The court cannot improve upon a contract that it is asked to interpret, or mend a bargain
One of the principles that underpins best practice in relation to service charges is that they should be administered on a “not for profit, not for loss” basis. In other words, landlords should receive no more than – and no less than – their actual outlay on the services provided. However, it is open to the parties to agree something different.
Arnold v Britton [2013] EWCA Civ 902; [2013] PLSCS 180 concerned a leisure park comprising 91 chalets, which were let on long leases. Most of the leases included covenants that the tenants would pay “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”.
Twenty five of the leases referred to an increase of 10% in every year of the term. The services that the landlord covenanted to provide were not particularly extensive. However, the projected annual service charge payable in the last year of the term, where the service charge contribution was to be compounded annually, was over £1 million.
Variable residential service charges are regulated by the Landlord and Tenant Act 1985. Consequently, the tenants tried to persuade the court that the service charge provisions created a variable service charge, subject to a cap of £90 in the first year of the term and thereafter to a cap rising by the rate of 10% per annum.
The landlord pointed to the language used in the leases. It argued that the tenants had agreed to pay a fixed sum of £90 per annum in the first year of the term and thereafter a fixed sum rising by the rate of 10% per annum, irrespective of the cost of providing the services. Therefore, this was not a variable service charge within the meaning of section 18.
The Court of Appeal upheld the landlord’s claim. It rejected the idea that service charge clauses in leases are subject to any special principles of interpretation and ruled that the court must examine the words, in context, against all the admissible background, in the light of the apparent purpose of the clause, and then decide what the provisions mean.
The figures shown to the court suggested that the tenants ought to succeed. However, the service charge clause had provided certainty at a time of very significant inflation and the merits of the case may have looked very different, had inflation continued at the rates prevailing when the leases were signed.
The court cannot improve upon a contract that it is asked to interpret, or introduce terms to make it fairer or more reasonable. Its task is to discover what the instrument means and, in the absence of grounds for rectification, the court was unable to mend the parties’ bargain. Sadly, the decision means that the tenants are saddled with onerous leases, which will not be easy to dispose of.
Allyson Colby, property law consultant
