Chalets and service charges: the Supreme Court orders for certainty in contracts

11 August 2015

Service charge provisions of £10 per annum at Welsh holiday chalets are facts not usually synonymous with civil claims for recoveries of £11m, but these formed the backdrop to the Supreme Court’s recent judgment in Arnold v Britton and others (10 June 2015). 

In its decision, the Court discussed the correct approach to be adopted on the interpretation and construction of a contract, here specifically in relation to contributions to the maintenance costs of a holiday park on the Gower Peninsula, such as maintaining roads, paths, fences, a recreation ground, drains, mowing lawns and removing refuse. The Court conceded that it has been having this debate for the past half a century, so while it might not particularly forge new law, it does serve as a binding precedent when interpreting a written contract.

In the leading Judgment, Lord Neuberger said that “The mere fact that a contractual arrangement…has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language”. It therefore decided to find for certainty of contractual provisions over any overarching principle of fairness or reasonableness.

A number of ninety-nine year leases were granted between 1978 and 1991 with the term running from 25 December 1974. Each lease contained service charge provisions requiring a contribution by the leaseholders of a fixed sum of £90 in the first year, increasing by 10% per year on a compound basis. The issue on this appeal is whether the respondent’s interpretation of that clause is correct.

A strictly literal interpretation of the clause would leave each tenant liable to contribute approximately £550,000 per annum in service charge by the end of each lease and a total service charge contribution over the lifespan of each lease of more than £11m. The tenants argued that when the leases were granted the fixed uplift was intended as a cap on their “proportionate” contribution, and that any objective view of the contract would appreciate the position.

The landlord contended that the terms of the lease were clear in spite of the fact that the sheer length of time involved in litigation meant that once in the Supreme Court the contribution exceeded the landlord’s total outlay in maintaining the park.

By a majority of 4:1 (and despite the windfall to the landlord of receiving disproportionately high sums) the Court rejected the tenants’ assertion that a “business common sense” approach should be applied to establish what a reasonable person would understand the original intention to have been. In the Court’s view, the wording of the clause was objectively certain and while a deeply unattractive result for the tenants resulted, there was no basis for interpretation of the drafting as anything other than a fixed uplift on the tenant’s service charge contribution. The Court would not rewrite the leases to relieve the tenants of a bad bargain, made without sufficient regard to long term consequences.

While ultimately a Court may adopt an objective view in relation to interpretation with one eye on the concept of fairness, this recent case is a strong indication that if a contract has sufficient certainty, it will be ordered as legally binding on the parties. 

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