Arnold v Britton & Ors

Commercial lease provisions are construed by identifying what a reasonable person, informed by the language, contract, admissible background and commercial purpose, would understand the parties to have meant. There is no general rule that a service charge must reimburse costs only, or that service charge provisions must always be construed restrictively. Clear language is not displaced merely because it produces a bad bargain, an onerous result or a profit for the landlord. A fixed charge subject to a specified percentage increase remains binding according to its terms. Where the language provides for a fixed indexed sum, it does not create a variable service charge linked to actual costs.

The lessor of a leisure park appealed declarations made by HH Judge Jarman QC in the Cardiff County Court. The proceedings concerned five versions of a covenant in long leases of chalets. The lessor contended that each clause required payment of a fixed initial sum of £90, increased by 10 per cent annually or, in one version, every three years. The lessees contended that the clauses required payment of a proportionate part of actual expenses, subject to an annually or periodically increasing cap.

The county court construed all five versions in favour of the lessees, treated the payments as service charges under section 18 of the Landlord and Tenant Act 1985, and granted declarations accordingly. The central issue on appeal was the true construction of the five clauses.

1. Appeal allowed. Each version of clause 3(2) required payment of a fixed sum of £90 and VAT for the initial period, increased by the specified 10 per cent formula. The clauses did not create variable service charges based on actual costs.
2. The court applied the ordinary principles governing construction of commercial instruments. The language had to be read in its contractual and factual context, with regard to admissible background and commercial purpose, to ascertain what a reasonable person would have understood. If the language was unambiguous, it had to be applied. A court could not rewrite a bargain merely because its consequences appeared commercially unattractive.
3. There was no special principle that a service charge clause should be construed so as to prevent the landlord making a profit. Nor were such clauses subject to an independent rule of restrictive construction. The wording and context had to be examined in the same way as other commercial provisions. General words might not be extended to cover work or services which could reasonably have been specified, but that did not alter the general approach.
4. For versions 1 to 3, the natural object of the covenant to pay was the stated yearly sum. The reference to a proportionate part of expenses identified the character of the payment. Version 4 used the word “for” to quantify the proportionate part by reference to the stated sum. The omission of “for” from its personal proviso was treated as an error which did not alter the result. Version 5 was materially the same as version 2.
5. The fact that the percentage formula might produce an onerous or profitable result, particularly towards the end of a 99-year term, did not establish absurdity, irrationality, mistake or lack of commercial purpose. The parties were bound by the fixed percentage they had chosen. The agreed annual increases operated on a compound basis.
6. It followed that the payments fell outside the definition of “service charge” in section 18(1) of the Landlord and Tenant Act 1985. Counsel were directed to agree a minute of order giving effect to the judgment.

• High Court (Chancery Division): Allowed the appeal from the declarations of HH Judge Jarman QC in the Cardiff County Court.
• Cardiff County Court: Construed the five clauses as variable service charges capped by specified sums, and made declarations under section 18 of the Landlord and Tenant Act 1985.