Arnold v Britton and others

Landlord and tenant – Service charge – Construction of lease – Appellants holding long leases of chalets in respondent’s leisure park on terms providing for annual increase in service charge – Relevant service charge provisions referring to annual sum and providing for subsequent percentage increases – Whether properly construed as variable service charge subject to cap or fixed charge with annual increases – Fixed charge approach leading to extremely high charges by end of lease – Whether such result to be rejected as contrary to commercial common sense – Appeal dismissed The respondent operated a leisure park that contained 91 holiday chalets let on long leases, with restrictions limiting use to half of the year. A dispute arose between the respondent and the appellants, as the lessees of 25 of the chalets, as to the proper interpretation of the service charge provisions in the leases. There were various different versions of the relevant lease. One defined the service charge payable by the lessee as “a proportionate part of the expenses and outgoings incurred by the Lessors 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 three years of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent three year period or part thereof.” Other versions were worded in a similar manner although some provided for an annual, rather than three-yearly, increase. On an application to the court for declaratory relief, the respondent contended that the service charge provisions obliged the lessees to make a fixed payment of £90 in the first year, with compounded increases of 10% thereafter. The appellants argued that the charge was not a fixed amount but was instead a variable service charge within the meaning of section 18 of the Landlord and Tenant Act 1985, with the amount to vary according to the respondent’s costs in each year, but subject to a cap of £90 in the first year, uplifted by 10% in later years. They pointed out that the respondent’s interpretation would result in huge service charge payments; for a lease on an annual compounded uplift, the annual service charge for 2012 would be £3,060, rising to more than £1m by the last year of the 99-year lease term. The county court made declarations in favour of the appellants, holding that the respondent’s interpretation would offend commercial common sense. That decision was reversed in the High Court, which held that a fixed charge, while potentially having the disadvantage of over-compensating or under-compensating a landlord for its costs, did not lack commercial purpose: see [2012] EWHC 3451 (Ch). That decision was subsequently upheld by the Court of Appeal: see [2013] EWCA Civ 902; [2013] 3 EGLR 37; [2013] EGILR 25. The appellants appealed to the Supreme Court. Held (Lord Carnwath dissenting): The appeal was dismissed. (1) When interpreting a commercial contract, by reference to the parties’ intentions as a reasonable person with the background knowledge available to the parties would have understood them to be, the court would focus on the meaning the relevant words in their documentary, factual and commercial context, but disregarding subjective evidence of any party’s intentions: Prenn v Simmonds [1971] 1 WLR 1381, Reardon Smith Line Lid v Yngvar Hansen-Tangen (t/a HE Hansen-Tangen) [1976] 1 WLR 989, Bank of Credit & Commerce International SA (in liquidation) v Ali [2001] UKHL 8; [2002] 1 AC 251, Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101; [2009] 3 EGLR 119 and Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900 applied. No special rule of interpretation applied to service charge clauses so as to require them to be construed restrictively: McHale v Earl Cadogan [2010] EWCA Civ 14; [2010] 1 EGLR 51; [2010] 14 EG 110 considered. (2) When construing the contractual provisions, reliance on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which was to be construed. The less clear the wording, and the worse drafted the provision, the more ready the court might be to depart from its natural meaning, but the court should not embark on an exercise of searching for drafting infelicities in order to facilitate a departure from the natural meaning. The mere fact that a commercial arrangement, if interpreted according to its natural language, had worked out badly or even disastrously for one of the parties was not a reason for departing from the natural language. Commercial common sense was relevant only to how the parties, or reasonable people in their position, would or could have perceived matters at the date when the contract was made, and was not to be invoked retrospectively. Moreover, even ignoring the benefit of hindsight, the courts should be slow to reject the natural meaning of a provision as correct simply because it appeared to be a very imprudent term for one of the parties to have agreed. It was not unknown for people to enter into arrangements which were ill-advised, but it was not the function of the court when interpreting an agreement to rewrite it to relieve a party from the consequences of his imprudence or poor advice. (3) The natural meaning of clause 3(2) was clear. The first part of the clause stipulated that the lessee was to pay an annual charge to reimburse the lessor for the costs of providing the services which he covenanted to provide, while the second part identified how that service charge was to be calculated, namely as a fixed sum, with a fixed annual increase, rather than a sum dependent on the costs to the lessor of providing the services. That approach was readily explicable as intended to avoid problems between the lessor and lessee over the calculation of the charge and take into account the parties’ assumption that the cost of providing the services would increase owing to inflation. The reference in the first part of clause 3(2) to a lessee paying a “proportionate part” of the cost of the services did not displace the natural meaning of the second part, even though the fixed annual increase looked likely to result in service charges for each of the appellants which exceeded the cost of providing services to the whole park. The purpose of the second part was to quantify the sum payable by way of service charge, and the fact that, in future, its quantum might substantially exceed the parties’ expectations at the time when the lease was granted was not a reason for giving a different meaning to the clause. Although there were small errors in the drafting, nothing had gone significantly wrong with the wording of clause 3(2). To view the two parts of clause 3(2) as mutually inconsistent in their effect, so as to enable the court to reject or modify one part in favour of the other, would involve the court impermissibly inventing a lack of clarity in the clause as an excuse for departing from its natural meaning in the light of subsequent developments. It was not inconceivable, from a commercial point of view, that a lessee would have agreed a fixed service charge of the kind for which clause 3(2) provided, at least in the 1970s and 1980s. Although it had turned out to be imprudent, a lessee could have taken the view that a 10% annual fixed rate of increase, on a fixed initial service charge, was attractive or at least acceptable at a time when annual inflation had been running at a higher rate for a number of years. That commercial justification comfortably applied to most of the leases. While it became more difficult to invoke the further one moved on from 1981, the last year when inflation had been above 10%, and was unconvincing in respect of four of the leases whose service charge provisions had been amended in 2000 when annual inflation was running at about 3%, that did not justify reaching a different result in respect of those leases. Three of the leases were easily explicable on the grounds that the variation was agreed by a lessee who was closely connected with the lessor but who subsequently assigned the lease. As to the fourth lease, while the variation was an improvident thing to have agreed, that was not enough to justify the court in rewriting the contract under the guide of interpreting it. This was not a case where one of the parties had done something which was not contemplated by the contract. The 10% annual increase was included to allow for a factor, namely inflation, which was out of the control of either party. There was no principle of interpretation which entitled the court to rewrite a contractual provision simply because the factor for which the parties catered did not seem to be developing in the way which they had expected: Aberdeen City Council v Stewart Milne Group Ltd [2011] UKSC 56; 2012 SCR 114 distinguished. (4) So far as the leases contained a provision requiring any other leases to be granted subject to identical or similar obligations, that might have given rise to a letting scheme enforceable between lessees as well as between lessor and lessee. However, it did not give rise to any implied term mitigating the effect of clause 3(2) in those leases which provided for an annual, rather than three-yearly, 10% increase. There were various problems with the “implied term” argument, not least was that the suggested term would be inconsistent with the express terms of the lease. The suggested implied term, that the lessor would not ask anything of the lessee that had not been asked of lessees of other chalets under leases past or future, would involve there being a 10% increase only every three years, as with the other leases, contrary to the express provision in the lease for an annual increase in that amount. Per curiam: Although the lessees could not unilaterally force the respondent as lessor to accept a surrender or forfeiture of the leases, the respondent realistically recognised the unsatisfactory situation in which the lessees found themselves and it was to be hoped that a fair and just amendment to the service charge provisions could be agreed. Also, while none of the legislative provisions which protected tenants against unreasonable service charges applied in the present context, the present case suggested that there might be a strong case for extending their protection to cases where a fixed sum was payable by way of service charge. Timothy Morshead QC and Rawdon Crozier (instructed by Fursdon Knapper Solicitors, of Plymouth) appeared for the appellants; Michael Daiches (instructed by Morgan la Roche Solicitors, of Swansea) appeared for the respondent. Sally Dobson, barrister Click here to read transcript: Arnold v Britton