James Driscoll expresses his disappointment at a Supreme Court decision that leaves chalet leaseholders trapped facing spiralling service charges
Key points
- A variable charge can be challenged in the tribunal; a fixed charge cannot
- Where a charge of £90 as inflated appears in a lease, is this a fixed amount or a cap on the recoverable expenditure?
Most people are likely be astonished to learn that service charges for certain holiday chalets have been escalating rapidly for years, to the point where some leaseholders face potential charges of over a million pounds.
Yet the leaseholders concerned have no right to challenge them. Surely, unreasonable charges can be challenged and in appropriate cases reduced or not allowed at all, under the provisions in the Landlord and Tenant Act 1985?
Not according to the Supreme Court’s decision in Arnold v Britton [2015] UKSC 36; [2015] PLSCS 177, where a majority dismissed the leaseholder’s appeal against the ruling of the Court of Appeal ([2013] EWCA Civ 902; [2013] 3 EGLR 37; (see Legal Notes, EG 28 September 2013). The court decided that the service charge provisions are fixed, not variable. Only variable charges can be challenged under the 1985 Act.
Annual increase
This long-running litigation involves a leisure park in Swansea with 91 holiday chalets held on long leases (99 years), where 25 of the leaseholders challenged their service charges. There were five versions of the relevant service charge clauses as the leases were granted at different times and some were later varied. What these clauses have in common is that they require the leaseholder to contribute to the landlord’s expenses and outgoings.
The original contribution is limited to the initial sum of £90 for the first year, rising by 10% each year for some of the leases, and every three years in others, on a compound basis. In each of the leases there is a reference to contributing a “proportionate part” of the landlord’s expenses and outgoings.
There was no evidence to explain the circumstances in which these leases were granted or varied, how the sum of £90 was fixed, or why some leases allow for increases over three years, while others allowed it each year. This led to the two groups of leaseholders paying wildly different charges.
The landlord’s argument was that the charges are fixed as they do not vary according to the landlord’s costs. However, the leaseholders subject to the annual increase maintained that the charges are, in reality, variable and subject to a cap of £90 in the first year, that cap rising at the rate of 10% each year thereafter.
The basic obligation, they argued, is to pay a proportionate contribution to the landlord’s costs of maintaining the estate, subject to the upper cap.
Evidence had been adduced of the effect of the retail price index on the way in which the charges would increase over the years. The total amount payable for the 25 leases for the remaining terms (2013 to 2072) is likely to be £11,238,016. The leaseholder argued that the landlord’s income from these charges did not reflect her actual costs and allowed her a growing profit.
The outcome
The Cardiff County Court held that they were variable service charges. The landlord succeeded on appeal to the High Court, and that decision was upheld in the Court of Appeal and now the Supreme Court.
In his leading judgment, Lord Neuberger conducted an extensive review of the relevant authorities on the interpretation of contracts and concluded that a court should not – in effect – rewrite the terms of an agreement. In a dissenting opinion (the longest of the judgments) Lord Carnwath would have allowed the appeal and restored the decision of the county court.
Lord Neuberger said: “…while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed…”
Lord Carnwath disagreed: “…the courts have a responsibility… to ensure that such clauses are interpreted as far as possible, not only to give effect to their intended purpose, but also to guard against unfair and unintended burdens being placed on lessees.”
It might seem remarkable that our Supreme Court Justices were at odds on the correct way of interpreting a clause in a residential lease. Reading the judgments, one is stuck by the fact that the majority hardly comment on the statutory regulatory framework for such leases, that is the right to challenge service charges in the tribunal. As a result of this decision, the leaseholders do not have the protection of these statutory safeguards.
One is also struck by the emphasis on the correct approach to interpreting contracts without acknowledging (as Lord Carnwath did) that leases, unlike many other sorts of contracts, involve individuals committing themselves financially for lengthy periods.
All of the Justices appeared sympathetic to the plight of the leaseholders and expressed the hope that the parties may negotiate a way out of the problems. But, for now, these leaseholders have no rights to challenge the charges and, as chalet owners, rather than flat leaseholders, they do not enjoy other protections such as the right to have a manager appointed.
To give Lord Neuberger the final word: “…I have considerable sympathy with Lord Carnwath’s conclusion that the appeal should be allowed (not least because it is a much more satisfactory outcome in common sense terms, particularly viewed as at today), and I acknowledge that his reasons are as powerful as his conclusion allows. However, for the reasons I have given, I cannot agree with him.”
Professor James Driscoll is a solicitor and a writer
