Landlord’s certification conclusive and binding on issues of law?
Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd  EWHC 1263 (Ch)
This appeal was against the Deputy Master’s refusal in  EWHC 3414 (Ch) to dismiss Blacks, the tenant’s counterclaim or to grant a summary money judgement in relation to S&H, the landlord’s claim for rent for over £400,000. It raised complicated issues concerning the construction and inter-relation between a set-off clause and a certification provision.
The judge held that the landlord’s service charge certificate was not an expert determination and neither it nor the no-set off provision prevented the tenant’s defence that the certified sums did not properly form part of the service charge and were therefore not lawfully due under the lease. The no set-off provision did not operate against sums which were not lawfully due under the lease.
What are the practical implications of this case?
This case provides a clear reminder to carefully consider the construction of the contract in question and the risks of a landlord relying on their own certification in an attempt to prevent genuine disputes as to liability arising. Neither the certification clause nor the no set-off provision can render recoverable sums which were never properly due. Further, a landlord cannot hope to recover for modernisation and improvements works, where these are prohibited under the service charge clause, merely by having those expenses certified by qualified surveyors and accountants.
So, how will the courts determine, on which matters a certification is binding? They will consider who is actually obliged to provide the certificate. Also, whether the lease provides a mechanism for resolving disputes by expert determination. Is the contract conferring on one of the parties the power to determine conclusively, subject to limited exceptions for obvious errors and fraud, questions of construction? The fact that a party may choose to seek expert surveyor, accountant or legal advice or assistance is not sufficient to make their determination conclusive. A party should not be construed as having agreed to expert determination just because they have agreed to a landlord certifying the total costs of service charges. The real question is whether the lease assigns disputed matters to an independent expert. If not, then the court will be seized of jurisdiction to determine issues of law and construction.
What was the background?
Sara & Hossein Asset Holdings Limited (“S&H”), a property investment company and the landlord of retail commercial premises at Chicago Buildings, Whitechapel and Stanley Street, Liverpool brought a claim against its former tenant Blacks Outdoor Retail Limited (“Blacks”), a large retail chain.
Blacks occupied the premises under a lease entered into in 2013 with IVG Institutional Funds GmbH. S&H was the successor in title of IVG from December 2016. The 2013 lease was for a term of 10 years with a break option after five years which Blacks exercised. Having done so, however, Blacks then entered into a lease for a further one-year term from May 2018 to May 2019.
The dispute arose because although Blacks paid the main rent due under the leases, and certain other charges, it did not pay the service charges for 2017–18 and 2018–19. Between October 2016 and September 2017 S&H had charged Blacks a service charge of around £55,000; the following year S&H sought to charge Blacks over £400,000, in circumstances where S&H knew that Blacks would be terminating the lease in May 2019. Blacks’ objection was that these service charges were excessive and were not properly due under the lease.
The relevant clauses were as follows:
The Certification Provision was contained in paragraph 3 of Part I of Schedule 6: “The Landlord shall on each occasion furnish to the Tenant as soon as practicable after such total cost and the sum payable by the Tenant shall have been ascertained a certificate as to the amount of the total cost and the sum payable by the Tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive.”
Under the No Set-Off Provision in clause 3.1(a) of the 2013 lease, Blacks covenanted: “To pay the yearly rent reserved by this Lease at the times and in the manner required under clause 2.3 and 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 (save as required by law).”
The Deputy Master had already held that in the no set-off provision (i) the reference to yearly rent was limited to the rent and did not include service charge or any other sums payable, but (ii) the remainder of the clause did not apply only to that rent and prohibited a set off against payments due in respect of service charge.
What did the court decide?
The court upheld the Deputy Master’s decision that the line of authorities dealing with expert determinations were of little relevance as S&H’s surveyors were acting in their capacity as the landlord’s agents rather than as independent experts. The fact that in practice the service charge certificate was prepared by the landlord’s managing agent, which was a reputable firm subject to professional obligations did not make the landlord’s determination an expert one.
The court first considered whether or not the landlord’s certificate was conclusive on all issues that might arise in determining whether certain costs were properly claimed as service charges including issues of law and the proper construction of the lease.
In the event of a dispute as to the proportion of the total costs of services and expenses that were payable by Blacks, paragraph 6 of Schedule 6 provided for the dispute to be determined by “expert determination”. The definitions in clause 1.1 provided that the expert in this case was to be an independent valuer, who in the absence of agreement was to be chosen by the President of the Royal Institution of Chartered Surveyors or their deputy, and the expert was required to give both parties an opportunity to make representations and counter-representations before determining the matter. There was, however, no provision in the Schedule for a similar expert determination in relation to the various costs and expenses that made up the total amount in relation to which that proportion was to be calculated. The lease made no provision for any conclusive determination by the landlord or anyone else as to whether the costs as a matter of principle fell within the scope of the service charge payable by the tenant under the lease. Where those matters are put into issue, the court can determine any disputes.
In answering that the Certification Provision should not be construed as having the effect of making the landlord’s certificate of the service charge conclusive absent manifest or mathematical error or fraud, the court considered that it would be inconsistent with the carefully-defined mechanism contained in the lease for determining disputes as to the proportion of the total costs of the services and expenses payable if the (potentially far more significant) question of the headline figure of the total costs and services was construed as falling to be determined conclusively by the landlord, with no provision for an independent expert determination nor any provision for representations by the tenant.
It was held that the certificate was intended to be conclusive on routine accounting matters, but not on the question of whether particular works fell within the landlord’s repairing obligations, including both works alleged by their nature not to have been within those covenants and works alleged to have been unnecessary. The certificate established “the amount of a cost of the service.” It did not establish whether that cost should properly have been incurred in the first place, within the scope of the lease obligations.
In terms of the argument that the Certification Provision read together with the no-set-off provision prevented Blacks raising any defence to liability to pay the service charge and that it must therefore bring a counterclaim, if it considered there had been breaches of the lease. The Judge agreed with the Deputy Master that the no set-off provision applied to payments due for service charges. She further agreed that this raised the question of what was “due” under the leases. There first needed to be a determination of whether the service charge costs were properly within the scope of the obligations in the lease before the amount of service charge due under the lease could be ascertained. It was only to the amount that was properly due that the no set-off provision applied.
Case details :
- Court: High Court of Justice, Business and Property Courts, (ChD)
- Judge: Kelyn Bacon QC (sitting as a deputy judge of the High Court)
- Date of judgment: 19/05/2020
This article was written by Morayo Fagborun Bennett and was first published by Lexis®PSL on 22/05/2020.
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