Service Charges – pay now argue later?

Service Charges

The recent case of Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd considered whether a tenant is under an obligation to pay a service charge demand even if the tenant disputed the sum that should be paid.

This case is of importance to both residential and commercial properties let by way of a lease and by extension, may also be applicable to freehold properties located on estates with an estate service charge.

In the above case, the Landlord issued a service charge demand certificated as required by the service charge provisions which was stated to be conclusive except in cases of “manifest or mathematical error or fraud”. The Tenant subsequently disputed the sum payable and refused to pay on the basis that the demand was conclusive as to the cost incurred by the Landlord but it was not conclusive as to whether that sum, or a proportion of it, was payable by the Tenant. This can effectively be summed up as an argue now pay later argument.

The Landlord’s argument was that the service charge demand issued was conclusive as to what the Tenant had to pay except where there was an obvious or mathematical error or fraud. This argument would effectively mean that the Tenant could not object to the demand in any way except where there was an obvious or mathematical error or fraud – i.e. the Tenant had to pay whatever the sum was and could not argue about the sum.

The majority decision of the Supreme Court did not support either of these arguments. The Court decided that the demand issued by the Landlord was conclusive as to what the Tenant had to pay in the timeframe set out in the lease but the tenant was entitled to challenge the sum it is actually liable for and if the Tenant was successful then the Landlord would have to repay the Tenant.

The decision appears to strike a more commercial approach to one of the more significant disputes that could arise between and a Landlord and a Tenant as it tries to balance the interests of the Landlord in ensuring that any monies it has incurred can be recouped but also the interests of the Tenant in being able to challenge whether the cost incurred is properly incurred for the purpose of the service charge provisions in its lease.

Therefore, where there is a dispute as to the costs demanded in a service charge, the majority decision in this case suggests that tenants should pay the sum demanded as required by the lease and then argue later once the service charge has been paid. However, the cost of bringing a claim in relation to any dispute may be significant as if a tenant did lose, it would have to bear its own costs and potentially the majority if not all of the landlord’s costs.

In reality, this benefits a landlord as it means that only the strongest of claims would be issued by a tenant as a weak or a 50/50 claim will be deemed to be too risky given the potential adverse costs consequences.

If the Tenant does not pay now argue later, it may be that the Landlord can forfeit the lease and so bring it to an end and then pursue the Tenant for any unpaid sums. If the lease is forfeited for non-payment of the Service Charge (which is often expressed to be payable as a rent) then it may be that a tenant loses their home (in the case of residential properties) or there may be a significant disruption to the tenant’s business and loss of any capital investment (more so in the case of commercial properties).

To provide a seamless service in relation to leasehold property matters, we have specialist solicitors who can deal with the sale or purchase of either leasehold property (whether residential or commercial in nature), the surrender of leases and associated termination issues and in relation to disputes relating to the provisions of a lease.

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