Service charges ruling puts onus on lease agreement drafting

A new London Court of Appeal ruling has confirmed that service charge certificates which could be certified by a business owner himself, rather than a third party, are conclusive as to the amount of service charge a tenant must pay under a commercial lease, said a real estate expert.

Anis Dadu of XYZ Law, however, said “the ability of landlords to rely on self-certification of service charge certificates in such circumstances will always depend on how the certification provisions in commercial leases have been drafted”.

Anis commented after the court considered the scope of a certification provision relied on by Sara & Hossein Asset Holdings Limited (S&H) to bring claims for arrears of service charges against its former tenant of commercial premises in Liverpool, Blacks Outdoor Retail Limited (Blacks) in the case.

Anis Dadu
Managing Partner, XYZ Law 

The interpretive approach adopted by the Court of Appeal in this case is not particularly surprising. The highest courts have said time and time again that it is not for the courts, when interpreting contracts, to salvage part of a reckless clause that it has accepted. The function and purpose of contractual interpretation is to identify what the parties have agreed.

Anis said “Many commercial leases contain a clause that prohibits a tenant from deducting and setting-off, and sometimes counterclaiming, rents owed under the lease. What this means in practice is that the rents are payable in full when liability arises under the lease. the lease, even if the lessee himself has valid claims against the lessor, against which he would otherwise be able to exercise a right of set-off. “

“Commercial leases also often contain an obligation on landlords to provide tenants with a certificate at the end of a year of service charge. The tenant will generally have paid an estimated annual service charge in quarterly instalments over the course of the year. Year of service charge. the certificate therefore “reconciles” the service charge at the end of the year. If the instalments overestimated the total amount of the service charge due for the year, the tenant will get a refund. estimated the amount of the service charge due, the tenant will have to pay the balance amount to the landlord,” he said.

“The effect of a service charge certificate will always depend on how the certification provisions are written in the lease. There are different formulations used by the commercial lease drafter. In this case, the certificate allowed the owner to determine for himself the total costs and the amount payable as a service charge. Under the terms of the lease, the certificate should therefore contain here “the amount of the total costs and the sum to be paid by the tenant”. Critically, the lease in this case also provided that “in the absence of obvious or mathematical error or fraud [the] certificate will be conclusive,” he said.

“While it is perhaps a little more common to see such power to determine liability for service charges finally vested in an owner’s surveyor, it is by no means uncommon for a third party surveyor to be granted this power as part of this process. These clauses are often called “conclusive evidence” clauses. Most of the legal cases involving them were about warranty contracts,” Anis said.

The Court of Appeal held that S&H could rely on its service charge certificate in this case to determine the Blacks’ liability for the service charges based on an interpretation of the commercial lease agreement that Blacks had signed with the owner. She held that if the lessor is empowered to determine the “total cost” of the service charge, this must necessarily mean both the identification of the services and expenses due under the lease, and the total costs incurred under the lease.

The court recognised that its findings could mean that a landlord, who could rely on this type of attestation provision, could be a “judge for his own cause” to determine a tenant’s liability for service charges, but stated that it was, in this case, a product of the negotiation of commercial contracts and therefore not something in which the court would interfere.

Anis said: “The approach to the interpretation adopted by the Court of Appeal here was not particularly surprising”.

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