Arnold v Britton and others [2015]

Critical decision on lease interpretation

Background

The case concerned a South Wales holiday park consisting of 91 chalets. Each chalet is let on a 99-year lease, with a start date of 25 December 1974. All leases contain broadly similar terms to retain consistency across the park.

Under the leases, the landlord is required to provide maintenance services such as the mowing of grass, removal of refuse and general maintenance of public areas, on payment of a service charge by the chalet tenants. For the first year in each lease, the service charge is £90; in the first 70 leases granted, this sum can be increased by 10% every three years. For the remaining 21 leases, the sum of £90 can be increased by 10% every year.

The tenants under the final 21 leases brought the claim, arguing that it cannot have been the intention to raise the service charge by such a significant amount; in 2015, the service charge would be calculated at £2,500 with the sum rising to £550,000 in 2072, the final year of the term.

The Law

The Court was asked to interpret a written contract. The parties’ intentions must be interpreted as “what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to be using the language in the contract”.

The importance of the actual language used was stressed as it is this which will determine how matters at the time the contract was made were perceived. The fact that the consequences may be severe, as in this case, is not enough to depart from the strict interpretation of the wording in the leases.

Decision

The Supreme Court has held in favour of the Landlord and disregarded the tenants’ appeal. It is decided that the clear wording of the clauses means that there can be no doubting the parties’ intentions when entering into the leases, although commercial common sense must always remain a factor. That said, the judgment refers to the fact that, when the 21 leases were entered into, inflation was running at higher than 10% in any event.

One judge, Lord Carnwath, disagreed with the decision and held that the 10% figure should be interpreted as a ceiling increase as, otherwise, the service charge becomes unacceptably unfair on the tenant.

JB Leitch’s Phil Parkinson adds:

“This case is of great importance in terms of lease interpretation; the judgment means that commercial considerations will not override the strict interpretation of parties’ intentions where lease wording is clear, even where the consequences may prove exceptionally costly for one party. Tenants must be sure that, when entering into a lease, they understand thoroughly the long-term implications of their service charge clauses.”