Man standing in front of the circular labyrinth

The decision of the Supreme Court in a recent case [1] was nothing short of a financial disaster for the defendants. The dispute concerned leases of holiday chalets and the service charge provisions contained in them. Although there were some differences in how the provisions were written, essentially the leases provided for:

  1. An initial fixed service charge fee of £90 per annum; then
  2. Increases at a compound rate of 10% every 3 years for the first 70 chalets let, but annually for the last 21 chalets.

The effect of such a provision seems to have gone over the heads of the chalet owners or it was not explained to them adequately or at all. What it meant was that, interpreted literally, by the end of 2015 some of the chalet owners were facing a service charge of £2,500 rising to more than £550,000 by the year 2072!

The chalet owners argued that the service charge provisions meant they only had to pay a fair proportion of the cost of providing services up to a maximum of £90 in the first year, that maximum figure rising by 10% thereafter.

In a case heard in 2011 the Supreme Court [2] had said that when asked to interpret ambiguous contractual provisions the Courts would consider the commercial purpose of the provision, and “if there are 2 possible constructions the Court is entitled to prefer the construction which is consistent with commercial common sense and reject the other.”

Nevertheless, in the present case all but one of the five judges of the Supreme Court were unable to find two possible constructions of the service charge provisions in the chalet leases. By a majority of 4:1 it was held that “the duty of the Court is only to interpret the bargain between the parties, not to correct it, however ill-advised the contract is and however unfortunate the terms turn out to be.” It was said that reliance on commercial common sense and surrounding circumstances should not be invoked to undervalue the importance of the language of the provision which is to be construed.

The leases meant what they said.

We can only pity the defendants and learn from their mistakes.

However, some top tips to take away from this case are:

  • With fixed increase clauses, do the maths. Work out what the increase means over the term of the lease.
  • Avoid fixed service charges if at all possible.
  • Always consult an expert lawyer.

This post was edited by Gary Bird. For more information, email blogs@gateleyplc.com.

[1] Arnold v Britton [2015]

[2] Rainy Sky SA v Kookmin Bank [2011]


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.