A recent decision in the Court of Appeal (England and Wales) has emphasised the importance of the words used in the service charge provisions of a lease.
What was the case about?
A tenant leased retail premises in the Chicago Buildings, Liverpool. Other parts of the Chicago Buildings were let to different business tenants.
The lease required the landlord to calculate the total cost of the services and expenses incurred each year. Once that exercise was complete, the landlord had to give the tenant:
"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"
The landlord's certificate for 2017-2018 was for a much larger amount than it had been in previous years. The tenant didn't pay so, the landlord issued proceedings and the tenant served a defence raising a number of different arguments.
The tenant's arguments failed to include an allegation that there was a manifest or mathematical error or fraud in the certificate. In the absence of such an argument, the landlord applied for summary judgment on the ground that the sum sought in the certificate was conclusive.
The Court's Decision
The court first decided that, whilst the certificate was conclusive as to the amount of the total cost of the services, it didn't preclude the tenant from arguing that the cost had not been properly incurred in the first place. The tenant's arguments included that works to the common parts of the building were unnecessary or were not repair works within the meaning of the relevant repairing covenants in the lease, and that the cost of the work was increased by past failures by the landlord to keep the premises in good repair.
The landlord's application for summary judgment was therefore dismissed.
The Landlord appealed and the matter ultimately ended up before the Court of Appeal.
This time, the landlord was successful. The Court of Appeal decided that the certificate was conclusive of both the cost of providing the services and the fact that the services fell within the scope of the services for which the landlord was entitled to charge. The landlord was therefore entitled to summary judgment for the service charges claimed in the proceedings.
What are the key lessons for landlords and tenants?
- Service charge provisions must be carefully considered. If they allow a landlord to conclusively certify sums as being payable, there will likely be limited scope for a tenant to challenge them.
- Whether such a certificate is truly conclusive will always turn on the correct construction of the contract. In this case, the Court of Appeal considered that the correct construction of the words used meant that the certificate was conclusive of both the cost of the services and that these were services for which the tenant was liable to pay.
- The Court of Appeal recognised that this may make a landlord a "judge in its own cause". The Court noted that whilst a well-advised tenant should give careful consideration before agreeing to a lease in such terms, it was not the function of contractual construction to save a party from an imprudent term.
- There is a commercial rationality to such clauses. Landlords understandably wish to avoid protracted and detailed arguments about whether pieces of work and expenses fall within the scope of the landlord's services.
- Any tenant wishing to challenge a sum that has been certified under such a clause must ensure that their grounds of challenge fall within those permitted by the lease. In this case, the tenant would have needed to point to a manifest or mathematical error or fraud.
The service charge provisions in a lease provide fertile ground for disputes between landlords and tenants. Understanding how a court is likely to construe such provisions is important both when entering into a lease and when considering whether or not to challenge any demand made by a landlord.