But that’s not what I meant – Service Charges and the Courts approach to interpretation in Arnold v Britton
Thu 27 Aug 2015
The recent case of Arnold v Britton and others  UKSC 36 acts as a reminder that the Courts are unwilling move away from the actual wording of a clause, even if the result is not what may have been intended by the parties. The actual terms of a lease or agreement are key, and the Court’s role is not to amend or rectify a party’s bad commercial decision. While this case relates to service charges, it has been viewed as having a wide application for contract interpretation in general.
Background to Arnold v Britton
The case deals with service charge provisions in leases at a holiday park in Wales. The leases were granted between 1978 and 1991. Some of the leases contained a service charge provision to pay £90 per annum, increasing by £10 per hundred per year. This resulted in a compounding increase of 10% per annum. The total service charge payable in 2015 was £2,500 for a lease granted in 1980, and would rise to over £550,000 by 2072. The total service charge payable over the full term of a lease would be approximately £11 million.
The tenants argued that this consequence was not intended by the parties, and that the amount should be interpreted to be a maximum or cap. Their view was the service charge payable should be a proportion of the total cost of the services, to a maximum of the specified amount.
The tenants viewed the payment as a variable service charge, and therefore within the meaning of section 18 of the Landlord and Tenant Act 1985, and subject to the statutory test of reasonableness. The increase could then be held as unreasonable and amended.
If the service charges were deemed to be a fixed payment towards maintenance costs, although increased each year, they would not be subject to the implied reasonable qualification under the LTA 1985.
The Supreme Court ruled that the terms of the service charge provision were clear, and that even though these had ‘unattractive consequences’, the Court was not able to interpret the value to be a maximum or a cap, as this would involve inserting words into the clause that were not there. The service charge provision itself was clear, the payment was a fixed cost, and no other interpretation was available. The Court determined 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”
The dissenting judgement of Lord Carnwath noted that the consequences of the clause resulted in ‘commercial nonsense’, and applying the test of a reasonable observer, he would have found for the tenants and agreed to a limited addition to the words proposed by the tenants.
What this means for landlords and service charges
The majority judgement represents a move back to a more literal interpretation of clauses than other recent decisions, and the case emphasises that the Courts will shy away from changing meanings that are clear or unambiguous or would require new words to be added.
This case emphasises the importance of looking at the plain meaning of terms and drafting, and following clauses through to their result on the plain wording, even in the long term.
This case may provide comfort where landlords are looking to enforce the provisions of a lease, but not where the terms of a lease do not reflect the intention of the parties.
However this case may raise concern for landlords where the total service charges payable do not cover the total outlay that a landlord is required to make. Where a service charge provision does not equal 100% recovery across all leases, but the terms are clear, there is a risk that the shortfall may have to be borne by the landlord and the Courts will not rectify a provision in favour of commercial common sense if one of the parties has made a ‘bad bargain’.
It is vital to be clear about the terms of service charge recovery, and to include provisions that the percentage or amount is able to be amended by the landlord at any time.
The wider implications
This case has been reviewed widely and has been applied in relation to other statutory interpretation issues, for example a recent case on contractual interpretation in a supply agreement for cupcakes, where the High Court declined to amend the language of the agreement.
As the case itself states “experience shows that it is by no means unknown for people to enter into arrangements which are ill advised…and it is not the function of a Court when interpreting an agreement to relieve a part from the consequences of his imprudence or poor advice”.
This is a reminder that, where a clause makes sense in its own right, the Courts are unlikely to apply a test of fairness or reasonableness where not required by statute, and are unlikely to agree to amend the terms based on an argument of ‘commercial common sense’. It is important to check any figures, calculations, formulas or percentages used in calculating payments to or from tenants or other parties to check that they mean what you want them to mean.
  UKSC 36 at p19
  UKSC 36 at p20