Summary

Richard Fowler acted for the successful appellant landlord, Sara, before the Court of Appeal and at first instance in a dispute over service charges claimed pursuant to a “conclusive certification” clause in leases of commercial premises. The reasoning of the Court of Appeal’s judgment is also applicable in the wider context of “conclusive certification” and “conclusive evidence” provisions in commercial contracts, including guarantees.

Richard was instructed by Richard Bartle and Jhoanna Alvarado Silva at Pinsent Masons LLP.

Facts

Sara was the landlord and Blacks the tenant of retail premises in central Liverpool under two successive leases. The leases contained identical provisions for the supply of services by Sara and the payment of service charge by Blacks. As is common in such provisions, Blacks was required to make quarterly payments on account, while at the end of each service charge year Sara was to serve a certificate of the actual service charge due for that year; a balancing payment would then be made either way as necessary.

A dispute arose over the amount of service charge payable for the years 2017/18 and 2018/19. Sara brought a claim against Blacks for substantial arrears of service charge, while Blacks disputed various items claimed and advanced a detailed set-off and counterclaim. By the time the case came before the Court of Appeal, Sara had served certificates for the service charge it said was due for both years.

The case turned on the construction of two clauses in the leases. The first provided, in relation to service charge, that Sara “shall … furnish to [Blacks] … a certificate as to the amount of the total cost and the sum payable by [Blacks] and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive” (the Certification Provision), while by the second, Blacks covenanted “… not to exercise or seek to exercise any right or claim to withhold rent or any right or claim to legal or equitable set-off or counterclaim (save as required by law)” (the No Set-Off Provision). Blacks did not contend that the certificates served by Sara were vitiated by manifest or mathematical error or fraud.

Sara applied for summary judgment, relying on the No Set-Off Provision and the Certification Provision. At first instance ([2019] EWHC 3414 (Ch)), the Deputy Master held that the service charge was within the definition of “rent” in the No Set-Off Provision. Even so, the Certification Provision was only “conclusive” with regard to the costs incurred by Sara, in effect “routine accounting matters”, but not as to the question of whether particular works fell within Sara’s obligations to provide services, and hence whether Blacks was obliged to pay for them; those were matters for the court. On Sara’s construction, he observed, Sara as landlord would be able to determine conclusively significant issues of law or principle. Blacks would only be able to challenge Sara’s decisions on the limited grounds of manifest or mathematical error or fraud; Sara would thus effectively be judge in its own cause. Hence Sara was not entitled to a money judgment on a summary basis for the arrears.

On Sara’s first appeal ([2020] EWHC 1263 (Ch)), the Deputy Judge upheld the Deputy Master’s decision on similar reasoning.

Held

On Sara’s second appeal, the Court of Appeal reversed the decisions below. David Richards LJ, giving the sole judgment, observed that the Certification Provision stated that Sara was to furnish a certificate “as to the amount of the total cost and the sum payable by [Blacks]”, and that the certificate was expressed to be “conclusive” unless vitiated by manifest or mathematical error or fraud, none of which were alleged by Blacks. The natural meaning of the language of this provision was that the certificate was conclusive as to both the amount of the total cost and the sum payable by Blacks.

While it might have been imprudent of Blacks to agree to a provision in these terms, in particular where the leases contained no cap on liability for service charge, David Richards LJ observed that it was not the function of contractual construction to save a party from an imprudent term, citing Lord Neuberger’s comments to that effect in Arnold v Britton [2015] UKSC 36 at [20]. The term made commercial sense for Sara, as it meant that it would avoid potentially protracted and very detailed arguments over what works and expenses did and did not fall within the definition of service charge.

Sara was thus entitled to summary judgment on its claim. If the parties were unable to agree whether Blacks’ counterclaim could proceed, in whole or in part, in the light of that decision, it would be remitted to the Chancery Division.

Note
Blacks is currently seeking permission to appeal to the Supreme Court.