Service Charge in Leases – Short-term gain could mean long-term pain

Andrew_-ChallenerWhere there is ambiguity in a contract or a lease the Courts can interpret the wording in the clause using commercial common sense. In the recent case of Arnold v Britton the Supreme Court was asked, on appeal by a tenant, to apply this approach in determining the service charge provisions in a number of leases of chalets on a holiday park in Wales.

The case centred on a number of leases of chalets on the park let to tenants on 99 year leases from 1974. The service charge payment was not directly related to the costs incurred by the landlord and allowed for a 10% year on year increase. Each tenant started paying £90 per year in 1974 but by 2072 would each be paying £550,000 per year.

The parties’ choice of a fixed 10% per year increase is easily understood because of the high levels of inflation in the 1970s and early 1980s which often exceeded 10% per year. However, although initially beneficial, having a fixed increase over such a long period has proved disastrous for the tenants of the holiday park.

The Supreme Court ruled that viewed objectively the service charge provision in the leases were clear. The lease set out the requirement to pay a service charge in return for the landlord providing services and further set out clearly how that service charge was to be calculated – i.e. a 10% annual increase. There was no ambiguity and therefore the Court was unable to intervene and interpret the provisions in a different way by applying commercial common sense. The lead judgement provided that it is not for the courts to apply common sense retrospectively to relieve a party from the consequences of imprudence.

Further, the Tenants could not be saved by legislation preventing high levels of service charge being foisted on residential tenants because fixed service charge increases are effectively excluded from that legislation. Commercial tenants are not protected at all by such legislation.

It is important when considering fixed increases in rent or service charge (including changes limited to RPI) to carefully consider the amounts payable throughout the term of the lease when taking a new lease or an assignment of an existing lease taking into consideration the length of the term.

Andrew Challener
Commercial Property Team
0113 227 9222

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