The Supreme Court has handed down its judgment in Arnold v Britton and others and in doing so, given a salutary reminder to both tenants and landlords of the importance of understanding the impact of lease terms. The Court would not rewrite the drafting or infer “fairness” to relieve one party of a bad bargain.

The case concerned a holiday park on the Gower coast, Wales. In the 1970s and 1980s, a number of lettings of chalets in the park were agreed for 99 year terms. Each lease contained service charge provisions requiring a contribution to a proportionate part of the maintenance costs of the estate. Each provision also allowed for uplift in the service charge on an annual basis.

In a number of the leases this uplift was a fixed 10%, compounded from the initial service charge of £90. A literal interpretation of the clause would leave each tenant liable to contribute approximately £550,000 per annum in service charge by the end of each lease and a total service charge contribution over the lifespan of each lease of more than £11m. The tenants argued, understandably, that when the leases were granted the fixed uplift was intended as a cap on their “proportionate” contribution, and that the reasonable third party reading the contract would understand this to be the case. The landlord however contended that the terms of the lease were clear notwithstanding that, by the time matters reached the Supreme Court, the contribution from the tenants exceeded the landlord’s total outlay in maintaining the park.

By a majority of 4:1 (and despite the windfall to the landlord of receiving disproportionately high sums) the Court rejected the tenants’ assertion that a “business common sense” approach should be applied to establish what a reasonable person would understand the original intention to have been. In the Court’s view, the wording of the clause was clear and, although it meant a deeply unattractive result for the tenants, there was no basis for interpreting the drafting as anything other than a fixed uplift on the tenant’s service charge contribution. The Court would not rewrite the leases to relieve the tenants of a bad bargain, presumably made without regard to the long term consequences.

As Lord Neuberger said, giving the leading judgment, “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”. (1)

Whilst the dissatisfaction felt by the Court in arriving at its decision is palpable on reading the judgment, contractual certainty was preferred to what may be deemed a “fair” result.

Although the courts have, on occasion, applied the "reasonable man" test to interpret contract terms, it cannot be assumed that they will always adopt this approach particularly in view of a clear interpretation to the contrary. It is therefore critical when agreeing wording in contracts and leases to consider the long-term implications despite immediate pressures to get deals over the line.