Joe Reeves | Wellers Law Group

Commercial Service Charges – Pay Now, Argue Later

Posted on February 13, 2023December 18, 2024 by Joe Reeves

In the recent case of Sara & Hossein Asset Holding Ltd v Blacks Outdoor Retail Ltd, the Supreme Court considered the correct interpretation of a service charge clause in a commercial lease. The clause related to the conclusiveness of a service charge certificate produced by the landlord in relation to the amount to be paid by a tenant.

The Court held that a landlord’s service charge certificate was conclusive (in the absence of manifest error or fraud) as to the sum payable by the tenant at that point but was not conclusive as to the tenant’s underlying liability for the service charge.

The Background

The key facts were as follows:

Blacks was the tenant of commercial retail premises in Liverpool, of which S&H was the landlord, under two successive leases dated 2013 and 2018. Blacks was required under the leases to make payment toward the service charges for the building.
The service charge provisions in the leases required that S&H must supply Blacks, on a yearly basis, with a certificate as to the “total cost and the sum payable by the tenant” and that this certificate was to be conclusive in the absence of “manifest or mathematical error or fraud”.
Blacks had the right to inspect receipts, invoices and other evidence relating to the service charges. However, Blacks did not have the right to set-off or counterclaim any sum against the service charges.
The service charge for 2017/2018 was in excess of £400,000, substantially higher than in previous years. Blacks refused to pay and S&H issued proceedings for recovery.

The dispute turned on the interpretation of the service charge provisions in the leases, specifically the meaning of the words “shall be conclusive” in the context of the landlord’s certificate as to the service charge payable by the tenant. S&H argued that the clause should be interpreted literally, namely that the certificate was conclusive as to the tenant’s liability. In other words, a “pay now, argue never” interpretation. Blacks argued that due to the content of other provisions in the leases including those strictly defining what costs were recoverable as service charges, the clause could not be so interpreted. Blacks argued that the clause was only conclusive as to the sums S&H had incurred, not what Blacks was necessarily liable to pay. In other words, an “argue now, pay later” interpretation. Blacks did not contend that there was manifest or mathematical error in the charges (“Permitted Defences”).

The matter was the subject of extensive litigation, finally reaching the Supreme Court. The Supreme Court rejected both parties’ interpretations, essentially reaching a halfway house. By a majority of 4 to 1, it held that S&H’s certificates were binding as to the amount Blacks had to pay on certification (subject to any Permitted Defences) but that this was not determinative of Blacks’ service charge liability. It was open to Blacks to challenge the amount following payment. Essentially, the Court concluded that the clause, in its true interpretation, created a “pay now, argue later” regime. Blacks had to pay the service charges but it had the right to subsequently challenge them.

Lord Briggs, in his sole dissent, criticised the majority’s “imaginative creation” on the basis there was no reason within the lease for the majority’s interpretation. He said he would have favoured the landlord’s interpretation.

The result of the decision is that:

A landlord can enforce payment of service charges due under a certification clause.
Payment of a service charge does not prevent a tenant from disputing the liability for such payment afterwards, for instance in relation to any costs excluded under the lease. Where sums are later successfully challenged, the tenant will be entitled to repayment of those sums.

The decision seeks to strike a balance between the interests of landlords and tenants. It will be welcome for landlords in that it ensures a consistent cashflow. A landlord has a clear interest in recovering sums it has properly spent on repair from its tenants, with minimal difficulty. The benefit to tenants is that this provides that the certification as to the sum to be paid to a landlord is not necessarily final. Where a tenant has legitimate concerns as to service charges it has paid, it retains the right to challenge them later down the line.

A lot will depend upon the specific wording of the lease and the precise facts and circumstances. It pays for both landlords and tenants to take advice on what costs are recoverable under a lease by way of service charges. For landlords, that will be important in making decisions about expenditure. For tenants, it will be important in understanding what sums they are liable to pay.

This article is not intended and should not be relied upon for legal advice, Should you wish to discuss your matter, please contact Joe Reeves of our Litigation Department on 0207 481 6383 or joe.reeves@wellerslawgroup.com.

The right to re-apportion service charges – an important ruling for landlords and tenants

Posted on February 10, 2023December 18, 2024 by Joe Reeves

AVIVA INVESTORS GROUND RENT GP LTD AND ANOTHER (RESPONDENTS) – V – WILLIAMS AND OTHERS (APPELLANTS)

In a decision which will be of importance to residential landlords and tenants, the Supreme Court has ruled to preserve the contractual right within a lease, where provided, for the landlord to re-apportion service charges..

The Background

On 8 February 2023 the Supreme Court handed down judgment in the case of Aviva Investors Ground Rent Gp Ltd and another v Williams and others.

The case had been the subject of litigation over a number of years through various courts, from the First Tier Tribunal finally up to the Supreme Court.

The judgment given by the Supreme Court addressed the following issues:

To what extent is a term in a residential lease which allows the landlord to revise the tenant’s share of the service charges invalidated by section 27A(6) of the Landlord and Tenant Act 1985?
If the effect is that any discretion to re-apportion the service charge is transferred from the landlord to the First-tier Tribunal does section 27A(6) enable the tenant as well as the landlord to invoke the Tribunal’s jurisdiction?

The dispute concerned the apportionment of service charges payable by leaseholders of 38 individual flats in a building located in Southsea, Hampshire. The leaseholders were obliged to pay service charges towards the cost to the landlord (Aviva Investors Ground Rent Gp Ltd) of maintaining the building and wider estate. Within their long leases, there was a clause which provided for the payment of service charges by residential leaseholders as either a fixed percentage of the costs or “such part as the landlord may otherwise reasonably determine”.

The landlord had for many years been demanding service charge payments in proportions different to (and above) the fixed percentages provided in the leases, under the provision for re-apportionment of service charges. The leaseholders issued proceedings against the landlord seeking to challenge that practice.

Section 27A(6) of the Landlord and Tenant Act 1985 gives the First-Tier Tribunal (Property Chamber) (the FTT) jurisdiction to make decisions about service charge payments, including whether they are payable and if so, in what amounts. The leaseholders had argued that the effect of section 27A(6) was to render void the apportionment provision in the leases.

As stated above, the case had been litigated over a number of years, finally culminating in an appeal by the leaseholders to the Supreme Court. Previously, the FTT had held that the relevant provision in the leases was not void and that the re-apportionments were reasonable. Subsequently, the Upper Tribunal (Lands Chamber) ruled that the re-apportionment provision was void pursuant to s 27A(6). The landlord had appealed and the Court of Appeal allowed the appeal, ruling that the re-apportionment provision was not wholly void and that the effect of s 27A(6) was to transfer the discretion to vary the service charge proportions from the landlord to the FTT. The leaseholders appealed to the Supreme Court.

The central question in the appeal was whether section 27A(6) renders void a contractual provision in a lease which provides for a leaseholder to pay a fixed proportion of service charges or such other proportion as the landlord may determine. The leaseholders had, in relation to this, maintained that the apportionments by the landlord were unreasonable.

The Supreme Court unanimously dismissed the appeal, finding that the revised apportionments of service charges by the landlord were valid.

The court held that section 27A(6) was plainly an anti-avoidance provision, designed to preserve the jurisdiction of the FTT in determining whether service charges were reasonable in amount. It was not the effect of section 27A(6) to deprive a landlord of its managerial decision making. In other words, it did not operate to prevent the landlord from exercising a contractual right to revise and re-apportion service charges, merely to maintain the jurisdiction of the FTT in determining the reasonableness of the amounts in question. The Court found that a lease provision would however be void if it aimed to oust or limit the jurisdiction of the FTT in determining the reasonableness of a service charge, for instance a provision making the landlord’s decision binding.

The Court found that section 27A(6) was not intended to remove the ability to vary service charge apportionments. In this regard it rejected the leaseholders’ approach, finding that the effect of this would be to remove altogether the power to vary service charges. This would have the effect of having apportionment fixed for many decades over the full term of a lease, even where the apportionment might overwise be varied, for instance by the increase of additional contributing flats in a building. That would be a commercially unattractive result clearly not intended by the parties.

The result will be welcome to landlords as it confirms the contractual right where contained within a lease to re-apportion service charges and the ability of the landlord to make managerial decisions in this regard. It is also an important reminder of the jurisdiction and ability of the FTT to assess the reasonableness and amount of service charges. This will no doubt be of consequence to many residential landlords and tenants throughout the country.

Commercial leases – when time is of the essence

Posted on June 24, 2019December 18, 2024 by Joe Reeves

Where time is of the essence in relation to the exercise of a right, the failure to exercise that right within the time limit specified means that the right is lost. An example of this might be where a contractor fails to complete works by a certain deadline, in which case it may lose the contractual right to complete those works and the innocent party will be entitled to terminate the contract.

What is the position then in relation to commercial leases, in particular in relation to the exercise of a break clause, or triggering a rent review clause?

Rent Review

It is important to ascertain the position and to comply with any deadlines as failure to do so could be severe. For a landlord, failure to exercise a rent review clause in time may mean it cannot operate the rent review and loses out on a higher rent, for a potentially significant period of time. For a tenant, failure to respond to any rent review notice in time may result in the rent automatically being increased to the figure proposed by the landlord, even if unrealistic and well above market rate.

The general presumption is that time is not of the essence in relation to the operation of a rent review clause. However, this will be displaced in the following instances:

Where time is stated to be of the essence in the rent review clause;
Where the wording set out in the rent review clause is sufficiently emphatic to show that time was intended to be of the essence (for instance, where the clause states that no other date or deadline is acceptable);
Where the rent review clause contains other indications that are consistent only with time being of the essence (for instance, if the clause sets a deadline for service of a tenant’s counter-notice and then spells out the consequences if the tenant fails to meet that deadline); and
Where the lease contains other provisions evidencing that the parties intended the rent review deadlines to be strictly observed (for example, where there is an interrelationship between the exercise of a rent review clause and another deadline in the lease, such as the exercise of a break clause).

It is the general presumption that time is not of the essence in relation to rent review and therefore not uncommon for landlords to delay in the implementation of rent review, particularly in a stagnant market where they will realistically not be able to get a better rent.

Break Clauses

By contrast to rent review, time will always be of the essence in relation to the operation of a break clause, unless it is specifically stated not to be.

Failure to operate a break clause in time could have severe repercussions for a tenant wishing to vacate as the lease will continue. The Courts have traditionally taken a strict approach towards compliance with break notices by tenants and therefore it is imperative that no deadlines are missed. For instance, if a lease requires 6 months’ notice of exercise of a break clause, failure to provide 6 months’ notice will mean that the right is lost and the tenant will be unable to break the lease.

It is good practice for any tenant in negotiating a lease, to carefully consider the wording of any proposed break notice. In addition, the tenant should seek to ensure that the validity of a break notice is not contingent upon any pre-conditions, for instance the vacant possession of the property. In practice, this will not always be achievable and will be a matter of negotiation between the parties when the lease is agreed.

Where there is a dispute as to whether time is of the essence, the starting point will always be to consider the wording of the lease, as well as the factual circumstances existing between the parties at the time the lease was agreed.

Penalty Clauses in Commercial Contracts

Posted on November 26, 2018December 18, 2024 by Joe Reeves

It is a well-established principle of English law that, where one party is in breach of contract, the aim of damages is to compensate the innocent party for the loss it has suffered as a result of the breach. Unlike in other jurisdictions, particularly the US, English common law does not recognise the concept of punitive or special damages.

Commonly, in commercial contracts, parties will seek to agree terms setting out the financial extent of liability on either party in the event of default. Such terms are known as liquidated damages clauses and are often used in oil and gas, manufacturing and construction contracts, when performance of the parties’ obligations is often set within tight timescales and failure to do so can have consequences on the ongoing contract. So, for instance, parties to a construction contract may agree that, if one party fails to deliver materials on time such that the project is delayed, it will pay a fixed sum of money per day, until delivery is made. It can be beneficial to use liquidated damages clauses, for various reasons.

Benefits of liquidated damages clauses are:

They provide certainty – the parties will know the extent of their liability in the event of default.
Ease of Enforcement – there will be a specific clause for the innocent party to rely on, making enforcement much easier.
Limitation of liability – the parties will know the limit of their liability. This might be beneficial for a party in default if, for instance, the actual loss caused by its breach is higher than the sum imposed by the liquidated damages clause. This can be viewed as a benefit or a disadvantage, depending on whose side it is considered from.
Preserving the ongoing commercial relationship – where, notwithstanding the breach, the parties need to continue to work together to complete the contract, litigious proceedings are a distraction at best and are expensive and commercially very damaging. Where there is an ongoing commercial relationship between the parties, a liquidated damages clause allows them to deal with the breach quickly and effectively, so they can resume the performance of the remaining obligations of the contract.

As opposed to claims for unliquidated damages, which are often fraught with issues over causation, proof of loss and remoteness of damage, liquidated damages clauses do not carry such legal difficulties.

However, following the principle stated above, the measure of liquidated damages must be such that it is a reasonable assessment of loss and intended to have the effect of compensating the innocent party, rather than punishing the party in breach, or of simply acting as a deterrent to any breach.

Nowhere has this principle come into play more evidently than in relation to the issue of penalty clauses. Broadly speaking, a penalty clause is a contractual provision which levies an excessive monetary penalty on a party in breach of contract which is out of all proportion to the loss suffered by the innocent party. Penalty clauses are generally unenforceable in English law. In considering the issue down through the years, the Courts have differentiated between a sum representing a genuine pre-estimate of damages (an enforceable liquidated damages clause) and a sum which is out of all proportion to any damages likely to be suffered by the innocent party (an unenforceable penalty clause).

The history of the law in this area is best exemplified in the case of Dunlop Pneumatic Tyre Co Ltd – v – New City Garage [1915], in which New City Garage breached a contract with Dunlop to sell tyres at an agreed price, as well as selling Dunlop tyres to certain black-listed customers. Dunlop sued and sought to enforce a provision in the contract which provided that a fixed sum would be payable in the event of any breach of the agreement. The House of Lords dismissed Dunlop’s claim on the basis that the fixed sums were penalties, not genuine pre-estimates of loss. In reaching its decision, the Court was no doubt influenced by the fact that the contract provided for a fixed price to be paid in the event of any breach, no matter the nature of that breach. Such a clause rendered it more difficult to argue that the fixed sum was a genuine pre-estimate of loss. The Court, in reaching its decision, set out the following factors for consideration:

The sum required to be paid was an “extravagant and unconscionable” deterrent, in light of the loss likely to be suffered by the innocent party:

- It exceeded the maximum possible loss
- Different breaches on the part of New City Garage gave rise to the same penalty
- It was not a genuine pre-estimate of loss, rather it was a sum clearly in excess of the loss likely to be suffered and as a result a deterrent and so unenforceable

Over the years however, there has been a shift in the Court’s approach. The Courts have slowly but surely began to accept that there were circumstances where parties could agree in their interests to have a commercial solution to a dispute which could render an agreed fixed remedy commercially justifiable. The shift in the legal landscape culminated in the cases of Cavendish Square – v- Makdessi [2015] and ParkingEye Ltd – v – Beavis [2015], which were heard jointly in the Supreme Court.

The decisions in these cases mark a radical change in the Court’s approach to dealing with liquidated damages clauses.

The first question to consider is whether the contract imposes a primary obligation or a secondary obligation. A primary obligation is a stand-alone contractual obligation, whereas a secondary obligation is only triggered as a consequence of breach of contract and is intended to provide an agreed contractual remedy, for instance, a secondary obligation to pay a fixed sum in the event of breach of a primary obligation. The question of whether a clause is a penalty clause (and therefore unenforceable) only arises in relation to a breach of a primary obligations, when the Court may seek to review and regulate the remedy imposed by the secondary obligation.

The Court departed from the “genuine pre-estimate” rule in Dunlop. Rather, they recognised that where an innocent party could demonstrate that it was using a clause in a contract to protect a legitimate interest and the penalty is not exorbitant or unconscionable, it does not have to be a genuine pre-estimate of loss. The Court held that the true test is “whether the impugned provision is a secondary obligation which imposes a detriment on the contract breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”. Therefore, the correct analysis to be applied is now as follows:

Is the disputed contractual term a primary or secondary obligation?
If it is the latter, does the innocent party have a legitimate interest to protect?
If not, the clause will be a penalty clause and unenforceable. If so, is the remedy imposed by the secondary obligation out of all proportion to the interest to the innocent party in the contract being performed? Again, if it is, it will be a penalty clause and unenforceable.

It should be noted that the Makdessi case was complex and often it will not be easy to determine whether a clause in a contract is a penalty clause. The wording of the clause itself must be analysed, as well as the expectations and interests of the parties when they entered into the contract, in order to form an informed view of the position. Furthermore, care should also be taken when drafting commercial agreements to ensure that obligations and remedies within them can be justified, should there subsequently be a dispute over their terms.

This article is not intended and should not be relied upon for legal advice. Should you wish to discuss your matter, please contact Joe Reeves of our Litigation Department on 0207 481 6383 or joe.reeves@wellerslawgroup.com.