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It’s no holiday for service charges

The Supreme Court has upheld the general rule that irrespective of how imprudent a term in a lease may be, the courts will be very reluctant to reject it, because the purpose of contractual interpretation by the courts is to identify what the parties agreed, and not what the parties should have agreed.

The case of Arnold –v– Britton [2015] UKSC 36  concerned a number of leases of holiday chalets with lease terms of 99 years from 1974.   The clause in question required the tenants to pay annual sums by way of an estate services charge (described as a “proportionate part” of the expenses incurred by the landlord) that increased by 10% annually, from a starting point of £90.  Given the dates most of the leases were entered into, and the fact that the UK was beset by high inflation in the 1970s and early 1980s, the likely explanation for this clause was “inflation-proofing”.  However, it seems very unlikely that the parties had really envisaged the outcome: that the annual amount would exceed £1 million towards the end of each lease, probably far exceeding the amounts the landlord would expend in providing the services.

In interpreting a lease, or any contract, the courts will create a hypothetical person – the “reasonable person” – who will have the background knowledge which would reasonably have been available to the parties when they entered into the contract, and who would be conscious of the practical consequences of entering into the contract.  This hypothetical person can investigate the common intentions of the parties by interrogating the parties.  The courts will ask: “what would this hypothetical person have understood the parties to have meant?”

However, the actual intentions of the parties cannot override what is written in the document, unless the clause is ambiguous.  If a court decides the clause is ambiguous, the court can move away from the natural meaning of the clause.  Unfortunately for the tenants, who tried to argue that the 10% reference in their leases was a cap on the annual increase, the Supreme Court decided that the clause was not ambiguous.

This case affirms the orthodox approach to contractual interpretation, which prevailed at a potentially enormous cost to the tenants.  However, it does serve as a reminder that English law prefers certainty to creative contractual interpretation, irrespective of the unpleasantness of the outcome.  Fortunately for the tenants, it should also be noted that the landlord has informally agreed to negotiate for a CPI-linked adjustment to replace the reference to 10% in the leases.