Arnold v Britton

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DMC/SandT/15/15

England

Arnold v Britton

UK Supreme Court: Lord Neuberger of Abbotsbury PSC, Lord Sumption, Lord Carnwath, Lord Hughes, Lord Hodge JJSC: [2015] UKSC 36, [2015] 2 WLR 1593: 10 June 2015:[[1]]

Timothy Morshead QC, Rawdon Crozier, instructed by Fursdon Knapper Solicitors, for the appellant, Britton

Michael Daiches, instructed by Morgan la Roche Solicitors, for the respondent Arnold

LANDLORD AND TENANT: LONG RESIDENTIAL LEASES: INCREASE OF SERVICE CHARGE AT YEARLY RATE OF 10% ON COMPOUND BASIS: CONTRACTUAL INTERPRETATION: CONTROL OF PARTIES OVER LANGUAGE USED IN CONTRACT: THAT CONTRACTUAL ARRANGEMENT WORKED OUT BADLY FOR ONE PARTY NO REASON FOR DEPARTING FROM NATURAL LANGUAGE

Summary

The present case concerned 99-year leases over 25 of the chalets in a leisure park, most of which were granted between 1977 and 1991. The leases contained a service charge provision which required tenants to pay “[as] a proportionate part of the expenses incurred by the Lessor in the repair maintenance renewal… the yearly sum of Ninety Pounds… for the first Year of the term hereby granted increasing thereafter by Ten Pounds per hundred for every subsequent year [or part] thereof”. By a majority of 4 to 1 (with Lord Carnwath dissenting), the Supreme Court held that on a proper interpretation of the clause, the annual service charge payable was fixed at £90 for the first year which would then be increased annually by 10% on a compound basis. There was no reason to read the rate of 10% as the maximum permissible annual increase.

This note has been contributed by Ken T.C. Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and barrister-at-law in Hong Kong.

Background

The Respondent (the Landlord) was the current owner of Oxwich Leisure Park in South Wales which contained 91 chalets.

The present case concerned 99-years leases over 25 of the chalets, most of which were granted between 1977 and 1991. The Appellants (the Tenants) were the current tenants of 24 of the leases. Under the leases, the Landlord was to provide services including maintaining roads and removing refuse. The Landlord also covenanted in Clause 4(8) that leases of other chalets “shall contain covenants on the part of the lessees thereof to observe the like obligations as are contained herein or obligations as similar thereto as the circumstances permit”.

The Tenants were required to pay an annual service charge under Clause 3(2), the wordings of which differed slightly in the 25 leases. While the words in square brackets were omitted in some leases, Clause 3(2) materially provided 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.”

The Landlord commenced the present proceedings in the county court, contending that Clause 3(2) provided for a fixed annual charge of £90 for the first year of the term, increasing each subsequent year by 10% on a compound basis. The Tenants contended that the Landlord’s construction would result in an increasingly and absurdly high annual service charge in the later years of the leases. In the case of a lease granted in 1980, the service charge had already risen to over GBP2,500 a year in 2015; by 2072 this figure would have escalated to over GBP550,000 a year. Accordingly, the Tenants maintained that Clause 3(2) only required them to pay a fair proportion of the lessor’s costs of providing the services, subject to a maximum of £90 in the first year of the term, which was to increase by a maximum every year of 10% on a compound basis.

While the judge in the county court had held in favour of the Tenants, the High Court and the Court of Appeal held in favour of the Landlord. The Tenants appealed to the Supreme Court.

Judgment

By a majority of 4 to 1 (Lord Carnwath dissenting), the Supreme Court dismissed the appeal by the Tenants.

Lord Neuberger delivered the judgment of the majority and Lord Hodge gave a short concurring judgment. Lord Neuberger noted that when interpreting a written contract, the court would 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” (see Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101).

Lord Neuberger emphasised the following factors:

(1) Commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision to be construed. As parties had control over the language they used in a contract, save in a very unusual case, the meaning of the provision was most obviously to be gleaned from its language.

(2) The less clear were the words centrally relevant to be interpreted, or the worse their drafting, the more ready was the court to depart from their natural meaning. However, this did not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning.

(3) Commercial common sense was not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, had worked out badly or disastrously for one of the parties was not a reason for departing from the natural language.

A reasonable reader of Clause 3(2) would see the second half as a quantification of that service charge. The increase of the annual sum at a fixed rate was explicable on the basis that parties assumed the costs of providing services in sterling terms would increase. While this formula was plainly unattractive for the Tenants, the Tenants’ contention involved inserting words which were not there. The Landlord was not required to assess the total costs of services and apportion the costs for each chalet. Further, the parties to the lease were taking a bilateral gamble on inflation. A lessee could have taken the view that a fixed rate of increase of 10% per annum at a time when annual inflation had been running at a higher rate between 1974 and 1981 was attractive or at least acceptable.

Lord Hodge emphasised that the conclusion of the majority was not reached simply by considering the natural meaning of the words and then seeing if there were circumstances which displaced that meaning; but by the unitary exercise or iterative process by which each of the rival meanings was checked against the provisions of the contract and its commercial consequences were investigated (Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, Re Sigma Finance Corp [2010] 1 All ER 571).

In his dissenting judgment, Lord Carnwath noted that in long residential leases like those in this case, an individual entered into financial commitment extending for the rest of one’s life and probably beyond. Further, substantial equivalence of rights and obligations under such leases, particularly the sharing of costs for common services and maintenance, was important for all parties, both for the good management of the estate and for harmony among those living within it.

Lord Carnwath was of the view that something had gone wrong in the drafting of Clause 3(2). The first part of Clause 3(2) could not simply be descriptive of the character of the payment to be made. The clause contained two different descriptions of the payable amount: first, a “proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services…”; and second, a “yearly sum” determined by reference to a fixed formula. He continued:

“There are two linguistic problems. First, there is no grammatical connection to show the relationship between the two descriptions. Secondly, they are mutually inconsistent. A figure can be determined as a proportionate part of some other variable amount, or it can be a yearly sum, fixed by a predetermined formula; but it cannot be both. There is an inherent ambiguity which needs to be resolved."

Under the interpretation held by the Court of Appeal, Lord Carnwath continued, the Landlord in 1980 would have been pessimistic about the future of the economy and would have thought it reasonable to assume continuing 10% inflation for the remaining years of these long leases. But such a prediction would have been impossible, even for economists. The differences in service charge with the existing leases would become grotesque over the years. It was inconceivable that potential purchaser would have been willing to accept a prediction of continuing inflation at that level and to take that as the basis for undertaking a contractual obligation lasting for the rest of his life. Therefore, the formula in the second part of Clause 3(2) should be read as a cap. The limit of 10% might be seen as an acceptable compromise between the parties for the immediate future while allowing for a return of inflation to more normal levels in the medium term.

Comment

A significant feature of the present case was that apart from the leases and the Retail Price Index (RPI) for each of the years 1970-2010, there was no evidence before the Court as to the surrounding circumstances in which the leases were executed (the Landlord was not an original party to the leases). It is hard not to sympathise with the Tenants who have to bear the consequences of an exponential increase in service charge, but the language of Clause 3(2) and the formula set out therein on the calculation of service charge were so clear, such that the rate of 10% could not be interpreted as the maximum permissible increase. Parties to a contract which would last for a substantial period of time should be careful as to the long-term implications of its provisions.

In rendering its judgment, the majority did express considerable sympathy for the Tenants’ predicament and urged the parties to find an acceptable commercial solution.