Arnold v Britton [2015] UKSC 36 Supreme Court

When common sense does not prevail

Summary

  • This case concerned the interpretation of service charge provisions in leases of chalets granted for a term of 99 years.
  • The landlord's interpretation led to an excessive charge whereas the tenant's interpretation led to a fairer charge.
  • The Supreme Court held that
    • If the natural meaning of the language in a contract is clear, this should be applied. It does not matter that this results in absurd circumstances.
    • It is not for the Court to correct an unfair agreement between the parties.
    • No special rules of interpretation apply to service charges.

This case is important as the Supreme Court considered again the principles that apply in the interpretation of contracts. Over the years, various principles (rather than rules) have been developed by the Courts and this was a useful reminder of the approach that will be taken.

The case concerned Oxwich Leisure Park, which contained 91 holiday chalets.  Leases had been granted in respect of the chalets for 99 years commencing in December 1974.

The leases were granted, either in consideration for a premium of around £20,000, or in return for constructing the chalet. The chalets were let at a low rent.  For example, the five leases before the Court reserved a rent of £10 per annum, rising by £5 every 21 years.

As one might expect, there were also provisions in the leases for payment of a service charge to the landlord for running the Leisure Park. The leases contained mechanisms for fixed rate increases. The main difference was that in some of the leases there was an increase every three years, whereas in other leases the increase was annual.

This case concerned 25 of those leases, which contained broadly similar clauses in respect of the service charge payment. An example is as follows:

"To pay to the Lessor without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and renewal of the facilities of the Estate and the provision of services hereinafter set out the yearly sum of Ninety Pounds and Value Added Tax (if any) for the first year of the term hereby granted increasing thereafter by Ten Pounds per hundred for every subsequent year or part thereof."

It can be seen that the first part of the clause required payment of a proportionate part of the expenses, but then the second part of the clause goes on to fix that sum at £90, increasing by 10% every year. This resulted in an excessively high service charge of £550,000 per year by 2072.

The landlord argued that the provision was clear and this required the sum of £90 to be simply increased at the rate of 10% every year on a compound basis. The tenants' response was that as this interpretation would result in such a high annual service charge in the later years of their leases, this could not be correct. Instead, their interpretation was that they were required to pay a fair proportion of the landlord's costs of providing the services, subject to a cap which was effectively £90 in the first year, increasing every year by 10% on a compound basis.

Lord Neuberger, President of the Supreme Court, gave the leading judgment and provided a helpful reminder of the correct approach to adopt for the interpretation or construction of contracts. Lord Neuberger reminded us of the important words of Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, para 14 being that the Court is concerned to identify the intention of the parties by reference to "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 to mean."

Lord Neuberger went on to say that the meaning of the words of the service charge provisions should be assessed in the light of:

  • the natural and ordinary meaning of the clause;
  • any other relevant provisions of the lease;
  • the overall purpose of the clause and the lease;
  • the facts and circumstances known or assumed by the parties at the time that the document was executed; and
  • commercial common sense; but
  • disregarding subjective evidence of any party's intentions.

Naturally, the tenants relied heavily on the argument that the landlord's interpretation of the provisions contravened commercial common sense and this was dealt with in some detail by the Court.

Essentially, the Court held that, although commercial common sense was a relevant principle to consider when interpreting a contract, it had no place and could not overrule the natural and ordinary meaning of the words. If, however, there was some ambiguity, it was appropriate to consider the natural common commercial sense.

In Lord Neuberger's view, the wording in this case was very clear and the fact that it resulted in an extremely high service charge (£550,000) by the year 2072, was irrelevant.

The Court also held that there were no special circumstances or special rules of interpretation that applied to service charges and so the previous thinking that they should be interpreted restrictively and therefore favour tenants is not to be inferred.

This was a majority decision, with one of the members of the Supreme Court (Lord Carnwath) dissenting.

Our View

This case is interesting because demonstrates differing views that may be had on the law even by members of the Supreme Court.