Service charge sting in the tail

The Supreme Court has this week dismissed an appeal brought by a group of lessees challenging the interpretation of service charge clauses.

The lessees are long leaseholders of holiday chalets at Oxwich Leisure Park near Swansea.  The Respondent to the appeal, Mrs Arnold, is the lessor and freehold owner of the Park.

The leases require the lessees to pay Mrs Arnold an annual sum in respect of expenses incurred by Mrs Arnold maintaining the Park. That’s the easy part. Now for the arguable bit.

The disputed clauses state that the lessees are to pay a “proportionate part” of the annual maintenance expenses, and also to pay a fixed sum which shall increase by 10% per annum, irrespective of the actual maintenance costs incurred by the lessor.

Hang on. Which it is? A fixed sum that increases each year? Or a proportion of the actual expenditure?

The lessees argued that the reference to paying a fixed percentage should be disregarded. They contended that this made no commercial sense at all. They pointed out that if the clause were to be interpreted in this way, by the end of their leases, they would be paying a service charge of over £1,000,000 per annum. For a holiday chalet. In the UK. Really? 

The lessor argued quite simply that the clause requires what it says on the tin. If the clause says that the lessess must pay a fixed yearly sum which rises at the rate of 10% per annum, then that is what they must pay. 

The Supreme Court’s view was that the natural meaning of the service charge clause is clear.  It found that a reasonable reader of the clause would understand that (1) the first part of the clause requires the tenants to pay an annual charge to reimburse the landlord for providing the services and (2) the second part of the clause identifies how that service charge is to be calculated and that it is a fixed sum with a fixed 10% annual increase.

In the leading judgment, Lord Neuberger emphasised that when interpreting a contract, there is no special principle of interpretation that service charge clauses are to be construed restrictively. Just because an arrangement has worked out badly, it does not justify departing from the natural meaning of the language used.