Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd

Factual and Procedural Background

The case concerns the interpretation of a provision in a commercial lease regarding the landlord's certificate of service charges being conclusive in the absence of manifest or mathematical error or fraud. The tenant, referred to as the Tenant, occupied retail premises under two leases: the first lease dated May 15, 2013, with a term of 10 years and a break clause after 5 years, and a subsequent one-year lease dated April 23, 2018, following exercise of the break clause. The freehold reversion was assigned to the Landlord in December 2016.

The 2018 lease incorporated the terms of the 2013 lease. Under the lease terms, the Tenant was liable to pay a service charge calculated by the Landlord based on Schedule 6, which included a provision that the Landlord’s certificate of total cost and service charge was conclusive except in cases of manifest or mathematical error or fraud. The Tenant was also prevented from withholding payment or setting off sums due except as required by law.

In January 2019, the Landlord issued a service charge certificate for the year ended September 30, 2018, certifying a sum significantly higher than previous years. The Landlord commenced proceedings in April 2019 to recover unpaid service charges for 2017-18 and 2018-19. The Tenant served a defence and counterclaim challenging the charges on various grounds including the nature and necessity of works and breaches of the lease.

The Landlord applied for summary judgment, arguing the certificate was conclusive and precluded the Tenant’s defences. The application was dismissed by the Deputy Master and the decision was upheld on the first appeal by the High Court judge. The Landlord appealed with permission granted.

Legal Issues Presented

1. Whether the landlord’s certificate of the total cost of services and the service charge payable by the tenant is conclusive not only as to the amount but also as to whether the services fall within the scope of the lease for which the landlord is entitled to charge.
2. Whether the tenant is precluded from challenging the validity or scope of the service charges certified by the landlord absent manifest or mathematical error or fraud.
3. The proper construction of paragraph 3 of Schedule 6 relating to the conclusiveness of the landlord’s certificate, especially in relation to the distinction between the amount of costs and the entitlement to charge those costs.

Arguments of the Parties

Landlord's Arguments

• The landlord’s certificate is conclusive as to both the amount of the total cost and the entitlement to charge those costs under the lease, except in cases of manifest or mathematical error or fraud.
• The tenant is precluded by the lease terms from withholding payment or raising defences against the service charge once certified.
• Contractual authorities concerning expert determinations support the landlord’s position that the certificate should be binding.
• The presence of a separate expert determination clause for apportionment of costs does not imply that the validity of the costs themselves is open to challenge.
• Allowing the tenant to challenge the entitlement to charge would undermine the purpose of the certification clause and lead to protracted disputes.

Tenant's Arguments

• The landlord’s certificate is only conclusive as to the amount of costs incurred, not as to whether those costs fall within the scope of services chargeable under the lease.
• The tenant may challenge whether the works or costs certified were necessary, properly categorized, or compliant with the lease covenants.
• The lease’s provision for expert determination of cost apportionment supports the view that other disputes about service charge validity remain open for judicial determination.
• Allowing the landlord to conclusively determine the scope of chargeable services would make the landlord judge in their own cause, which is unfair and unsupported by precedent.

Table of Precedents Cited

Court's Reasoning and Analysis

The court analyzed the wording of paragraph 3 of Schedule 6, which states that the landlord’s certificate as to the total cost and sum payable by the tenant is conclusive except for manifest or mathematical error or fraud. The court noted that the certificate covers two elements: the total cost and the tenant’s proportionate sum payable. The tenant’s proportion is subject to expert determination under paragraph 6, but the certificate itself is conclusive as to the total cost figure.

The court rejected the lower court’s distinction between the amount of costs and the entitlement to charge those costs, finding no express or implied language in the lease to separate these elements. The court reasoned that the certificate necessarily involves the landlord identifying which services and expenses are included, thus making the certificate conclusive on both identification and amount.

The court acknowledged the tenant’s concern that this gives the landlord the power to be judge in their own cause but held that contractual interpretation must reflect the parties’ agreement, not what the court might consider prudent. The presence of an expert determination clause for apportionment does not imply that the validity or categorization of costs is left to the court.

The court found the landlord’s construction consistent with the lease’s language and purpose, facilitating certainty and avoiding protracted disputes about the nature of costs. It overruled the lower courts’ decisions that had allowed the tenant to challenge the scope of chargeable services despite the certificate.

Holding and Implications

The court allowed the appeal and held that the landlord’s certificate of service charges is conclusive as to both the amount of total costs and the entitlement to charge those costs under the lease, except in cases of manifest or mathematical error or fraud.

As a result, the landlord is entitled to summary judgment for the service charges claimed. The court noted that the tenant’s counterclaim was not fully explored in light of this decision and remitted any unresolved issues to the Chancery Division for determination if the parties cannot agree.

This decision clarifies the interpretation of certification clauses in commercial leases, emphasizing the binding effect of landlord certificates on both cost amounts and their entitlement under the lease, thereby limiting tenants’ ability to challenge service charge claims once certified.