Bad Bargain? Bad news! Says the Supreme Court

The Supreme Court has ruled that tenants will not necessarily be saved from bad bargains even if service charge provisions require them to pay sums well in excess of the landlord's actual costs.

Arnold v Britton and others [2015] UKSC 36 concerned the interpretation of service charge payment clauses in 25 long leases of holiday chalets in a leisure park. The clauses varied slightly, but all required the tenant to pay a fixed annual sum for services, rather than the cost of those services, as might be more common in a commercial lease. The problem didn't lie in the payment of the original fixed sum of £90 per annum, more that this would increase at a compound rate of 10% every year after the first year of the 99 year term, or for some leases, every three years. Applying that interest calculation, the annual service charge payable by some tenants in 2015 was £2,500. By term end in 2072, the annual amount due for very modest services, where the chalets could only be used for six months of the year, would be an enormous £550,000.

By a four to one majority, the Supreme Court refused to rewrite the bargain that the parties had entered into when they signed up to the leases between the 1970s and 1990s. Whilst recognising that the consequences of the clauses which at first sight seem fairly innocuous could be catastrophic for the tenants, the Court ruled that the clauses were clear and unambiguous enough so that their natural meaning was not in doubt. The Court's role was to interpret the contract, and not to correct it. The leases were granted at a time of significant and spiralling inflation. In that context, an objective reading of the lease showed that the parties had chosen a fixed sum with fixed annual increases. It was inferred that the tenants would have known on the first day of the lease term what the payments would be going forward, and indeed, benefited from that low rate in the early years of the term. Equally, the Court concluded that the landlord had accepted the risk that, should inflation continue at the prevailing rates, he may not recover the full amount that he might spend in providing the services he was obliged to.

The case shows how difficult it is to unravel any contract once it has been entered into. These tenants, and those in a similar position, will be bound by their leases, unless they can agree a surrender or variation with their landlords, both of which can only be negotiated with the landlord's agreement. Landlords will obviously be in the strongest negotiating position. Parties who find themselves in similar situations could consider whether the document reflects their intention at the time of entering into the contract, and, if not, whether a claim of rectification could be brought. They might also consider whether any misrepresentations were made by the other party to the contract which they relied on when entering into the contract. This might give rise to a claim in estoppel or for misrepresentation. Finally, parties to contracts where there are unexpected consequences could also consider whether they were properly advised by their legal or other representatives of their potential liabilities when they entered into the relevant contract, and whether there is any potentiality for a claim in professional negligence.

For more information please contact Matthew Bonye or Rhian Arrenberg at Herbert Smith Freehills.