Service charges: challenging a landlord’s certificate

It is very common for a commercial lease to stipulate that the landlord’s certificate stating the total cost of services provided under the lease, and the service charge payable by the tenant towards those services, is conclusive and binding on the tenant in the absence of manifest error or fraud.

Such a provision was considered in May this year by the High Court in the case of Sara & Hossein Asset Holdings Limited -v- Blacks Outdoor Retail Limited.  The Court decided that this wording meant that the landlord’s certificate produced by the landlord was conclusive as to the amount of the costs incurred (except for manifest or mathematical error or fraud) but was not conclusive as to whether those costs, as a matter of principle, fell within the scope of the service charges payable by the tenant under the lease.  This therefore opened the door for a challenge by the tenant.

The Court of Appeal has now, in a Judgment handed down on 13 November 2020, considered the appeal in this case and come to a different conclusion.  The Court of Appeal decided that the landlord’s certificate was conclusive both as to the amount of the service charges and the issue of whether those costs fell within the scope of the service charges payable by the tenant.  Accordingly, except where there was manifest or mathematical error or fraud, the tenant was unable to challenge the certificate and obliged to make payment of the amount certified.

The Court of Appeal recognised that this might put a tenant in a difficult position, but made the point that the tenant “would be well advised to consider very carefully before agreeing a lease in these terms”.

This underlines the crucial importance for tenants to consider the detail of their service charge provisions before agreeing the terms of a new lease. However, the decision is not fatal to all challenges by tenants to their service charges: each case will depend on the exact wording of the landlord certification provision and these can vary significantly.Furthermore, apart from the fraud and mistake exception, some leases contain a dispute resolution provision enabling the tenant to challenge the service charges  Accordingly all tenants should make it their practice to check carefully all service charge statements provided to them by their landlord as well as the terms of their lease before payment.