The Supreme Court has delivered its judgment in Arnold v Britton, determining the amount of service charge payable by tenants of 25 chalets on a caravan park in South Wales. The caravan park is owned by Mrs Arnold and the chalets were let on a 99 year term beginning on the 25 December 1974. The leases provide that the service charge is reviewed annually, increasing by 10% per year. The effect of this clause results in a service charge of over £1 million each year by the end of the term, in 2072.

The tenants claimed that this 10% rise should be interpreted as a cap on the service charge rather than a fixed rate. Unfortunately for the tenants, the Supreme Court disagreed. The wording of the clause is as follows:

To pay the lessor without any deduction in addition to the said rent a proportionate part of the expenses and outgoings occurred by the lessor in the repair maintenance renewal and provision of services hereinafter set out the yearly sum of £90 and value added tax for the first year of the term hereby granted increasing thereafter by £10 per 100 for every subsequent year or part thereof.

Lord Neuberger gave the leading judgment and considered the principle of contractual interpretation. While the courts have historically been inclined to apply a principle of commercial common sense to contractual interpretation, Lord Neuberger was clear to convey that it will not be used to turn a bad bargain into a good deal.

The judgment set out several factors to be considered when applying commercial common sense to an interpretation of a clause. Lord Neuberger emphasised the importance of the principle, but stressed that clear drafting should not be ignored, and it, “should not be invoked to undervalue the importance of the language of the provision which is to be construed.

In addition, while Lord Neuberger conceded the “unattractive consequences” of a literal interpretation of the clause, he stated that:

“In my judgement there is no principle of interpretation which entitles a court to rewrite a contractual provision simply because the factor which the parties catered for does not seem to be developing in the way in which the parties may well have expected”.

This case shows that the drafting of any commercial agreement and in this case a commercial lease, is essential to get right first time. The courts will be slow to reject a clause with a clearly drafted meaning despite any apparent ‘unfairness.’ Contractual certainty has many advantages as the terms of the agreement are the first point of call when matters become contentious. While we may spare a thought for the tenants of the chalets in this case, the decision is a timely reminder to ensure that any agreement is drafted thoughtfully and carefully with regard to any consequences.

For further information or if you have any concerns regarding this topic, please contact a member of the Property team at Edwin Coe.

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