This week we cover a Court of Appeal ruling on commercial service charges, a reminder of points for landlords to consider on Company Voluntary Arrangements, and the latest case on the vexed question of when a landlord is a re-seller of water. We also include our usual links to recent insights from colleagues around the firm and some positive news.
Service charge certificate conclusive and binding
The Court of Appeal's decision in Sara and Hossein Asset Holdings Ltd v Blacks Outdoor Retail Ltd [2020] EWCA Civ 1521 concerned a clause in a commercial lease which provided that the landlord’s certificate as to the service charge payable by the tenant was conclusive in the absence of manifest or mathematical error or fraud.
A dispute arose when the landlord served a service charge certificate certifying that over £400,000 was due, which was substantially more than the £55,000 that had been demanded for the previous year. The tenant disputed the charges on various grounds and so the landlord issued a money claim and an application for summary judgment arguing that the lease provided that the certificates were "conclusive" and therefore the tenant could not pursue its defences.
The High Court had dismissed the summary judgment application and distinguished between the issues of (i) the total costs of the services (as to which the certificate was conclusive) and (ii) whether the cost fell within the scope of the service charge payable under the lease (as to which the certificate was not conclusive).
The Court of Appeal disagreed, ruling that on the ordinary meaning of the language used it was not possible to separate those two elements. David Richards LJ said that treating the categorisation of the relevant services as not being conclusively determined by the landlord's certificate (subject to mathematical or manifest error) would have required express wording to that effect and there was no such express wording or necessary implication in the lease.
Richards LJ acknowledged that the effect of such a finding would "make the landlord judge in his own cause" but held that it is not the function of contractual construction to save the tenant from an imprudent term and that the landlord was entitled to summary judgment.
Whilst this decision ultimately turned on the specific terms of the lease, it is a salutary reminder of the importance of ensuring that parties understand the operation of the service charge provisions in commercial leases before they are entered into. It also highlights an apparent gulf between service charge disputes in the residential context (where there is a statutory right to challenge the reasonableness of service charges) and the commercial context (where matters rest entirely on the terms of the lease).
Company Voluntary Arrangements – a recap for landlords
Café Nero and Clarks became the latest companies to announce company voluntary arrangements (CVAs) over the last week. With more tenants likely to be adopting the same approach, landlords need to be increasingly alert to any CVA proposals and of the importance of acting early.
A CVA is implemented under the supervision of an insolvency practitioner and allows a financially distressed company to avoid potential terminal insolvency proceedings by coming to a binding agreement or compromise with their unsecured creditors. CVAs bind all unsecured creditors of a company if 75% of creditors by value who respond vote in favour of the proposals, unless those voting against it include more than 50% of the total value of creditors unconnected to the company whose claims have been admitted for voting.
CVA's are of particular relevance to landlords because they enable tenants to restructure their rent obligations. Where a landlord is bound by the CVA, all rent arrears will be caught by the terms of the CVA, as well as other sums falling due under the lease. It is therefore imperative that landlords act quickly when they become aware that a CVA is being proposed by one of their tenants.
It may be possible for a landlord to successfully challenge the CVA on the grounds that it is unfairly prejudiced if it can be shown that the landlord would achieve a better outcome for itself in a formal insolvency process. In practice, it is often beneficial to liaise with other creditors, many of whom may be landlords in a similar position, to potentially vote against the CVA proposals or otherwise bring pressure to bear on the tenant to change its proposals.
Forfeiture may be the appropriate course of action in some circumstances. Landlords should also check whether any guarantors can be pursued.
In short, action and advice should be taken quickly.
Wet, wet, wet
The Mayor & Burgesses of the Royal Borough of Kingston-Upon-Thames v Moss (2020) EWCA Civ 1381
The key issue in this case was whether a local authority that collected Thames Water's water charges from its tenants as part of the rent was actually a "re-seller" for the purposes of the Water Resale Order 2006. This is important because the 2006 Order imposes maximum charges on re-sellers and only allows modest administration charges.
This was the local authority's appeal of the High Court decision that it was a re-seller. The appeal was dismissed and it was upheld that the local authority was a re-seller and therefore bound by the maximum charges provisions. As such, it had overcharged tenants because it had not passed on the benefit of the discounted water rates paid by way of commission for collecting the charges as part of the rent. It followed that although Mr Moss had been charged the same sum that he would ultimately have paid to Thames Water, he was nevertheless charged in excess of the cap set by the Water Resale Order because the discounts were not passed on and so he was entitled to repayment of the overpaid amount.
This case reaffirms the legal position as decided in Jones v Southwark LBC [2016] EWHC 457 (Ch) and is of significance because it means that other landlords who had entered into similar arrangements with Thames Water are likely to be deemed as a re-seller. It should be noted however that it was accepted that a variation entered into between RB Kingston and Thames Water in 2017 had effectively remedied the position, such that RB Kingston was not deemed a re-seller and there had been no overpayment from 2017 onwards.
The Court of Appeal's decision emphasised that the answer to the question of whether a landlord is an agent or re-seller depends in each case on the interpretation of the agreement between the landlord and water company. For example, unlike this case and Jones v Southwark, in Rochdale Boroughwide Housing Ltd v Izevbigie (2017) EWHC 790 (Ch), the landlord successfully argued that it was not a 're-seller' based on the contractual terms of its agreement with United Utilities. As such, it is imperative that landlords understand whether their contract with a water company makes them an agent or reseller, if water charges are subsequently collected from tenants as part of the rent.
Insights from around the firm
- The Charter for Social Housing Residents: Social Housing White Paper – at first glance
- Quarterly Housing Update – Autumn 2020
- Webinar: Green and sustainable finance – Market update and sustainability linked loans
Positive news
- Pfizer and BioNTech have released further information in relation to their coronavirus vaccine to state that it appears to protect 94% of adults over 65 years old. Whilst the final data is yet to be released, it is a positive step in the right direction.
- Prime Minister Boris Johnson has made what is hoped to be a positive environmental step and has stated that from 2030 in the UK, new cars and vans will not be solely powered by fossil fuels. The move is part of what Mr Johnson says is a "green industrial revolution".
- Captain Tom Moore has become the oldest person to star on GQ's cover at age 100 in recognition for his volunteering efforts for the NHS. What started as an aim to raise £1,000 for NHS charities instead raised over £32 million.
- Further to Marcus Rashford's successful campaigns for free school meals, the soccer star is now working with Macmillan Children's Books to launch a book club to encourage children to get into reading and have access to books.
