service charge rights and liabilities. Please contact Lewis, who will be very happy to help.

[1] [2023] UKSC 2

[2] that is, the conclusive certification/demand process on the one hand, and the service charge dispute resolution mechanism on the other

[3] ibid para 71