Service charge interpretation and the cautionary tale of Arnold v Britton

In the recent case of Arnold v Britton[1], the Supreme Court considered the meaning of a service charge clause in a long lease which would result in the tenant paying service charges of over £550,000 per annum by 2072.

The Supreme Court held that whilst the provision might lack commercial purpose now, the wording of the lease was sufficiently clear and they would not rewrite a bad bargain. Lord Neuberger PSC commented:

"While commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed."

The case

This case concerned 21 lessees who held 99 year leases of chalets on a leisure park. Each lease contained a covenant which differed slightly but with the effect that the lessee was to pay "a proportionate part of the expenses and outgoings incurred by the lessors in the repair, maintenance, renewal and the provision of services [as set out in the lease] in the yearly sum of £90" and, pursuant to clause 3(2) of the lease, an annual 10% compound increase on that service charge.

By 2011 the lessees of the chalets were paying a service charge of over £2,700 per annum, which would increase to over £550,000 per annum by 2072. The lessees argued that an interpretation of the clause which required a fixed sum payment resulting in such an absurdly high annual service charge could not be right and that clause 3(2) should be read as requiring the lessees to pay a variable sum, "being a fair proportion of the costs of providing the services with the specified sum being no more than a cap on the maximum sum payable".

The Supreme Court rejected the lessees' argument and held that the wording of clause 3(2) was clear and the court would not depart from the natural meaning.

Lord Neuberger stated in his judgment that "commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language".

Comments

Where lease wording is ambiguous the courts are often minded to take a commercial approach in deciding how best to interpret the clause in dispute. However, as demonstrated in this case, where the wording is clear there is no reason to depart from the natural meaning, even if it results in a bad bargain for one party.

Further, the leases were granted in the 1970s when there were high levels of inflation in the UK, therefore the 10% increase on service charge could not have been said at that time to have lacked commercial purpose. Just because the lessees did not like the outcome some years further down the line, this did not provide a just reason for the court to reinterpret the meaning of the lease clause.

There are many cases on ambiguous lease wording, however where the lease wording is clear, as in this case, even if it is not what the parties (or at least one party) intended the court will be unwilling to re-interpret the lease wording. Care must therefore be taken when drafting leases that the terms are sufficiently clear and unambiguous and regard is given to what may happen in the future – a lease term that seems reasonable now might not be reasonable in 70/80/90 years.

[1] [2015] UKSC 36