Service charge

It’s Natural: Establish Service Fee Provisions in a Commercial Lease

In a previous article, I reviewed the recent decision of the Court of Appeal in Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020] EWCA Civ 1521. In this article, I wish to examine this decision in more detail and focus in particular on the issue surrounding the construction of the Owner’s Encumbrance Certificate (“the Certificate”).

to summarize

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 responsible for the service charges “calculated and payable… in accordance with Schedule 6”. Paragraph 3 of Annex 6 stated that “The owner must at each occasion [that service charges falls due] provide the tenant… [with the C]certificate of the amount of the total cost and the amount to be paid by the tenant and in the absence of manifest or mathematical error or fraud, this certificate will prevail”. Parts IIA and IIB of Schedule 6 specified the items that could be included in the owner’s certificate.

The owner filed a claim, claiming that the certificate issued to the blacks was conclusive and that the blacks’ failure to pay the full outstanding fees meant that he had significant arrears. Blacks filed a counterclaim in which it disputed its liability for several items on the certificate.

The Court of Appeal ruled in favor of the owner.

Analyzing the Judgment: construction issues

In his judgment, David Richards LJ referred to the well-established principle in Arnold vs. Britton [2015] UKSC 36 that, when interpreting the terms of a contract, the Court “… identify what the parties agreed, not what the courts think 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 of Schedule 6 to the lease was that the certificate was conclusive as to the charges payable by the tenant in respect of the service charge. The Landlord’s determination of the service charges payable under the Certificate was a two-step process. First, the identification of the Service Fee and the expenses payable in connection with the Service Fee. Second, the calculation of the total costs incurred under these service charges. No step could be dissociated with regard to the Certificate and the Tenant had no basis to contest his liability (absence of fraud or mathematical error).

In crafting the service fee provisions, David Richards LJ also observed that the purpose of making the certificate conclusive was to “provide an easy way to establish the existence and amount of debt and avoid investigation» in the individual costs that made up the responsibility of the tenant. While this undoubtedly gave the landlord a considerable advantage over the tenant, it was not the court’s function to prevent the blacks from making an unwise bargain.

Conclusion

When analyzing the effect of service charge provisions, one must first look at the specific terms of the lease. These words should be interpreted in accordance with their natural meaning. Also, the courts will not interfere with a contract simply because it disadvantages one party. Similarly, with respect to certification clauses, courts recognize that there can often be a commercial premium for certainty.

If you would like to discuss any issues relating to commercial lease disputes, please contact a member of the Property Dispute Resolution team on 01895 207835 or 01895 207295, or email propertydisputes@ibblaw.co .uk.