Parties cannot expect the Court to release them from bad bargains.
The High Court has held that a landlord can recover a fixed service charge well above its actual expenditure on services.
Mr Arnold is the landlord of the Oxwich Leisure Park in Swansea. There are 91 chalets constructed on the Park and the case involves the service charge liabilities of 25 of the tenants.
The chalets were let over a period of time from 1977. The tenants paid for construction of their chalets on the land that was let to them and they are liable to pay a ground rent of £10 per annum which increases by £5 every 21 years. In addition, a service charge is payable for the maintenance of roads and footpaths and pipes and suchlike and the use of the Recreation Area in the Park.
There were various different versions of the leases but, in essence, they all provided that the tenants would pay, as a proportionate part of the expenses and outgoings incurred by the landlord, the yearly sum of £90 increasing thereafter by £10 per hundred for every subsequent year.
It was the tenants’ case that the sum of £90, and any increase thereof in subsequent years, was intended to be a cap on their service charge liability rather than a fixed sum payable and their actual liability was much lower. They claimed it could not be a fixed amount as this would result in a service charge of over £1million per annum by the end of their leases in 2073. They said that the leases had to be construed upon the basis that a landlord was not intended to make any profit from the services it provided and this argument succeeded in the County Court.
The landlord’s case was that many of the leases had been entered into at a time when inflation was running at well over 10% per annum and that it was clear from the wording that there had been no intention to provide for a variable service charge with a cap as there were simply no provisions for ascertaining what proportion any tenant would pay.
Unfortunately, the Court was not given any details as to how the sum of £90 had been calculated in the first place or the basis upon which service charges had been collected in the past but it appeared that the tenants had paid on the basis that there was a fixed charge until the amount reached an unacceptable level. For the year ended 24 December 2012, the amount payable by each tenant was £3,060.36.
The High Court summarised the principles that apply in relation to the construction of leases. It confirmed that regard can be had to the background circumstances and that the ultimate aim is to determine what the parties intended but, where the parties have used unambiguous language, the Court must apply it. The Court cannot rewrite contracts in order to make them more commercially sensible but, in the event of ambiguity or uncertainty, the Court can seek to give effect to the more commercial interpretation.
The Court did not consider 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 although, if this led to a complete absurdity, the Court would clearly take this into account when considering whether it reflected the intention of the parties.
The tenants argued that the service charge provisions had to be construed in the light of the fact that the ground rent was at such a low level but the Court took the view that it was entirely conventional to reserve a small ground rent and, therefore, the amount of rent payable did not shed any light as to the intended operation of the service charge provisions.
Aside from the actual language used, the most telling factor for the Court was the fact that, at the time many of the leases were entered into, inflation was running at or above 10% per annum so annual increases at this rate was not so absurd.
Obviously, whilst it would have been more commercially sensible to link any increase in the fixed sum to any increases in the RPI, the parties had chosen not to do so and both had run the risk that they could lose out depending on whether inflation rose or fell. Although, in relation to some of the later leases, inflation had fallen considerably by the time they were granted, the Court took the view that the lessees had entered into the leases with their eyes open and the consequences of having to pay such considerable sums in future years could not override the language used.
Accordingly, the High Court held that the tenants were liable to pay the fixed sum and not just a variable service charge capped at this limit. This decision will affect the other 66 tenants as well as their leases are similar save that the 10% increase applies every 3 years rather than annually.