The Supreme Court has rejected a claim that service charge provisions, which would see the bill for tenants of 25 holiday chalets near Swansea ultimately rise to more than £1m per year, rendered their leases defective.
By a four to one majority, the court refused to rewrite the bargain entered into by tenants between the 1970s and the 1990s, holding them to a compound increase in service charge that has seen some of them facing bills of more than £3,000 a year, while their neighbours pay less than a tenth of that amount.
Lord Neuberger, Lord Sumption, Lord Hughes and Lord Hodge upheld earlier rulings to the effect that, as a matter of interpretation, the leases oblige the lessees to pay a fixed yearly amount, which rises at the rate of 10% per annum irrespective of the cost to the lessor of providing the relevant services.
In contrast, the tenants of the 66 other chalets at Oxwich Leisure Park, Oxwich, Gower, near Swansea, are subject to a compound increase of 10% only every three years.
Lord Neuberger said that the tenants had gambled on inflation and lost, and that commercial common sense should not be invoked retrospectively just because a contractual arrangement, if interpreted according to its natural language, has “worked out badly, or even disastrously, for one of the parties”. That, he said, is not a reason for departing from the natural language.
He added: “Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party.”
He said that the consequences of the annual sum of £90 being increased annually by 10% on a compound basis are “plainly unattractive, indeed alarming, to a lessee holding a chalet under one of the 25 leases”, adding: “If one assumes a lease granted in 1980, the service charge would be over £2,500 this year, 2015, and over £550,000 by 2072. This appears to be an alarming outcome for the lessees, at least judging by how things look in 2015, because annual inflation in the last 15 years has hardly ever been above 4%, indeed has been under 3% for 10 of those years, and has notoriously been falling recently almost to the point of turning negative, whereas the service charge over that period has increased, and will continue to increase, by 10% per annum.”
However, he rejected the tenants’ argument that this demonstrated the “extreme unlikelihood” that the parties to the leases intended to agree to those terms, and said he was far from convinced that it was “inconceivable” that a lessee would have agreed a service charge provision which had that effect, at least in the 1970s and much of the 1980s.
He said: “Although I would have expected most solicitors to have advised against it, and imprudent though it undoubtedly has turned out to be (at least so far), a lessee could have taken the view that a fixed rate of increase of 10% per annum on a fixed initial service charge, at a time when annual inflation had been running at a higher rate for a number of years (well over 10% per annum between 1974 and 1981, indeed over 15% per annum for six of those eight years; although it was less than 10% per annum after 1981), was attractive or at least acceptable.”
Addressing the choice made by lessees in that period, he said: “They are taking a gamble on inflation, but at least it is a bilateral gamble: if inflation is higher than 10% per annum, the lessee benefits; if it is lower, the lessor benefits.”
In a dissenting judgment in which he said he would have allowed the appeal, Lord Carnwath described the “wretchedly conceived clauses” as having a result which is “commercial nonsense”.
He said that the landlord of the site, Paddy Arnold, had indicated her willingness to renegotiate the leases, but expressed the view that the other lessees may perhaps be persuaded that they have a “common interest in the good management of the estate, and at least a moral obligation to contribute their fair share of its costs”.
He said: “A long-running dispute of this kind can hardly be conducive to the atmosphere appropriate to a holiday location, even for those not directly involved. It is to be hoped that some way can be found of bringing them into the discussions. On any view, the case seems to cry out for expert mediation, if it has not been attempted before, preferably not confined to the present parties.”
Arnold v Britton and ors Supreme Court (Lord Neuberger, Lord Sumption, Lord Carnwath, Lord Hughes, Lord Hodge) 10 June 2015
Timothy Morshead QC and Rawdon Crozier (Instructed by Fursdon Knapper Solicitors ) for the appellants
Michael Daiches (Instructed by Morgan la Roche Solicitors ) for the respondent
