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Service Charge Disputes in 2021 – Can’t Pay Won’t Pay?

In a recent service charge decision The Court of Appeal confirmed a commercial landlord’s role can be as judge, jury and potentially executioner in terms of the service charge sum payable by the tenant under the lease. As always, this is dependent on the precise wording of the lease but given the impact of the pandemic and general economic uncertainty that there is right now, this is a highly relevant case. It is now established that a landlord’s service charge certificate can be conclusive in any service charge dispute. The decision will be welcomed by many landlords who may have incurred significant additional and unforeseen costs throughout the pandemic. It also has important and significant consequences for tenants who are budgeting and planning for 2021 generally.

The background  in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020] EWCA Civ 1521 is likely to be a common scenario for commercial landlords and tenants over the coming years. Blacks were tenant of retail premises owned by SHAH and had generally paid around £55,000 in service charges under their lease. The service charge liability for 2017/18 and 2018/19, certified by SHAH as per the lease, was over £400,000. Blacks challenged the sum through the lower Court, and presented a complex counterclaim challenging various charges and advancing a set-off argument.

The Court of Appeal found that in line with the service charge provisions in the leases the landlord’s certificate was “conclusive” on  both the proportion of the overall service charge payable and whether each service fell within the scope of the service charge clause. The leases provided that “in the absence of manifest or mathematical error or fraud” the service charge was not open to challenge. Although fact-specific, the decision hands the reins to landlords and gives tenants little room to manoeuvre if their leases contain similar clauses.

So what does this mean in practice?

Service charge disputes are likely to increase as we move through and out of the pandemic. 2020 presented issues that were unprecedented and not foreseen.  The pandemic’s immediate and potentially longer term impact on the commercial property sector, in particular retail, leisure, and office premises, is well documented. The Royal Institute of Chartered Surveyors (RICS)’ guidance on service charges during the pandemic confirms that mandatory aspects, such as the issue of annual service charge budgets and accounts to tenants, must continue. If appropriate, RICS recommend that service charge costs should be limited to works required to keep properties safe and secure.  However there will be many multi-occupied sites housing essential businesses that will have required full, and potentially, enhanced services throughout 2020 and, most likely, beyond. Crucially, RICS say that tenants should continue to pay all sums or reach agreement on future payment, despite the limits on a landlord’s ability to enforce at present.

There are some steps that can be taken to protect a landlord and/or tenant’s position or at least to plan ahead.

Landlords should audit their portfolios to identify which leases enable them to issue conclusive service charge certificates. Such clauses are a powerful tool, but landlords must take still take care not to fall foul of their service charge mechanisms. Failure to properly account for service charges or even serve the required documents could potentially mean that the opportunity to recover sums from a tenant is lost.

Tenants must understand that the court will not interfere or rewrite a bad or imprudent bargain, meaning that they will be stuck with the service charge agreement and any certification method agreed to.  Tenants will need to be aware of precisely how their liability will be calculated. The key point is to beware of any landlord “certification”  provision at the negotiation stage, particularly if there is no cap on the tenant’s service charge liability. If the landlord can issue a conclusive certificate, any tenant seeking to challenge it can only do so within the confines of the lease drafting, for example as in this case a challenge was only possible where there was a manifest or mathematical error or fraud. Any dispute should also be approached with caution in that under the lease the tenant may also be liable for landlord’s costs in relation to any default and breach of covenant, including service charge arrears.

It is sensible for tenants to budget for service charge increases as soon and as accurately as possible. Have additional services been provided in recent months, for example enhanced cleaning, physical alterations to layouts to enable social distancing or additional security for empty premises? Have insurance premiums been impacted? If so, the scope of the service charge clause should be carefully analysed to determine whether these sums are recoverable and an early conversation with the landlord about potential cost will enable a tenant to plan ahead.

Regardless of how the service charge is determined, there are likely to be tenants who simply cannot afford to pay the additional sums demanded. Ultimately, a landlord’s hands are tied at present in terms of enforcement. Forfeiture is prohibited until 31 December 2020 by s82 of the Coronavirus Act 2020, and winding up petitions cannot be presented until the same date with very limited exceptions. CRAR (Commercial Rent Arrears Recovery) can only be used to recover rent and not service charges, interest, rates etc but other options including debt claims and recovery from guarantors remain available albeit costly and slow.

There are however likely to be changes in early 2021, and the government may well seek to shift the balance of its measures from a focus on protecting the tenant to more of a level playing field. Regardless of when that happens, all parties to commercial leases must heed the warning of David Richards LJ in this case who confirmed that the Court will not save a party from an imprudent deal.

Blacks are presently seeking leave to appeal the Court of Appeal’s decision to the Supreme Court.

For more information on the article above contact Warren Reid and Sophie Michaelides.

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