Spoiler – no, a landlord cannot conclusively mark its own homework anymore.
In a decision potentially of relevance to all contracts which allow one party to certify matters of fact and law conclusively, the Supreme Court has today held that whilst such a certificate may determine the amount payable by the other party, it is not determinative of the underlying liability, which that paying party can then challenge later. This is the judgment of the Supreme Court in Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd.
Background
The case concerned a landlord's certificate as to service charges payable by a tenant under its lease. As is fairly standard, the lease provided that throughout the year the tenant would make on account payments of service charge. At the end of the year, the lease provided that the landlord should provide the tenant with "a certificate as to the amount of the total cost and the sum payable by the tenant and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive." The tenant was then obliged to pay the landlord the additional balance, being the difference between those on account payments and the sum payable according to the certificate.
The lease also provided that the tenant was not permitted to withhold rent (which was defined to include service charges) or claim a set-off or counterclaim.
Here, the tenant refused to pay the service charge balance and the landlord sought summary judgment of the circa £400,000 debt, relying on the certificate and the fact that the tenant could not withhold payment. The tenant disputed the debt, arguing that the amount demanded was not properly due under the lease. It argued that the certificate was conclusive only to the amount of costs incurred by the landlord but that it was not conclusive as to the tenant's service charge liability.
Court process
The High Court twice ruled that the certificate was conclusive only as to the amount spent by the landlord on the services and expenses - but not to the tenant's liability, i.e., whether those amounts were properly due under the lease as a matter of principle because this was a matter of law and for the courts to determine - not the landlord. In short, the landlord could not mark its own homework.
The landlord appealed. The Court of Appeal decided in favour of the landlord, ruling that the certificate was conclusive on both issues and so the landlord could mark its own homework. The Court of Appeal said this decision was based on its interpretation of the express words used in the lease and there was no justification to imply words into the lease.
The tenant then appealed to the Supreme Court. By a majority of 4 – 1, the Supreme Court has given a judgment which represents a compromise between the landlord and tenant's positions, deciding that the certificate is conclusive as to the amount to the "service charge sum payable by the tenant but not as to the underlying liability for the service charge."
So, the tenant is bound to pay the amount set out on the certificate BUT the tenant can still challenge that liability at a later stage and argue that the costs were not properly charged by the landlord. The tenant is not therefore limited to relying on reasons of manifest or mathematical error or fraud as were set out in the lease. The Supreme Court referred to this compromise as a "pay now, argue later" approach. The Supreme Court said that this interpretation was consistent with the express wording in the lease and allowed the different provisions of the lease to fit together avoiding uncommercial consequences.
Comment
Whilst this situation will be preferable to tenants than the Court of Appeal decision, it still leaves the tenant liable to pay the service charge up front and then incur the costs of a challenge, leaving the tenant starting on the back foot. For landlords and other certifying parties, whilst this decision may protect their cash flow and their immediate right to the money, it opens the door to many more legal challenges later down the line with uncertainty as to whether or not they can keep that money. The intended purpose of conclusive certification clauses was to limit time consuming and costly disputes. That seems no longer to be the case.