Landlord and tenant – Service charge – Construction of lease – Long leases of chalets in leisure park providing for annual increase in service charge – Whether properly construed as variable service charge subject to cap or fixed charge with annual increases – Court construing as fixed charge – 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. The appellants, as the lessees of 25 of the chalets, disputed the respondent’s interpretation of the service charge provisions in the leases. One version 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.
The respondent asserted 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 contended 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 respondent applied to the court for declarations in support of its own interpretation. That relief was refused in the county court on the grounds that the respondent’s interpretation would offend commercial common sense. The respondent successfully appealed against that decision; the judge held that while a fixed charge might have the disadvantage of either over-compensating or under-compensating a landlord for its costs, it did not lack commercial purpose: see [2012] EWHC 3451 (Ch); [2012] PLSCS 264. The appellants appealed.
Held: The appeal was dismissed.
In construing the service charge provisions, the court’s task was to discover what the instrument, read as a whole and set in its surrounding circumstances, meant; it could not improve on the instrument to make it fairer or more reasonable: Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] 1 WLR 1988 applied. Normally, a service charge clause in a lease could not be taken as intended to provide a landlord with a profit over and above the cost of the services provided. If the clause potentially gave rise to such a result, it should be closely read to see if the wording required such a conclusion. However, no special principle of construction applied; that approach was simply a facet of the ordinary process of construction, having regard to the presumed commercial objective of the clause used in the particular case. Ultimately, all depended on the meaning of the language, set in context and having regard to the commercial purpose.
Having regard to the figures advanced, an initial gut reaction was that the lessees’ interpretation of the service charge provisions ought to be correct. However, to reach that conclusion would subvert the proper process of construction of the language actually used and would involve the court rewriting the bargain that the parties had made. Although something appeared to have gone wrong with the language of the service charge clause, the object of the verb “to pay” used in that clause was, on a natural reading, “the yearly sum of £90” etc. The reference to a proportionate part of the expenses and outgoings of the lessors had the function of identifying the character of the payment to be made. If that involved notionally writing in the word “as” before the words “a proportionate part”, for clarification of the syntax, then that was an entirely natural approach as a matter of the ordinary process of interpretation. The words “a proportionate part” were appropriate for an estate where other lessees were contributing to the overall service charge, which was consequently to be apportioned between them. Those words, in such a context, were not inconsistent with a fixed service charge. The appellants’ argument involved unacceptably rewriting the clause. The existence of a “cap” could not legitimately be spelled out from the words used. Objectively speaking, such a cap was not what the parties would reasonably have understood the document to convey at the time it was entered into.
Although that conclusion meant that the holders of the leases were currently required to pay more than £3,000 pa for the relatively limited services provided for the holiday chalets, and with potential remorseless compounded increases thereafter, that was the result of the bargain made and the court could not properly, under the guise of a process of interpretation, introduce new and other terms to mend a bad bargain.
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
