The Supreme Court has ruled against tenants in a dispute over holiday park service charges in the case of Arnold v Britton and others [2015] UKSC 36.

In a judgment given on 10th June 2015, the Supreme Court refused to step in and rescue the owners of long-term leases at a leisure park in South Wales from the consequences of making a bad bargain.

The dispute

The dispute concerned leases mainly granted between 1977 and 1991, which had a service charge mechanism that 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.

This meant that by 2072 each tenant will be liable to pay a service charge in the eye-watering sum of over £550,000.

The tenants’ case was that such an outcome would be absurd and can’t have been what the parties had intended when they entered into their leases.

They argued that the leases should be construed so the service charges would be limited to a percentage of the actual costs incurred by the landlord, and that the clause was actually intended to operate as a cap on the total expenditure which the landlord could recover.

The decision

While it was sympathetic to the tenants’ position, the Supreme Court came down 4-1 in favour of the landlord’s interpretation. It held that the meaning of the service charge mechanism was clear and unambiguous.

This decision emphasises that the court will not step in to save a party from a bad bargain where the terms of the contract are clear. It is only where a clause is badly drafted or open to more than one interpretation that the court can choose the interpretation most consistent with ‘commercial common sense’.

The Supreme Court also made it clear there is no special principle of interpretation that says that service charges are to be construed restrictively i.e. in favour of the tenant.

Currently, leases that provide for a ‘fixed’ service charge are not subject to the Landlord and Tenant Act 1985, which limits the service charge payable to the costs reasonably incurred by the landlord. The Supreme Court noted that only intervention by Parliament, not the court, could change this.

But it should be noted that residential leases granted after 1st July 1995 are now subject to the Unfair Terms in Consumer Contracts Regulations 1999. A fixed service charge provision of the type considered in this case might well be vulnerable to a challenge under the Regulations.

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