Today’s decision by the Supreme Court in Arnold v Britton, dismissing an appeal by the tenants of 25 holiday chalets over the spiralling service charges imposed by their leases, has been met with some disappointment, but little surprise, from practitioners.
Paul Tonkin, senior associate in the real estate litigation team at Hogan Lovells International LLP, said that the case illustrated that the court is only willing to go so far in applying commercial sense to the interpretation of contracts.
“In recent cases the Supreme Court has made much of the importance of applying commercial common sense in interpreting agreements,” he said. “However, this case shows the limits of that approach: where the wording of an agreement is clear, a party cannot rely on commercial common sense to rescue it from a bad deal – no matter how un-commercial that deal may have turned out to be.”
Roger Cohen, real estate sector partner at Berwin Leighton Paisner LLP, reflected that the Law Lords’ judgments are “rich in analysis but poor in practical application”.
He said that there have been occasions in the past in property law where the courts have “cheated a little bit to get the right result”, adding that, in this case: “It’s a great shame that the majority either were not a little more creative or willing to cheat a little bit to get the right result.”
He added: ”It’s a shame that Lord Carnwath could not persuade two colleagues to join him in allowing the appeals. The annual escalator in the service charge clauses has been escalated to the top floor of the legal system. There, the parties found good law but not the creativity which was applied by the county court.”
Lauren Fraser, associate with Charles Russell Speechlys LLP, said that the Supreme Court’s decision seems “grossly unfair” to the leaseholders concerned and was clearly handed down reluctantly, highlighted by the fact that Lord Carnwath dissented.
But she said that the court had no alternative but to apply the established legal principles of interpreting contracts and found that the wording of the leases was too clear to reach any other interpretation but that which favoured the landlord.
“The leaseholders made a bad bargain and now have to live with it,” she said.
“While there are a number of statutory protections available to leaseholders, the court determined that these did not apply to the service charge provisions in question. The court is restricted to interpreting contracts, it is not in its power to ‘correct’ them. The court does not have jurisdiction to rewrite the service charge clauses in such a way that would protect the leaseholders and allow them to avoid paying the charges they had agreed to. Any extension of the statutory protection would be down to parliament.
“Nonetheless, one cannot help but feel sorry for the leaseholders who will soon face annual service charges in the tens and hundreds of thousands of pounds. The charges will soon exceed the value of their properties. The Supreme Court has suggested that an agreement may be reached with the landlord for a more equitable result.
“Potential leaseholders would be well advised to keep in mind the classic maxim ‘let the buyer beware’ and to carefully check how their service charges are calculated before entering into a new lease, rather than seeking a way out after the deal has been done.”
Matthew Bonye, head of real estate dispute resolution at Herbert Smith Freehills LLP, acknowledged that any case where the Supreme Court identifies a need for parliamentary intervention will be one where the consequences are going to be harsh on the losing party.
“Here, this was recognised by all of the panel of judges,” he said. “Lord Neuberger, whilst dismissing the appeal, still emphasised that allowing the appeal would have been a much more satisfactory outcome in ‘common sense terms’.”
He added: “The case demonstrates that wording in a lease that at first sight seems quite innocuous can actually have a disastrous effect on a party in the long run. Any clause involving compound growth on a sum paid annually is a prime candidate for very close inspection before signing up.
“We can see that for the tenants, the clause under scrutiny may have seemed inoffensive both because of higher prevailing inflation at the time when the leases were granted, and also because the compounding would have had an unremarkable effect in the early years of the leases.
“We see similar situations arise in other contexts, for example overage provisions, where parties had signed up to land agreements containing assumptions as to how the world would work in many years’ time, which were not then borne out by events. More flexible drafting at the outset to adjust for the unknown would have served them better.
“In today’s judgment, there was, it seems, evidence of an underlying expectation in the 1970s of high inflation forever more, that has left the tenants in a difficult position now.”
Property law consultant Allyson Colby added: “Lord Justice Hoffman famously once said that language is a very flexible instrument. Unfortunately for the tenants, it proved to be inflexible here, which leaves the tenants exposed to potentially catastrophic financial consequences.
“The decision means that the tenants will be bound by their contracts, unless and until the landlord agrees to vary their leases, or forfeits or accepts surrenders of them and, unfortunately for the tenants, all these options lie within the landlord’s control. The court was keen to encourage the landlord to compromise with the tenants – and suggested that this was a possibility. However, many will regard this as little more than a forlorn hope.”
She said that Lord Carnwath’s dissenting judgment highlights the different approaches of parliament and the judiciary.
She continued: “Parliament has enacted statutory controls over variable service charge provisions in most modern residential leases – and Lord Carnwath took the view that, even where the legislature has not intervened, the courts have a responsibility to ensure that clauses like this are interpreted as far as possible to guard against unfair and unintended burdens being placed on tenants.
“It is often said that we have a ‘nanny state’. However, the decision of the majority indicates that we don’t yet have a nanny court!”
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
