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Practical implications of “Pay Now, Argue Later” approach to service charge


The Supreme Court’s recent decision in Sara & Hossein Asset Holdings Limited v Blacks Outdoor Retail Ltd has found in favour of a “pay now, argue later” regime where there is a final and binding certification process for determining a tenant’s service charge liability under a lease.


Case Summary:

Blacks was the tenant under a lease that included a provision that the service charge sum stated in the landlord’s year-end service charge certificate was final and binding and could only be challenged in very limited and defined circumstances (mathematical error, manifest error or fraud). The lease also included provisions as to what items were recoverable under the service charge regime, including specific exclusions from recovery.
The landlord argued that the wording of the certification process meant that the tenant should “pay now, argue never” in relation to the service charge sum, whilst the tenant’s position was that the specified limits and exclusions on the recoverability of services meant it should be entitled to withhold payment and “argue now, pay later”.

The Supreme Court in fact decided that neither party’s interpretation was satisfactory and so it tried to reach a commercially sensible compromise — “pay now, argue later”. The Court found that the tenant was required to pay the certified sum in the time specified. However, the certification process did not prevent the tenant from subsequently pursuing a claim against the landlord over the liability for such costs under the terms of the service charge provisions.

The decision was an attempt to strike a balance between landlords and tenants by protecting landlords’ cash flow, whilst allowing tenants to take action if necessary. That said, cash-strapped tenants may not have the funds to mount a legal challenge after the event and they will be in the weaker bargaining position of having to reclaim money paid, rather than being entitled to withhold payment pending resolution of the dispute.

Practical Points:

Most commercial leases include provisions stating that service charge certificates are binding and conclusive and prohibiting any right of set-off and this is unlikely to change in the near future. Therefore, the decision has not altered the position already set out in most leases. However, there are a few practical points for landlords and tenants to take away from the Blacks decision:

  • Service charge budgets – Landlords should ensure that these are prepared annually in advance and accurately reflect the anticipated expenditure so that there are no surprises in the year end certificate. Tenants should ensure that the budgets are chased where not forthcoming and should raise any concerns regarding proposed expenditure early on in order to flush out any arguments as to recoverability prior to costs being incurred.
  • Dispute resolution clauses – Going forward, landlords and tenants may wish to include specific dispute resolution clauses in relation to the certification process, allowing for any disputes to be resolved before such certificate is deemed “conclusive”. Whilst this would save lengthy litigation costs for both parties in the event of a dispute under the “pay now, argue later” regime, it remains to be seen whether there will be any appetite from landlords for such provisions given that the burden of arguing the recoverability rests on tenants.
  • Inspect receipts – Most leases provide for a period in which the tenant can inspect receipts in connection with the service charge certificate. Tenants should ensure that they make use of these provisions where any expenditure is not as expected.
  • Certificates should be carefully and accurately prepared – Professionals preparing the year-end certificates, such as surveyors and asset managers, should ensure that certificates are accurately prepared and in line with the specific service charge regime in the lease, otherwise negligence claims could arise from a certificate that is later challenged.

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