The court’s approach to the interpretation of contracts is well known. It must identify the intention of the parties by reference to what a reasonable person, having all the background knowledge that would then have been available to the parties, would have understood them to be using the language in the contract to mean.
The Supreme Court decision in Arnold v Britton [2015] UKSC 36 is one of the most important cases to have been decided since Rainy Sky SA v Kookmin Bank [2011] UKSC 50, in terms of the application of these rules and the practical consequences for the owners of holiday homes whose leases provided for fixed service charges, subject to an escalator clause. It stresses the importance of identifying what the parties have agreed and not what, with the wisdom of hindsight, the court thinks that they should have agreed, and reminds us that the fact that a contractual arrangement has worked out badly, or disastrously, for one of the parties does not justify departing from its natural meaning.
The case concerned a leisure park comprising 91 chalets. The leases included covenants that the tenants would pay a proportionate part of the cost of the provision of services. The service charge was initially fixed at £90 per annum, which was to be increased at a compound rate of 10% triennially – except in the case of 25 leases, where the escalator was to be applied annually.
This resulted in dramatically increasing, and ultimately grotesque, differences between the amounts payable by the two different groups of tenants. Indeed, figures quoted by Lord Carnwath suggested that the total service charges payable over the next 59 years under each “annual” lease would be £11,238,016, compared to £53,386 payable for the same period under each “triennial” lease – sums that were well in excess of the service charge costs for the estate as a whole.
Could the provisions be interpreted as variable service charges, subject to a cap to which the escalator applied? The tenants cited cases in which the court had rescued parties from the unfortunate effects of contractual provisions by the way in which it had interpreted them. However, the court could find nothing to support the tenants’ construction of their leases, except a significant drop in the rates of inflation since the leases were signed.
The statutory provisions that control variable service charge provisions in residential leases did not apply, and the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contract Regulations 1999 were of no assistance. The 1977 Act is not applicable to contracts that create or transfer interests in land, and the regulations were not relevant because they came into effect after the leases were granted.
In his dissenting judgment, Lord Carnwath suggested that, even where parliament has not intervened, the court has a responsibility, so far as is possible, to guard against unfair and unintended burdens being placed on tenants. However, the majority felt unable to interfere and suggested that any intervention would require a policy decision by the legislature.
The decision means that the tenants are saddled with onerous leases and will remain bound by their contracts, unless and until the landlord agrees to vary their leases, or forfeits or accepts surrenders of them. Unfortunately, these are all options that lie within the landlord’s control.
Allyson Colby is a property law consultant