It’s Only Natural: Constructing Service Charge Provisions in a Commercial Lease

In a previous article, I looked at the recent Court of Appeal decision in Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020] EWCA Civ 1521. In this article, I want to look at that decision in more detail and particularly focus on the issue surrounding the construction of the landlord’s certificate of service charges (“the Certificate”).

Recap

The case concerned a commercial lease between Blacks (“the Tenant”) and Sara and Hossein Holdings Ltd (“the Landlord”).

Under clause 2.3(d) of the lease, Blacks was liable for service charges “calculated and payable… in accordance with Schedule 6”. Paragraph 3 of Schedule 6 stated that “The Landlord shall on each occasion [that service charges falls due] furnish to the Tenant… [with the C]ertificate 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”. Parts IIA and IIB of Schedule 6 specified the items that could be included in the Landlord’s Certificate.

The Landlord brought a claim, asserting that the Certificate issued to Blacks was conclusive and Blacks’ failure to pay the total costs payable meant it was in substantial arrears. Blacks issued a counter claim in which it disputed its liability with respect to several items included on the certificate.

The Court of Appeal found in the Landlord’s favour.

Analysis the Judgment: issues of construction

In his judgment, David Richards LJ referred to the well-established principle in Arnold v Britton [2015] UKSC 36 that, when interpreting the terms of a contract, the Court will “… identify what the parties have agreed, not what the courts thinks that they should have agreed”. To do this, the Court will construct a term in accordance with its natural meaning.

According to David Richards LJ, the natural meaning of paragraph 3 to Schedule 6 of the lease was that the Certificate was conclusive as to the costs payable by the tenant in respect of service charges. There were two stages involved in the Landlord determination of the service charge payable under the Certificate. First, the identification of the service charges and expenses payable within the service charge. Second, the calculation of the total costs incurred with respect to those service charges. Neither stage could be separated with regards to the Certificate and the Tenant had no basis on which to dispute its liability (absent fraud or mathematical error).

In constructing the service charge provisions, David Richards LJ also observed that the purpose of rendering the Certificate conclusive was to “provide a ready means of establishing the existence and amount of debt and avoiding an inquiry” into the individual costs that comprised the Tenant’s liability. Whilst this undoubtedly gave the Landlord a considerable advantage over the Tenant, it was not the court’s function to save Blacks from having entered an imprudent bargain.

Conclusion

When analysing the effect of service charge provisions, one must first look to the specific words of the lease. Those words should be interpreted in accordance with their natural meaning. Furthermore, the courts will not interfere with a contract merely because it puts one party at a disadvantage. Equally, with respect to certification clauses, the courts appreciate that there can often be a commercial premium on certainty.

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If you would like to discuss any issue relating to commercial lease disputes, please do not hesitate to contact a member of the Real Estate Dispute Resolution Team on 01895 207835 or 01895 207295, or email us at propertydisputes@ibblaw.co.uk.