Judgment was recently handed down by the Supreme Court in the case of Arnold v Britton and Others [2015] UKSC 36. The case provides valuable guidance on how the Court will seek to interpret the unfavourable wording of contracts and leases (in this case, payment of service charge).

Facts

The case concerned leases of chalets in Oxwich Leisure Park in Wales. The leases were granted between 1978 and 1991 for a term of 99 years from 25 December 1974. The service charge provisions within the leases (which all  had similar wording), provided for the tenants to make

a payment in the first year of the term of GBP 90.00 per annum towards service charge and for each following  year, to pay a sum which increased on the previous by 10% (therefore a compounding rate of 10%). Whilst this may have been acceptable to the tenants at an earlier time in the term of the lease, at 2015 (had the lease been granted in 1980) the total service charge would have increased to over GBP 2,500 and would be set to increase to in excess of GBP 550,000 towards the end of the term!

The proceedings first came to Court by way of the landlord issuing declarative proceedings (in particular, claiming  that the sum payable was not a service charge within the meaning of Section 18(1) of the Landlord and Tenant Act 1985). The Judge at first instance found in favour of the tenants.

The decision was later overturned by Mr Justice Morgan, whose decision in turn was upheld by the Court of Appeal and the Supreme Court.

In the Supreme Court, the tenants asserted that the provision was not what had been intended by the parties. Instead they argued that the sums acted as an overall cap on the amount the landlord could recover (in effect, that the words “up to” should be read into the clauses). The tenants argued that the landlord should instead only be entitled to a fair proportion of the cost of the total services incurred.

Decision

The Supreme Court dismissed the tenants’ appeal and found that the wording of the leases, albeit commercially harsh on the tenants, was to stand as the correct interpretation. Lord Neuberger, with whom Lord Hughes and Lord Sumption agreed, reasoned that the wording of the clauses was sufficiently clear and that it was not appropriate for  the Court to depart from that wording when it was clear. The tenants would therefore be liable to pay to the landlord a fixed sum (rather than a proportion of what the landlord had incurred in providing the services) as the wording of  the clauses had intended.

The Court noted that the leases had been entered into at  a time when inflation was high (and therefore the wording had made sense to the parties at the time it was entered into). The risk of the wording fell onto both parties: it was the bad luck of the tenants that in the last fifteen years, inflation had been rarely above 4%, but, had inflation been higher, the landlord would have been required to pay for the shortfall. Lord Neuberger noted that: “The mere fact that a contractual arrangement, if interpreted according  to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language.”

Lord Neuberger noted what he thought to be relevant factors (which are summarised below):

  1. Commercial common sense and surrounding circumstances should not take precedence over the importance of the language of a provision. The meaning of what was intended by the parties is most likely to be found by reading the provision (ii) The clearer the wording of a provision, the more difficult it is for the Court to depart from it 
  2. Commercial common sense cannot be invoked with hindsight. If the wording of a provision results in a bad outcome for one or both parties, it does not mean that the wording does not have the intended meaning 
  3. Courts should be slow to reject the meaning of a provision because it appears to be imprudent and the purpose of interpretation is to identify what the parties agreed and not what, with hindsight, should have been agreed
  4. The Court can only take into account facts which existed at the time the contract was made 
  5. In some cases, an event later occurs which was not intended or contemplated by the parties, looking at the wording. In such case, if it is clear what the parties would have intended, then the Court will give effect to that intention 
  6. Service charge clauses are not subject to any particular rule of interpretation

Lord Carnwarth, in disagreement with the majority, gave an interesting judgment. He stated that he would have found for the tenants and allowed for a limited addition to the wording, allowing for a commercially better result: “…the limited addition proposed by the lessees does not do such violence to the contractual language as to justify a result which is commercial nonsense.”

Conclusion

Whilst the decision results in a commercially harsh decision for the tenants, it shows the Court is reluctant to depart from wording which, although has uncommercial consequences as at the present day, was intended by the parties as at the date of the contract and is sufficiently clear in its meaning. The Court is not able to assist parties by amending or interpreting wording in a different manner solely because the wording has resulted in an unjust outcome or bad bargain for one party (or perhaps both) and will only interfere where the meaning of the wording is so uncertain that a different commercial approach is demanded. 

The Court did note that there may be a case for extending the existing statutory provisions which protect tenants against unreasonable service charges to circumstances such as these (although this would be a matter for the legislature).

The case shows that the meaning of particular wording, once tested, can often come as a surprise to parties (for example, if a tenant is required to pay a penalty payment on the exercise of a break clause, when it did not intend to do so when it entered into the lease). It emphasises that parties (together with their solicitors or surveyors) should consider the long term effects of particular wording and in the case of service charge and other financial provisions, calculations should be carried out to assess what the liability will be in five, ten years and so on.