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Background
The appellants, Britton & Ors (the lessees), represent 43 lessees under 25 long leases of holiday chalets at Oxwich Leisure Park near Swansea. The respondent, Mrs Arnold, is the freehold owner of the leisure park and the lessor of the above leases (the lessor). The dispute is regarding the interpretation of certain service charge clauses contained in the leases which generally provide for the lessees to pay to the lessor an annual sum in respect of expenses and outgoings incurred by the lessor for repair and maintenance of the park.
The leases contain five slight variations of the same clause with no explanation or evidence being provided by the lessor as to the reason for the variance. By way of example, one version of the clause reads as follows:
Clause 3(2): “To pay to the Lessors without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance and renewal of the facilities of the Estate and the provision of services thereafter set out the year 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 variations of this clause include the word “as” appearing before the words “a proportionate part” and also rather than “every subsequent year” a number of the leases provided for “every subsequent three year period”.
On 7 December 2011, the lessor sought declaratory relief that on the true construction of clause 3(2) of the leases the lessees are obliged to pay a fixed yearly sum which rises at the rate of 10% per annum, irrespective of the actual cost to the lessor of providing the relevant services.
The lessees contended by way of defence that clause 3(2) should be construed to give rise to a variable service charge provision, based on a proportionate part of the lessor’s expenses actually incurred each year, subject to a maximum yearly cap on increases of 10%.
The lessees were successful at first instance, with HHJ Jarman QC finding it decisive that the lessor stood to make very substantial sums from her interpretation, and that this interpretation “offends not only commercial common sense but ordinary common sense”. The lessor appealed to the Cardiff District Registry, which overturned the decision and upheld the lessor’s appeal. Morgan J stated that there were obvious dangers of agreeing to a fixed percentage increase, and that the arrangement was bound to favour one party or another, depending on the actual cost of the work which was needed. Nonetheless, he stated “if that is what they have done, then they are bound by the consequences”.
Court of Appeal
The lessees appealed the decision in the Court of Appeal. The appeal was heard before Lord Justice Richards, Lord Justice Davis and Lord Justice Lloyd Jones. Lord Justice Davis gave the lead judgment, with which there was unanimous judicial consent.
Mr Morshead for the lessees emphasised the words “proportionate part” and “incurred” in clause 3(2) stating that on the lessor’s construction the lessee will be paying not simply a disproportionate, but an arbitrary part of what will not have (actually) been incurred at all. He suggested that a court should lean in its interpretation against an outcome that could lead to injustice and unreasonableness, in the absence of clear wording, the lessor should not be entitled to a profit over and above her actual outlay. Mr Daiches for the lessor contended that the words “the yearly sum of £90” were the object of the verb “to pay”; there is neither evident ambiguity nor mistake in the wording. The rate of inflation could not have been forseen but the parties had chosen to put their estimate at 10% per annum. Thus the parties had chosen to trade accuracy for certainty which cannot be said to be commercially absurd.
Davis LJ agreed with the decision of Morgan J in the Cardiff District Registry and dismissed the lessees’ appeal. He stated that to interpret the clause as the lessees suggest “would involve subverting the proper process of construction of the language actually used and would in truth involve the court rewriting the bargain the parties have made”[1]. He did not believe one could legitimately spell out the existence of a “cap” from the words used; “[t]hat whole concept simply is not there”[2].
Davis LJ did not agree that the words “a proportionate part” bore the weight the lessees suggested. When one considers that it is an estate whereby other lessees are contributing to the overall service charge, which is then apportioned between them, the words “a proportionate part” are not inconsistent with a fixed service charge (i.e. each of the lessees bears a proportionate share of the overall (fixed) service charge).
Consideration was also given to the fact the leases were entered into during a time of significant inflation. It is by chance that inflation has decreased below 10%; if the position was that inflation regularly exceeded 10% per annum, on the lessor’s approach that risk is simply borne by the lessor but on the lessees’ approach the lessor would be limited to recovering his actual outlay if inflation is low but exposed if inflation is high.
It was also noted that under the versions of the lease which provided for a triennial increase of 10%, this interpretation was potentially favourable to the lessees concerned.
Davis LJ concluded that “the court cannot properly, under the guise of a process of interpretation, introduce new and other terms to mend a bad bargain: which is, in reality, what the court is being asked to do”[3].
For these reasons the Court of Appeal dismissed the appeal.
Appeal to Supreme Court
The lessees brought an appeal to the Supreme Court which was heard by Lord Neuberger, Lord Sumption, Lord Carnwath, Lord Hughes, and Lord Hodge on 26 January 2015. The decision is awaited as to whether as a matter of interpretation the leases in all or any of their variants: (1) oblige the lessees to pay a fixed yearly amount which rises at the rate of 10% per annum irrespective of the cost to the lessor of providing the relevant services; or (2) oblige the lessees to pay a proportionate part of the lessor’s expenses actually incurred each year, subject to a maximum yearly increase of 10%.
[1] Arnold v Britton & Ors [2013] EWCA Civ 902 (22 July 2013), para 45
[2] Ibid, para 50
[3] Ibid, para 57