Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd

A commercial lease certificate stated to be “conclusive” as to service charges may, on its proper construction, determine the amount payable on the payment date without finally determining the tenant’s underlying liability. Its effect depends on the language and scheme of the lease, read objectively as a whole through an iterative comparison of text, context and consequences.

Where the certificate creates a payment obligation subject only to manifest or mathematical error or fraud, the tenant must pay first but may later claim repayment of charges outside the lease or otherwise excluded. A no set-off clause prevents the counterclaim from delaying payment. Clear language is required to extinguish the counterclaim itself. Manifest error means an obvious error admitting no reasonable difference of opinion and demonstrable without extensive investigation.

Sara & Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd concerned service charges under two commercial leases. The landlord certified charges exceeding £400,000 for one service-charge year. The tenant contended that the certificates included unnecessary, out-of-scope and excluded expenditure.

A Deputy Master dismissed the landlord’s application for summary judgment: [2019] EWHC 3414 (Ch). A Deputy High Court judge dismissed the landlord’s appeal: [2020] EWHC 1263 (Ch); [2020] L & TR 30. The Court of Appeal allowed a further appeal, granted summary judgment for £407,842.77 and remitted the counterclaim: [2020] EWCA Civ 1521; [2021] 2 P & CR 18.

The central issue was whether the landlord’s certificate was conclusive only as to costs incurred, conclusive as to the tenant’s underlying liability, or conclusive merely for the purpose of requiring immediate payment while preserving a later challenge to liability.

1. Appeal allowed in part by a majority of four to one. Lord Hamblen, with whom Lord Hodge, Lord Kitchin and Lord Sales agreed, held that the Court of Appeal had correctly entered summary judgment for the landlord. The certified sum was immediately payable. The certificate did not, however, prevent the tenant from pursuing its counterclaim concerning underlying liability.

2. Commercial contracts must be interpreted objectively and as a whole. Interpretation is a unitary and iterative exercise in which the language, contractual context and consequences of competing constructions are checked against each other. The majority applied the principles stated in Wood v Capita Insurance Services Ltd [2017] UKSC 24.

3. The permitted challenges for manifest or mathematical error or fraud were narrow. Manifest error denotes an error which is obvious or readily demonstrable without extensive investigation and which admits of no reasonable difference of opinion. Unless the contract confines the inquiry to the certificate itself, extrinsic evidence may be considered. The necessary investigation must ordinarily remain limited in time and extent and cannot depend on a full trial.

4. Neither party’s proposed construction reconciled the whole lease satisfactorily. Treating the certificate as final on underlying liability fitted its immediate wording but conflicted with the inspection rights, the separate expert-determination machinery and the presumption against abandoning legal remedies without clear words. Treating it as conclusive only as to expenditure incurred deprived the words concerning the “sum payable by the tenant” of effect and impaired the landlord’s cashflow protection.

5. The certificate was therefore conclusive for the payment machinery in Schedule 6. It established the sum payable on the relevant date, subject only to the permitted defences. It was not conclusive as to the parties’ underlying rights and liabilities under the lease. The tenant had to pay first but could later seek repayment by establishing that charges were outside the contractual scope, expressly excluded or otherwise not due.

6. The no set-off clause prevented the tenant from withholding the certified sum or using its counterclaim to obstruct payment. It also made a stay pending resolution of the counterclaim most unlikely. It did not extinguish the counterclaim or determine underlying liability; much clearer language would have been needed for that effect.

7. Lord Briggs dissented. Applying the restriction on using commerciality to rewrite contractual language stated in Arnold v Britton [2015] UKSC 36, he considered that the lease contained no linguistic basis for a “pay now, argue later” construction. He would have held the certificate conclusive as to liability, subject only to the specified grounds, and dismissed the appeal entirely.

1. United Kingdom Supreme Court: By a majority of four to one, the court upheld summary judgment for the landlord but held that the tenant could pursue its counterclaim concerning underlying liability: [2023] UKSC 2.
2. Court of Appeal: Allowed the landlord’s appeal, granted summary judgment for £407,842.77 and remitted the case to the Chancery Division to determine any remaining counterclaim issues: [2020] EWCA Civ 1521; [2021] 2 P & CR 18.
3. High Court, Chancery Division: A Deputy High Court judge dismissed the landlord’s appeal from the Deputy Master: [2020] EWHC 1263 (Ch); [2020] L & TR 30.
4. High Court, Chancery Division: The Deputy Master dismissed the landlord’s summary-judgment application and ordered the tenant to pay £150,000 into court: [2019] EWHC 3414 (Ch).