Arnold v Britton and others

This appeal concerned the construction of service‑charge provisions in long leases for chalets at Oxwich Leisure Park. The majority applied the established, unitary approach to contractual interpretation: identify what a reasonable person with the relevant background would have understood the parties to mean and give effect to the natural and ordinary meaning of the words unless that meaning is displaced by the context. The court held that clause 3(2) should be read according to its natural language as fixing the annual sum (an initial £90) and prescribing its formulaic increases (10% compounded annually in the relevant leases), rather than as creating a variable charge capped by that figure.

The majority emphasised that courts should not rewrite contracts to rescue a party from an imprudent bargain, that commercial common sense may justify preferring one of two possible constructions but cannot be used to invent words, and that there was insufficient basis to imply a term (or rectify drafting) so as to convert the formula into a cap. The court also rejected the argument that clause 4(8) and the recital implied a term limiting the service charge to what was recoverable under earlier leases. The consequence is that the clauses produce fixed, escalating sums (which the lessees conceded are not within the statutory variable service‑charge controls in the particular circumstances of these leases).

Background and facts:

• Oxwich Leisure Park comprises 91 chalets each let on long leases (99 years from 25 December 1974). The leases contain broadly similar covenants including clause 3(2) dealing with a service charge and clause 4(8) obliging the lessor to grant other leases on similar terms.
• The leases before the court comprised several drafting variants. Seventy early leases used a formula that increased a notional £90 by 10% every three years (roughly 3% pa). Twenty‑one later leases (and four deeds of variation) used wording that, on its face, increased £90 by 10% every year (a substantially higher compound rate).
• The landlord (respondent) contended the later clauses fixed the annual charge and its annual 10% compound increases. The tenants (appellants) contended the clauses required payment of a proportionate part of the lessor's costs subject to an upper limit equal to the inflated £90 (ie that words such as "up to" should be read in), and alternatively argued that clause 4(8) and the recital limited the landlord to what could have been recovered under the original 70 leases.

Procedural history:

• The dispute began with pre‑action disclosure (county court). HHJ Jarman QC in the county court decided for the tenants. Morgan J in the High Court reversed that decision. The Court of Appeal ([2013] EWCA Civ 902) upheld Morgan J. The tenants appealed to the Supreme Court where permission was granted.

Nature of relief sought:

• The landlord sought declarations about the true construction of clause 3(2) and its status under the Landlord and Tenant Act 1985 (whether it was a statutory "service charge"). The tenants sought a contrary construction (variable charge subject to a capped formula) and relied in the alternative on implied terms arising from the letting scheme.

Issues framed by the Supreme Court:

1) Whether clause 3(2) should be construed as a fixed formula determining the annual sum (and therefore not subject to the statutory controls for variable service charges), or as a cap limiting a lessee's liability to a proportionate share of actual costs.

2) Whether an implied term arising from clause 4(8), the recital and the opening words of clause 3 limited the landlord's entitlement to the level of service charge recoverable under earlier leases.

3) Whether surrounding circumstances, commercial common sense or correction for a drafting mistake justified reading in words or implying a term.

Court's reasoning and conclusion:

• The majority applied the unitary approach to contractual construction (Chartbrook, Rainy Sky and related authorities), giving substantial weight to the natural meaning of the words while having regard to the factual and commercial matrix known to the parties. The court set out principles emphasising (inter alia) the primacy of the contract language, caution about departing from clear language merely because it produces an imprudent result, the limited role of subjective evidence, and the narrow circumstances in which courts may correct drafting mistakes.
• The majority concluded that, on natural reading and in context, clause 3(2) quantified the service charge by reference to a fixed formula and that perceived harsh consequences did not permit judicial re‑writing. The argument that the clause should be read as imposing a cap and requiring the landlord to assess costs and apportion them was rejected because it would insert words and substitute a different mechanism from that which the parties had plainly adopted.
• The court rejected the tenants' implied‑term argument based on clause 4(8) and the recital: the implied term the tenants needed would conflict with express terms, and any legitimately implied term would not assist them in avoiding the contractual liabilities they had accepted. The court also observed that statutory protections for tenants against unreasonable service charges did not apply in the particular circumstances of these leases.
• Lord Carnwath dissented: he would have allowed the appeal and read the clauses as imposing a proportionate, variable charge subject to a cap (the inflated £90) because he considered the lessor's interpretation commercially improbable and that implication or correction would give a sensible result consistent with the parties' reasonable expectations.

Appeal dismissed. The majority held that clause 3(2) should be given its natural meaning as a formula fixing the annual sum and its annual 10% compound increases; commercial improbability and the harsh consequences for lessees did not justify rewriting the leases or implying words to convert the formula into a cap. The argument based on clause 4(8) and the recital, that an implied term limited recoverable service charges to the terms of earlier leases, was rejected as inconsistent with express terms and not helpful to the appellants.

County Court (HHJ Jarman QC) decided for the tenants; reversed by Morgan J (High Court); Court of Appeal [2013] EWCA Civ 902 (Richards, Davis and Lloyd Jones LJJ) upheld Morgan J; appeal to the Supreme Court [2015] UKSC 36 (majority dismissing the appeal, Lord Carnwath dissenting).