“Pay Now, Argue Later”: tenant-friendly interpretation of service charge provisions provides grist for disputes
This case is of interest because commercial service charges are very rarely reviewed by the Supreme Court. The majority decision gives a surprisingly tenant-friendly view on what was a very traditionally worded service charge schedule. As a result, landlords are now at risk of more pushback and argument from their tenants about the service charges they pay.
The lease contained the usual provision for the rent and additional rent (comprising service charges and insurance) to be paid without set-off or counterclaim. The service charge schedule provided for the landlord’s certificate of the amount that it had spent on services for any given year to be conclusive, absent mathematical or manifest error or fraud. The tenant was given a limited period each year to scrutinise the landlord’s accounts in order to check for error.
Service charges were allocated between the tenants in the building based on the size of their demise. The service charge schedule contained a dispute resolution clause to arbitrate on actual square footage in the event of disagreement.
The tenant refused to pay an unusually large service charge rent, and the landlord made an application for summary judgment – a procedure used when the applicant believes that the respondent has no arguable case – which was heard by a Deputy High Court Judge.
Influenced by the presence of a dispute resolution clause to arbitrate on the extent of the demise, but no corresponding clause for disputed service charges, the Deputy High Court Judge held that there was an arguable claim which should be resolved after a full hearing. His view was that it was unlikely that a professionally advised tenant would have agreed that a landlord could effectively be allowed to act as both judge and jury. The landlord appealed to a High Court Judge, who also found for the tenant on a similar basis.
The landlord then appealed to the Appeal Court, where it was successful. The court found that the lease provisions clearly intended to limit the tenant’s ability to resist payment. Commercial reality dictated that the landlord needed a reliable income stream to comply with its obligations under the lease. The tenant then appealed the decision to the Supreme Court.
The Judgment in the Supreme Court
The majority came out with a novel interpretation of the provisions, which was characterised as “Pay now, argue later.” They held that the service charge certificate was conclusive and had to be paid at the due time by the tenant. However, the entitlement of the tenant to scrutinise the landlord’s accounts, coupled with the dispute resolution clause on the extent of the demise, allowed them to find that the tenant having paid the certified sum would then have a chance to challenge any sums it disagreed with.
The dissenting judge, who was the only lawyer with significant experience in the field of landlord and tenant practice, held that the traditional interpretation of such service charge provisions was the correct one, namely “Pay up and don’t ever argue“.
The majority’s decision to accommodate both parties is undoubtedly going to result in more service charge disputes in the future. Landlords will be keen to draft their way around this judgment, so that as far as service charges, hey can retain their position of judge, jury and executioner. The lease in question was drafted before the new RICS Commercial Service Charge Code, which prescribes fairer dispute provisions, however it is not compulsory.
If you wish to receive periodic updates on this or other topics related to UK real estate, subscribe to our Real Estate Insights mailing list.
For any other legal questions related to UK real estate, please get in touch with your usual Mayer Brown contact or one of the blog editors.