The service charge crisis ... pay now, argue later?

20 March 2023

Whilst many will be familiar with the cost of living crisis, fuelled by rising interest rates, leaseholders will be all too familiar with the impact this has had on service charges.

Higher expenses with the heating and lighting of common parts combined with increases in building costs have fuelled the rise in service charges. The service charge crisis has resulted in many leaseholders challenging service charge demands as being unreasonable and extortionate.

Entitled to refuse to pay

It was only a matter of time before the courts would be invited to consider whether a leaseholder was entitled to refuse to pay service charges. Therefore, the Supreme Court's decision in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd was highly awaited.

The lease, in this case, contained the usual provision for the rent and additional rent (comprising service charges and insurance) to be paid without set-off or counterclaim. The service charge schedule provided for the landlord’s certificate of the amount, that it had incurred on services, to be "conclusive" in the absence of mathematical or manifest error or fraud.

property dispute then arose when Blacks (the tenant) refused to pay Sara (the landlord) the entire amount of the service charge on the basis that it was excessive and included unnecessary items that did not fall within the landlord's repairing obligations.

The landlord stated that the right to set-off, off was excluded by the lease and the service charge certificate was conclusive as to both the costs it incurred and the sums payable. Thus, the landlord argued that the tenant had agreed to accept the charges incurred in the absence of error or fraud.

The Supreme Court held that the landlord's certificate was conclusive as to the obligation on the tenant to make a payment, but this did not prevent the tenant from raising a dispute at a later stage, therefore adopting a "pay now, argue later" approach.

The court considered that this met the landlord's commercial interest in preserving its cash flow and not being out of pocket for expenses it had already incurred whilst allowing the tenant to recover or challenge charges following payment.

Service charge provisions

This case serves as a reminder that tenants should be careful about agreeing to a service charge provision where the amount is conclusive, particularly given the increase in service charges. Undoubtedly, the case should also serve as a reminder to landlords that just because a tenant has paid a demand, this does not stop them from challenging the charges at a later date.

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