Service Charge certificates

In Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020] EWCA Civ 1521, the Court of Appeal considered the question of what was encompassed by a certificate as to the total costs recoverable by way of service charges.

The appeal related to the construction of a service charges clause in a commercial lease. The clause provided that a landlord’s certificate of the service charge payable by a tenant was conclusive. At first instance, the clause had been found conclusive as to the calculation of the cost of providing services, but not as to the broader question of whether services provided fell within the scope of services for which the landlord could charge a tenant.

The relevant clause of the lease provided that the tenant was to pay the service charge “calculated and payable […] in accordance with Schedule 6”.

Schedule 6 provided:

1. There shall be calculated […] the total reasonable and proper cost […] of the services […]
2. The further rent payable by the Tenant shall be a sum equal to a fair and reasonable proportion of such total cost of the services […]
3. The Landlord shall on each occasion furnish to the Tenant […] after such total cost and the sum payable by the Tenant shall have been ascertained 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.

Other parts of Schedule 6 set out the services and expenses for which the landlord was entitled to charge.

A dispute arose between the landlord and tenant, inter alia, as to whether some of the works claimed had been unnecessary, as to whether some of the works were not within the meaning of repairing covenants, and as to whether the works had progressed with reasonable speed.

The Court of Appeal found that the natural meaning of paragraph 3 of Schedule 6 (above) was that the two elements in determining the service charge (i.e: i) the identification of the services and expenses properly falling within the service charge; and ii) the total costs incurred in respect of those services and expenses) could not be separated in relation to the certificate of service charge costs. The wording of paragraph 3 rendered the certificate conclusive as regards the single figure of the total cost. That necessarily involved both elements which made up the single figure. Without express words to distinguish between the two categories, there was no basis for finding a distinction within paragraph 3.

Citing an analogous point in Dobbs v National Bank of Australasia Ltd (1935) 53
CLR 643, David Richards LJ noted that the manifest objective of such a certification clause is to “provide a ready means of establishing the existence and amount of [a] debt and avoiding an inquiry upon legal evidence into the debits going to make up the indebtedness”.

Whilst David Richards LJ recognised a concern that this construction would make the landlord the judge in his own cause, the court maintained that “it is not the function of contractual construction to save a party from an imprudent term”. It was trite law that the court’s role is to identify what the parties have agreed, and not what the court thinks that they should have agreed.

Conclusion

The starting point for analysing the effect of a service charge certificate will always be to start with the wording of the individual lease in question. The straightforward approach of the courts will be to construe the meaning of a lease in accordance with the natural meaning of its words. In doing so, the courts recognise that there is value in the certainty of certification clauses, even where they might put one party at a commercial disadvantage.