Service charges – no bargain to be had!
In the recent case Arnold v Britton the Court was asked to interpret a service charge clause contained in various holiday chalet leases. Despite an overwhelming disparity in favour of the Lessor, the Court felt obliged to construe a service charge clause according to its simple interpretation and could not be asked to mend a "bad bargain".
The Claimant, Mr Arnold is the landlord of the Oxwich Leisure Park in Swansea where there are 91 leasehold holiday chalets which form part of the Park. This case involved the service charge liabilities of 25 tenants of those chalets.
The chalets were granted for a term of 99 years at various times from 1977. There was a nominal ground rent of £10 increasing by £5 every 21 years.
The court was asked to interpret the service charge clause which unfortunately was not very clear, and not helped by the marginally different wording contained in each of the various leases.
The service charge clause for Chalet 96 provided the tenant should pay:
"… a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance renewal 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 thereof."
The tenants suggested that the £90 and the subsequent 10% increases represented a cap on the total amount of service charges that could be claimed, but the landlord applied the literal interpretation which afforded compounded increases at 10% per annum.
As a result of the landlord's interpretation, by the time the case got to court some of the tenants were paying over £3000 per annum in service charges. Worse still by the end of the term, (in some cases some 60 odd years from now) some of them could be paying an annual service charge of over £1.025m.
It is unsurprising therefore, that the tenants sought to argue that this figure was intended to create a cap and their actual liability.
The Court found that the wording of the clause was unambiguous and it was not their place to imply additional words to mend a bad bargain, particularly when there was no contemporaneous evidence of what the parties had intended.
In the 1970s when the clause was drafted 10% was representative of the rate of inflation and accordingly had the rate of inflation increased over the years (rather than decreased as it has done) the landlord could have faced a shortfall in his service charge recovery.
The Court did not consider that there was any principle of construction whereby a service charge provision should be construed so as not to entitle a landlord to make a profit.
When faced with the potential figures in this matter the outcome is unquestionably unfair to the tenants and affords the landlord with potentially huge profits in respect of his service charge recovery. It may ultimately force some of the tenants into surrender and forfeiture providing a potentially even greater windfall for the landlord.
Lord Justice Davis strongly recommended, however, that the case "cries out … for a fair minded and sensible negotiated solution involving all lessees on the Estate" and warned the landlord about the "local publicity" the case would have generated.
Let's hope that the Landlord and the Tenants were able to mend the bad bargain where the Court could not!
By Sophie Carey
Sophie Carey is a solicitor in the Michelmores property litigation team. For further information on the issues raised in this article, please contact Sophie at email@example.com.
This information has been prepared by Michelmores LLP as a general guide only and does not constitute legal advice on any specific matter and should not be relied upon as such. We recommend that you seek professional advice before taking action. No liability can be accepted by us for any action taken or not taken as a result of this information.