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Arnold v Britton [2015] UKSC 36: Service Charges Not Subject To Any Special Rule Of Interpretation

Summary: There is no general principle that service charge clauses should be construed “restrictively”: service charge clauses are not subject to any special rule of interpretation.  The alarming consequences of an interpretation regarding a lease granted in 1980, where the service charge would be over £2,500 in 2015 and over £550,000 by 2072) was not a convincing argument for departing from the natural meaning of the clause. The lessees’ appeal was dismissed.

Arnold v Britton [2013] EWCA CIV 902: Payment Of Annual Sum Increase Of 10% Per Year

Summary: On their proper interpretation the service charge clauses in the leases of holiday chalets at a leisure park provided for the payment of an annual sum which increased at the rate of 10% per year.

Facts: The appellant lessees appealed against Morgan J’s decision ([2012] EWHC 3451 (Ch) – summarised in the December 2012/January 2013 update) on the interpretation of their leases. The leases were long leases of holiday chalets at a leisure park. The service charge clauses were not in precisely the same terms for each lease, but the essential issue was whether the clauses provided for annual compounded increases, at the rate of 10 per cent, in the charges payable, as the respondent landlord contended (and Morgan J held); or whether the figure given in the clauses was a cap up to which the landlord could recover the actual expenditure on the provision of services.

The tenants’ case was that the effect of compounding was that the service charge was already over £3,000 per annum for the relatively limited services provided for the holiday chalets and, by the last year of the lease, the total would be over £1 million. The tenants argued that this was uncommercial and nonsensical and so required the clause to be regarded and read as a cap. The landlord submitted that there was no evident ambiguity or mistake in the wording; the landlord’s interpretation was not absurd since at the time the leases were made and at times thereafter annual inflation exceeded 10 per cent.

Decision On Appeal (Richards, Davis and Lloyd Jones LJJ): Dismissing the appeal, although the court’s conclusion was not attractive, the lessees’ argument would involve subverting the proper process of construction of the language actually used and would in truth involve the court rewriting the bargain the parties have made. The court cannot properly, under the guise of a process of interpretation, introduce new and other terms to mend a bad bargain: to do so would involve distortion of all correct legal principles.

Comment: Although the issue on the appeal was the construction of specific clauses in various leases, the decision on the principles of construing service charge provisions is of wider significance. The court rejected a submission that service charge clauses are to be construed restrictively and should not be construed, in the absence of clear wording, so as to entitle the landlord to a profit over and above his actual outlay in providing the contracted services. The court approved Morgan J’s statement in para 43 of his judgment ([2012] EWHC 3451 (Ch)) and held that a service charge clause in a lease is not subject to any special principle of construction.

Arnold v Britton [2012] EWHC 3451 (Ch): Landlord Allowed To Make Profit Over And Above Cost Reimbursement

Summary: There is no special principle that a service charge clause in a lease (1) should not be construed (in the absence of clear words) so as to entitle the landlord to a profit over and above reimbursement of his costs incurred in providing the relevant services; or (2) should be construed restrictively.

 

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