Sara & Hossein Asset Holdings Ltd. v Blacks Outdoor Retail Ltd. [2023] UKSC 2

[Music] Hello and welcome to another edition of the UK Law Weekly podcast with me, a host, Marcus Cleaver. This week we are going to be looking at the case of Sarah and Hussein Asset Holdings Ltd and Blacks Outdoor Retail Ltd. The citation for this case is 2023 UKSC2. In this case is about a landlord and tenant relationship in a commercial context. Blacks Outdoor Retail rented commercial property from Sarah and Hussein and to two successive leases from 2013 and then 2018. The thing about those leases that is relevant to this case is that the landlord should provide a certificate each year which sets out the service charge payable by the tenant. Crucially it says that the landlord should provide a certificate, quote, "as to the amount of the total cost and the sum payable by the tenant," end quote. And that such a certificate would be crucial in the absence of, quote, "manifest or mathematical error fraud." Problems arose when Blacks refused to pay the service charge for the years 2017 to 2018 and 2018 to 2019 because they argued the service charge was excessive and included unnecessary items and expenses that were not properly due under the lease. Sarah and Hussein brought a claim on the basis that the sum was conclusive and payable subject only to the cited defences of fraud or error found in the clause. On the other side, Blacks argued that the certificate was only conclusive insofar as the cost incurred by the landlord but not conclusive as to Blacks own liability for the service charge. The original claim and appeal in the high court were dismissed, but then Sarah and Hussein's appeal to the court of appeal was allowed. Blacks appeal to the Supreme Court and that is where we pick things up. In a somewhat unusual turn of events, the justices disagreed with the interpretation provided by both sides. Sarah and Hussein, the landlord's, argued that the certificate is conclusive as to the service charge liability, subject only to the defences of fraud or mathematical error. Based purely on the wording of the clause we mentioned earlier, that interpretation does make sense, but it is inconsistent with the other provisions of the lease. The overall lease makes it clear that the service charge that is payable depends on the overall proportion of the premises that the tenant rents. There is then a detailed dispute resolution mechanism and the lease to properly work out that proportion and may ultimately alter the amount payable by the tenant. As such, the certificate simply cannot be entirely conclusive as to the amount that is due to be paid. Furthermore, the fact that the tenant has a right under the lease to inspect receipts, invoices and other evidence relating to the service charge for up to 12 months after the certificate is issued also does not sit well with the interpretation of that single clause provided by Sarah and Hussein. If the only legitimate defences with cases of fraud or mathematical error, then those inspection rights would be relatively meaningless. There are a lot of issues that might come up in those receipts and invoices that would be grounds for an arguable dispute of the sum payable. And yet the interpretation by the landlord here would give no recourse to actually dispute any questions that might arise. Instead, the landlord is basically proposing a system whereby whatever they say goes, an attendant is not even able to make arguments in their own favour. The Justices described this as a pay now argue never regime. And that is unsustainable because it is a well-established legal principle that when interpreting a contract, there is a presumption that neither party intends to abandon any remedies which arise by operation of law unless there are very clear words rebutting that presumption. On the other hand, blacks, the tenant in this case, argued that the certificate is conclusive only as to the landlord's costs and not as to the sum payable by the tenant. However, this interpretation was not convincing for the Justices either because it simply does not marry up with what the wording of the disputed clause in lease says. As a reminder, that clause says that the certificate is conclusive as to both the amount of the total cost as well as the sum payable by the tenant. Furthermore, Sarah and Hasein make a good point when they argue that allowing blacks to challenge the payment of the service charge undermines the commercial purpose of enabling the landlord to recover costs and expenses with minimal delay and dispute. What blacks are effectively arguing for is an argue now pay later regime and that just isn't sustainable either. Instead, the Supreme Court came up with its own resolution to this problem. They held that the certificate is conclusive as to the amount that blacks is required to pay, subject only to the permitted defences of fraud and mathematical error. This ensures that Sarah and Hasein will get their money regularly and on time, thereby protecting their cash flow. Nevertheless, the fact that the sum has been paid should not preclude the tenant from disputing the amount at a later date. That ensures that the right to inspect receipts and invoices is not meaningless and that any dispute can be pursued to their full extent. This creates a "pay now" argue later regime that is fairly common in commercial contracts. It also means that the interpretation of the clause works within the wider context of the lease agreement. As a result, the appeal was dismissed but blacks are well within their rights to now pursue a counter claim. Overall, I think that this is a sensible approach but not all of the justices agreed. Lud Briggs gave a dissenting judgment where he agreed with the interpretation provided by the landlord. He was not impressed with the reasoning of the majority and found it to be incompatible with the wording of the clause. In particular, he found that just because there is a dispute resolution mechanism in relation to proportion adjustment, this does not mean that the landlord's certificate is not conclusive in respect of all other aspects of the tenant's service charge liability. Furthermore, the inclusion of inspection rights to invoices and receipts does not necessarily mean that the tenant has wider rights when it comes to challenging the service charge. It is perfectly reasonable that the inspection rights should only be there for blacks to investigate potential fraud on mathematical error. Finally, Lud Briggs also pointed out a broader commercial reason why Sarah and Hasein should exceed on their interpretation. Disfeat over service charges can often result in complex and costly litigation and so it is perfectly reasonable for them to want to limit the grounds on which such a claim could be made to fraud on mathematical error. Now, I think those are all solid points, but for my mind they aren't without problems of their own. For a start I think it is true that the mere existence of a dispute resolution mechanism in relation to proportion adjustment is not a strong argument for there being a mechanism in terms of the service charge liability as well. In fact, I think it is probably the weakest part of the majority's judgment, but their overall argument does not purely rest on this rather loose connection alone. Instead, it is also based on the broader legal principle of access to legal remedies and that is much more persuasive. Secondly, I think it is fair to imply that a right to inspect receipts and invoices points to a wider right in terms of investigating other grounds for dispute in relation to the inspection charge. Potential fraud and mathematical error are such limited grounds that the right just doesn't make sense for it to solely exist for that purpose alone. Finally, it is true that in the broader commercial context these disputes over service charges can be complex and it can be costly. Bloodbriggs is correct to be wary of that, but it shouldn't take away from the right of a tenant to a remedy when there is a legitimate ground for disputing the sum. His judgment would have created a severe imbalance between the landlord and tenant. In a relationship where the landlord already has much of the power and the right to specify the terms of an agreement. This is not to say that judges should always find in favour of tenants in any dispute, but when there is an argument that is open to interpretation, it is reasonable to expect a court to consider the context of the relationship and offer an interpretation that is equitable across the board. That is what the majority managed to achieve here in a way that remains consistent with the wording of the lease. Thank you very much for tuning into this podcast and thanks as over to bentsound.com who provide the theme music. Quick reminder before we go that if you would like to support the podcast and help to keep it out free, then you can subscribe to my newsletter and earn yourself some nice perks including more content from me each week and free ebook on how to answer essay questions on a law degree. This week in the newsletter we discussed the Nadeem Zahawi controversy and the legal reasons why reporting on the news was initially so difficult. If that sounds like something you're interested in then check out the link in the description to this podcast episode. Anyway I'll be back with another episode next week, but for now, bye! [Music]