S&H Holdings v Blacks (2023) – Nobody expects this Service Charge inquisition

Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2

Citations in [square brackets] refer to the judgment, which can be found here.

Facts

Blacks, the clothing chain, were the tenant of two properties in Liverpool owned by Sara & Hossein Asset Holdings. The two properties were governed by separate leases, but they both contained an identical service charge provision. In return for services rendered by the landlord (maintenance, repairs, etc.), the tenant would pay a sum enumerated by a “conclusive” annual certificate.

The service charge certificate could be challenged by the tenant if “manifest or mathematical error or fraud” was present. By way of example, S&H had charged Blacks around £55,000 for the 2016-17 year, which Blacks duly paid. For the next two years, 2017-18 and 2018-19, S&H charged Blacks over £400,000 and £62,000 (for the remaining 7 months of the lease) respectively, which Blacks refused to pay, although it made the main rent payments for this period [9].

S&H duly claimed for the outstanding service charge value, on the basis that Blacks agreed to the clauses stipulating that the certificate was conclusive in the absence of fraud or error. The “ordinary and natural meaning” [44] of the word ‘conclusive’ meant just that, so on signing the contract Blacks was acknowledging that the certificate, if not fraudulent or subject to mathematical error, was binding.

Blacks counterclaimed, averring that the sums were improper. Blacks claimed that the work carried out and paid for by the landlord were inappropriately charged to the tenant, or were unnecessary, and they were not beholden to the sum given by the certificate. Furthermore, the construction of the relevant clauses in the lease were so narrow that it was almost impossible to dispute the charge – it could only be adjusted in the presence of “manifest or mathematical error or fraud” [21], not leaving room for appropriateness of services included in the charge (the court labelled this a “pay now, argue never” regime [49]).

The courts found for Blacks at first instance and on appeal to the High Court, with the Court of Appeal allowing the appeal and holding in favour of S&H – Blacks duly appealed in turn to the Supreme Court.

Judgment

The Supreme Court granted summary judgment to S&H, but in actual fact did not strictly find for them, deeming neither submission’s interpretation of the certification process entirely satisfactory. Instead, they found something of a compromise, which Lord Hamblen termed a “pay now, argue later” provision [57]. Blacks was required to pay S&H the outstanding sum, but was not confirmed to be liable for the underlying requirement to pay – instead, they could chase the liability question through the courts. The Court interpreted the construction of the service charge clause in the original contract as preventing the tenant from holding up payment, not preventing them from litigating over the matter if they felt that they were not liable.

Lords Hamblen, Hodge, Kitchin and Sales formed the majority, with Lord Briggs dissenting. His dissent would have held for S&H, on the grounds of commercial reality (Blacks would still retain some inspection rights and the “pay now argue later” policy may result in increased litigation).

Significance

While the court’s middle ground solution is useful in this case for the two parties, giving S&H their money and Blacks the opportunity to litigate to get it back, this is not a particularly practical solution for the vast majority of landlords and tenants. The court noted that both parties are “sophisticated commercial entities” [35], with the leases prepared by solicitors on both sides. A large commercial retailer like Blacks may be able to afford more court cases, but smaller residential or commercial parties would have no chance. This might be especially problematic for tenants who are unable to afford extortionate service charges but also cannot dispute them until the sum has been paid to the landlord. In terms of contract law, it is notable that the Supreme Court essentially declined to construe the offending clause one way or the other. Splitting its conclusiveness into two parts – the actual sum, and the underlying reasons for the sum – presumably satisfies neither party, who may face yet more court dates. This represents a move away from a rigorously literal model of contractual interpretation – see, for instance, our blog on Arnold v Britton [2015] UKSC 36, where the court held that a contract should be interpreted according to the ordinary meaning of its words, even if it resulted in an absurd outcome. S&H v Blacks gives more room for nuance, but with nuance also comes the possibility of confusion.

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