An Inconclusive Account: Construction and Certification Provisions in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2

Hugh Rowan discusses the Supreme Court decision in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2023] UKSC 2 which looks at the interpretation of a commercial service charge provision.

Summary

In a potential departure from previous authority, the Supreme Court provided its own interpretation of a commercial service charge provision. By a majority of 4 to 1 the Court held that a certification provision in a lease created a “pay now, argue later” scheme whereby the landlord’s certificate was conclusive as to the sum payable by the tenant but not as to the underlying liability of the tenant, thus allowing the tenant to seek repayment of improperly charges costs. In a critical dissenting judgement, Lord Briggs suggested that this was an “imaginative” solution, and not one that was derived by any process of construction applied to the terms of the lease.

The Facts

The dispute concerned a commercial lease held by the Respondent (‘Blacks’). The lease required Blacks to pay “a fair and reasonable” proportion of the service charges to the Appellant (‘S&H’). Any dispute over the proportion was to be determined by expert determination. The key provision in dispute was the certification provision, which read:

“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.”

S&H argued that the commercial purpose of the provision was to protect the landlord’s cash flow where landlord will in all likelihood already have incurred the relevant costs. As a result, the certificate should be conclusive as to both the costs to the landlord and the sum payable by the tenant, subject to the permitted defences of “manifest or mathematical error or fraud” (‘the Permitted Defences’). This accorded with the commercial purpose of enabling the landlord to recover the costs and expenses it has incurred without significant delay or dispute.

Blacks’ case was that the certificate should only be conclusive as to the amount spent by S&H on services and expenses, but not as to Blacks’ liability. Blacks argued that the process of determining the service charge could be subject to dispute at a number of stages, and that S&H should not be allowed to be the “judge in his own cause”. Further, S&H’s case did not fit with the detailed dispute resolution mechanism in the lease, including expert determination, nor with the provision that allowed Blacks a specified period in which to inspect the receipts and invoices.

The Decisions Below

The Judges at first instance and of first appeal both decided in favour of Blacks: The certificate was conclusive as to the amount of the costs incurred, absent manifest or mathematical error or fraud, but was not conclusive as to the question of whether those costs fell within the scope of the service charge payable by the tenant under the lease.

In a unanimous decision by the Court of Appeal these findings were reversed. David Richards LJ, as then was, held that the plain and ordinary meaning of the words were that the certificate was conclusive as to “the sum payable by the tenant”. Any contrary interpretation would require express words or a necessary implication to the contrary.

The Majority Decision

Lard Hamblen, giving the majority decision, summarised S&H’s case as being a “pay now, argue never” (subject to the permitted defences) regime. Blacks’ case by contrast was an “argue now, pay later” regime. The Supreme Court held that neither party’s interpretation was satisfactory; Blacks’ case failed to account for the plain and ordinary meaning of the words, and S&H’s approach failed to account for the contrary provisions in the lease. Their Lordships instead suggested a “pay now, argue later regime”, whereby the tenant was liable for the sums claimed without set-off, but that the tenant could subsequently dispute liability.

Lord Briggs’ Dissent

In a critical dissent, Lord Briggs argued that the Court’s role was to choose between genuinely available constructions, rather than mending the parties’ bargain. The Court does not have carte blanche to create a novel solution (Arnold v Britton [2015] UKSC 36; [2015] AC 1619, per Lord Hodge at [77]).

Lord Briggs considered that there was no “peg” within the lease on which to hang the majority’s decision. Lord Briggs further suggested that S&H’s interpretation was not inconsistent with the remaining terms of the lease. It was consistent with the finality of the certificate for there to be provision made for expert determination on the subject of apportionment only; This clause operated separately. Nor was the requirement for inspection of documents inconsistent as such inspection was required in order for the tenant to be able to consider the Permitted Defences. Finally, while it may be possible to challenge the service charge at many stages, it would not be uncommercial that the landlord should have wished, and insisted, on limiting the available grounds for litigation to only the Permitted Defences.

Comment

In reaching its decision, the majority supported an interpretation of the lease that had not been raised by either party nor in the decisions below. While an undoubtedly sensible conclusion that could have been the subject of the parties’ agreement, it does not overcome the hurdle of the plain and ordinary meaning of the provision that the landlord’s certificate is “conclusive” as to the “sum, payable by the tenant”. As stated by David Richards LJ in the Court of Appeal express words or a necessary implication to the contrary should be required to displace this meaning. Absent either of these, the express words should prevail.

In finding the ‘middle road’ of contractual interpretation the Court may have opened the door to a novel approach to construction, and one that does not necessarily fit with established principles.

Practitioners, as well as landlords and tenants, should be aware of the potential far-reaching consequences of this judgment both in the context of certification clauses and also in contractual interpretation more generally.

 

This article first appeared in Practical Law’s Property Litigation Column in February 2023.