The Supreme Court has considered a commercial tenant's service charge liability and the proper interpretation of a service charge clause in this recent case.
The clause in question provided that the landlord shall, at the end of the service charge year, provide to the tenant a certificate as to the amount of the total cost and the sum payable by the tenant and that, in the absence of manifest or mathematical error or fraud, such certificate shall be conclusive. A dispute had arisen as the certified sum sought from the tenant in the year 2017/2018 (a year before lease expiry) was circa £400,000, at odds with previous (and subsequent) years where the certified sum was circa £55,000.
Landlord's position
The landlord's position was that the wording of the lease was clear that the sum payable by the tenant was the sum on the certificate and that the provision must be understood in the context of the commercial purpose of the clause, i.e to ensure that a landlord is able to recover service charges particularly when in most cases, it would already have incurred the costs of providing the services. The landlord referred to the fact that there are exceptions (manifest error, mathematical error and fraud) and so the rights of the tenant to dispute the sum are not wholly ousted.
Tenant's position
The tenant's position was that a service charge calculation is a complex exercise, involving careful consideration of the lease provisions and services provided. Any part of the calculation can give rise to a dispute which would not fit neatly into the exceptions. Therefore, to take the landlord's interpretation of the provision would allow the landlord to be "judge in his own cause" and leave the tenant powerless to challenge its liability.
The tenant also alleged that the landlord's interpretation was at odds with the other terms of the lease, including the extensive dispute resolution mechanism for other matters and the fact the tenant has a right to inspect the receipts.
On that basis, the clause could only be interpreted such that it is conclusive as to the costs and expenses of the landlord but not as to the sum the tenant is liable to pay.
The Supreme Court's decision
The Court rejected both the landlord's and the tenant's positions, finding that there was an alternative interpretation, namely that the certificate is conclusive as to what is required to be paid by the tenant as at that date, but that does not preclude the tenant from later challenging its underlying liability. However, the onus will be on the tenant to make out and bring any such claim.
The Court considered that this interpretation gives effect to the words and protects the landlord's cashflow concerns but at the same time gives the tenant recourse to pursue any arguable case.
Commentary
This case highlights the difficulties of balancing the landlord's commercial purpose as a property owner and manager of a building, with a tenant's right to fairness and transparency. It also provides clear and unequivocal guidance to landlords and tenants with similar provisions in their own leases as to how the Courts expect such service charge provisions to operate.
