The case involved a dispute between S&H, as landlord, and Blacks, as tenant, over the calculation of service charge, and whether:-
- a “landlord’s certificate” setting out the sums payable under the service charge and stated to be “conclusive” (subject to very limited exceptions) was definitive, both as to the costs incurred by the landlord, and whether the items claimed were validly recoverable under the service charge provisions; and
- Blacks could set-off disputed amounts, despite a “no set-off” clause.
Blacks was required to pay service charge instalments quarterly in advance, based on estimates provided by S&H. At the end of each service charge year, S&H had to produce a certificate setting out the costs incurred, and the amount payable by Blacks, giving rise to balancing payments by either party as necessary. The lease provided that the landlord’s certificate would set out “the amount of the total cost and the sum payable by the Tenant”, and “in the absence of manifest mathematical error or fraud” would be “conclusive”.
In the 12 months following the issue of a landlord’s certificate, Blacks had the right to request and inspect receipts, invoices and other evidence relating to the service charge calculation.
The lease also contained a “no set-off provision” under which Blacks agreed “not to exercise or seek to exercise any right or claim to withhold rent or any right or claim to legal or equitable set-off or counterclaim…”.
In the final 2 years of the lease – knowing that it would be coming to an end - S&H charged Blacks £440,000 under the service charge. This was substantially more than the £55,000 paid for the previous service charge year, and Blacks disputed it, arguing that S&H had included works which were outside the scope of the service charge (including improvements), and that the costs were inflated by historic failures to repair.
S&H sought summary judgment for the sums owed by Blacks, set out in the landlord’s certificate.
Summary Judgment Application and appeal
At the initial summary judgment hearing, the Court was keen to avoid allowing the landlord to “be the judge in his own cause”, and unilaterally determine what could be validly included within the service charge. On that basis, the Deputy Master found that the landlord’s certificate was only conclusive as to “routine accounting matters” (including the costs incurred by S&H), and not on whether particular items fell within the service charge regime.
On appeal to the High Court, the Deputy Judge endorsed that conclusion. Her approach was also influenced by the perceived unfairness of allowing S&H to make decisions in its own favour, with no right of challenge by Blacks. S&H appealed.
The Court of Appeal
While acknowledging that allowing the landlord to conclusively certify the amounts payable to it didn’t seem like a great deal for Blacks, the Court of Appeal focussed on the natural meaning of the words of the lease and, quoting Lord Neuberger in another service charge dispute, Arnold v Britton , noted that it was not the court’s role to rescue one party from a bad bargain through contractual interpretation.
Their judgment was that the lease was clear on the effect of the landlord’s certificate, which was expressly stated to be conclusive both as to “the amount of the total cost” and “the sum payable by the Tenant”, and the two could not be separated as the previous judgments suggested.
The Court of Appeal therefore ordered Blacks to pay the outstanding service charge. This time, Blacks appealed and was given permission to take the case to the Supreme Court.
Supreme Court judgment
While the Supreme Court agreed with S&H’s interpretation on the wording of the landlord’s certificate – which clearly stated that it was conclusive both as to the amounts incurred by S&H and the amounts payable by Blacks (what it called a “pay now, argue never” approach) - It was also sympathetic to Blacks’ argument that, if the certificate were conclusive as to items included within the service charge, the provisions in the lease excluding certain costs, and Blacks’ ability to request copies of invoices and receipts supporting the calculation would be meaningless (what it called the “argue now, pay later” approach).
In reaching its own interpretation (which hadn’t been put forward by either party), the Supreme Court considered the provisions of the lease in the round, as well as the commercial rationale , and concluded that the correct reading of the lease was a “pay now, argue later” approach. The certificate was conclusive on the amounts payable by Blacks as a balancing payment – meaning that S&H could validly seek summary judgment for those sums - however, Blacks had the right to subsequently challenge the calculation and issue its own claim in respect of items wrongly charged. This satisfied S&H’s commercial interest in not being out of pocket for costs it had already incurred while disputes were resolved, while still giving Blacks the right to recover improperly included sums following such payment.
The Supreme Court was clear that Blacks’ ability to bring a counterclaim following payment of amounts demanded in the landlord’s certificate was not hampered by the “no set-off” clause, the purpose of which was to prevent Blacks from holding up payment of the amounts demanded under the landlord’s certificate by disputing items claimed. However, it did not extinguish Blacks’ right to bring a counter claim following payment – if the parties had intended to impose such a drastic effect, they would have needed much clearer express wording to do so.
What next for contractual interpretation?
As always, this is a reminder to landlords and tenants to be clear on what they mean and the effects of what they’ve agreed, as the Courts have been consistently clear that they cannot intervene to fix a bad commercial deal. Tenants in particular should continue to be wary of “conclusive certificate” wording in service charge provisions.
However, it also shows the continuing conflict in the Court’s view of the limits of contractual interpretation, between the very literal approach in Arnold v Britton , and more flexible approach seeking to balance a literal and contextual approach in the subsequent case of Wood v Capita . The Court of Appeal and Lord Briggs’ dissenting judgment in the Supreme Court follow a very literal approach, whereas the Supreme Court has taken a much more contextual/commercial approach to reconcile seemingly contradictory clauses within the lease.
It remains to be seen if the more contextual approach taken in this case will continue to win out in subsequent cases.
Authored by Lucy Redman and Paul Tonkin.