The million pound service charge: case law review on service charge and contractual interpretation

News - 28/10/2015

The case of Arnold v Britton and others [2015] is a cautionary tale involving holiday chalets in South West Wales and a service charge liability that will eventually increase to £1M per annum.

The tale is set in the seemingly peaceful surroundings of Oxbridge Leisure Park in South West Wales, which plays host to a collection of holiday chalets. In the 1970s, a number of these chalets were let on long leases, each for a term of 99 years and each with a covenant by the landlord to provide services and a reciprocal covenant by the tenant to pay a service charge.

A typical example of the relevant service charge mechanism in each lease is:
“To pay to the Lessor without any deduction in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for the first year of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent year or part thereof”.

The case turned on the interpretation of this clause.

The landlord’s interpretation was that each tenant would pay an initial annual service charge of £90 which increased at a compound rate of 10% every year after the first year. Although this seems simple enough, it would have disastrous consequences for the tenants.

Not all of the service charge mechanisms provided for an annual fixed increase. Some provided for a triennial increase. To put that in context, this meant that, by 2072, those with a triennial increase would be paying around £1,900 per annum whereas those with the annual increase would be paying over £1,000,000 per annum.

Those tenants in the annual increase category argued that the leases should all be on the same terms and, therefore, it was necessary to imply a term into their leases to mirror those leases with the triennial increase.

The dispute went all the way to the Supreme Court, but the tenants found little sympathy there. By a majority of 4 to 1, the tenant’s argument was rejected. In the leading judgment, Lord Neuberger commented that:-

• The importance of the language of the provision should not be diminished by placing reliance on commercial common sense.

• Commercial common sense cannot be invoked retrospectively to facts arising after the date of the contract. It is only relevant to ascertaining how matters would or could have been perceived at the date of the contract. Just because an arrangement has resulted in bad or disastrous consequences, that does not justify departing from the natural meaning of the wording used.

• It is not the court’s function to relieve a party from the consequences of imprudence or poor advice.

• There is no special principle of interpretation that service charge clauses are to be construed restrictively. The usual principles of interpretation apply.

This case does not create any new law. However, it provides a salutary reminder of the rules of contractual interpretation and the importance of choosing words carefully. This is particularly important in the case of leases, which, by their nature create long term contractual relationships and obligations.

At Morrisons Solicitors, our property litigation team is able to advice on issues arising out of service charge and contractual interpretation. For any enquiries, please contact Graham Halsall – https://www.morrlaw.com/team/graham-halsall/ call 01737 854 577 or email [email protected].

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