Arnold v Britton & Ors

A service-charge covenant is construed by ordinary contractual principles. The court must ascertain the meaning of the language in its context and in light of its apparent commercial purpose. There is no special rule that prevents a service charge from producing a landlord’s profit or loss.

A fixed charge with a stated compound increase remains enforceable even where it ultimately bears little relation to the cost of the services. The court cannot introduce a cap, or otherwise remake the bargain, merely because the result later appears harsh or commercially unattractive. Correction by interpretation requires a clear mistake and a clear intended meaning.

The claimant freeholder brought Part 8 proceedings seeking declarations on the construction of service-charge covenants in five versions of long leases of holiday chalets. Each covenant referred to a proportionate part of expenses and outgoings, but also specified an annual sum of £90 with compound increases of ten per cent at annual or three-yearly intervals.

County Court: HHJ Jarman QC construed the provisions as variable service charges subject to a cap, principally because the freeholder’s construction could generate substantial surpluses.

High Court: Morgan J allowed the freeholder’s appeal and granted declarations that the clauses required fixed payments: [2012] EWHC 3451 (Ch).

The lessees appealed. The central issue was whether the stated sums fixed the annual charge or merely capped a proportionate contribution to actual expenditure.

1. Appeal dismissed unanimously. The clauses required payment of a fixed annual sum of £90 in the first year, followed by the stipulated compound increases. They did not create a variable service charge capped at those sums.

2. The starting point was the ordinary process of contractual interpretation. A service-charge covenant has no special construction rule. Although such covenants will commonly be intended to reimburse the cost of services, that commercial expectation cannot displace language which, properly construed, creates a fixed charge.

3. In version 3, the words identifying the yearly sum were naturally the object of the covenant to pay. The preceding words describing a proportionate part of expenses and outgoings identified the character of the payment and the apportionment among estate lessees. They did not require a correlation between each lessee’s payment and the freeholder’s actual outlay.

4. The lessees’ proposed cap could not be derived from the wording. It would require the court to add terms. Nor was there a sufficiently clear drafting mistake, coupled with a clear intended correction, to justify that course. Their construction also left unresolved how the proportionate share was to be calculated and imposed an uncommercially one-sided risk on the freeholder if inflation exceeded ten per cent.

5. A fixed escalating charge can over-compensate or under-compensate the provider. That was the parties’ allocation of the risk of future inflation in exchange for certainty. The eventual size of the charge was unattractive but reflected the bargain made, not a basis for judicial revision. The same reasoning applied to all five versions; versions 2 and 5 made the character of the fixed payment still clearer, and version 4 supported that construction.

• Court of Appeal (Civil Division): dismissed the lessees’ appeal and upheld the fixed-charge construction.

• High Court (Chancery Division, Cardiff District Registry): Morgan J allowed the freeholder’s appeal from the County Court and granted the requested declarations: [2012] EWHC 3451 (Ch).

• County Court: HHJ Jarman QC had granted declarations in favour of the lessees, construing the sums as caps on variable service charges.