Arnold v Britton & Ors

Factual and Procedural Background

The dispute centres on service-charge clauses contained in ninety-nine 99-year leases of holiday chalets in a leisure park (“the Estate”) in South Wales. All leases commenced on 25 December 1974 and reserve a nominal ground rent. The lessor covenanted to provide common services (maintenance of roads, paths, fences, drains, lawn-mowing, refuse removal and security patrols). Each lessee covenanted, in clause 3(2), to pay a service charge.

Seventy early leases (granted 1974-1980) adopt a triennial formula: an initial £90, increased by 10 % every three years (≈ 3 % p.a.). Between 1980 and 1991 twenty-one further leases were granted on two variant wordings that require the same £90 to increase by 10 % every year. Four of the original seventy leases were formally varied in 2000 so that the annual 10 % escalator replaced the triennial one. Thus twenty-five leases (“the 25 Leases”) carry the annual compound escalator; sixty-six do not.

The Respondent, current landlord, demanded service charges on the basis that the annual 10 % increase created a fixed, ever-escalating liability. The Appellants, who hold twenty-four of the twenty-five leases, contended that the wording merely set an upper limit, leaving the charge otherwise tied to a fair proportion of actual expenditure. They alternatively relied on a “letting scheme” argument, asserting that the Respondent could not recover more than is recoverable under the earlier seventy leases.

In the County Court Judge Jarman QC accepted the Appellants’ construction; the High Court (Judge Morgan) and the Court of Appeal (Judge Davis LJ giving the only judgment) reversed him. The Supreme Court heard a further appeal and, by majority (Judge Neuberger, Judge Hodge and Judge Hughes), dismissed it; Judge Carnwath dissented.

Legal Issues Presented

1. Whether clause 3(2) in the 25 Leases imposes a fixed service charge of £90, rising by 10 % each year on a compound basis, irrespective of the landlord’s actual costs; or instead sets a maximum, so that lessees pay only a proportionate share of real expenditure capped at the escalating figure.
2. Whether, by reason of a letting-scheme obligation (recital (2), clause 3 introductory words and clause 4(8)), the Respondent is precluded from recovering more than is recoverable under the earlier seventy triennial-formula leases.

Arguments of the Parties

Appellants' Arguments

• The natural reading of “a proportionate part of the expenses … the yearly sum of Ninety Pounds … increasing thereafter by Ten Pounds per Hundred” requires the words “up to” or similar to be implied, making the figure a cap, not a fixed amount.
• The Respondent’s interpretation yields absurd and commercially disastrous results (e.g. a charge exceeding £2,500 by 2015 and £550,000 by 2072) and thus offends commercial common sense.
• Recital (2) and clause 4(8) create a letting scheme obliging the landlord to grant all leases on similar terms; therefore the Respondent cannot demand more than under the earlier triennial leases.

Respondent's Arguments

• The wording is unambiguous: the second half of clause 3(2) quantifies the service charge as a fixed, annually rising sum; the first half merely describes its character.
• Commercial common-sense cannot override clear language; lessees assumed the inflation risk.
• Clause 4(8) concerns future leases only and does not impliedly vary existing express terms; in any event a letting scheme cannot curtail the express monetary obligation in clause 3(2).

Table of Precedents Cited

Court's Reasoning and Analysis

Majority (Judge Neuberger, with Judges Sumption and Hughes concurring; Judge Hodge agreeing):

• The interpretative task is to ascertain objectively what a reasonable person with the relevant background would understand the parties to mean. Six core interpretative principles were restated, emphasising primacy of the contractual language and caution against using commercial common sense to undermine clear words.
• Clause 3(2) naturally divides into (i) a description of the service-charge obligation and (ii) a mechanism that quantifies it. The second half fixes the sum; it does not merely cap it. Drafting infelicities and escalating figures do not justify inserting words (“up to”) absent from the clause.
• The commercial consequences, however unattractive for lessees, cannot override clear language. Parties sometimes make bad bargains; courts cannot rescue them under the guise of construction.
• The “letting-scheme” provisions (recital (2), clause 3 opening, clause 4(8)) do not incorporate earlier service-charge formulas by implication: (a) it is doubtful a scheme extends to positive monetary covenants at all; (b) clause 4(8) is forward-looking; (c) even if a term were implied, it would mirror the wording of the 25 Leases, not contradict it; and (d) any breach would sound in damages, not alter the express obligation.
• Accordingly the Respondent may recover the fixed, annually escalating sums.

Dissent (Judge Carnwath):

• Both halves of clause 3(2) are mutually inconsistent, generating ambiguity. Interpreting the second half as a cap reconciles the language and avoids commercially absurd results (liabilities exceeding £11 million per lease).
• Context shows the escalator was initially designed to protect lessees against inflation, not to create windfalls for the landlord. Ordinary purchasers would never have accepted perpetual 10 % compounded increases.
• Using accepted techniques (corrective construction, implied terms, business common sense) the court should read in words limiting the charge to “up to” the stated figure.

Holding and Implications

Holding: the Supreme Court (by majority) DISMISSED the appeal. Clause 3(2) requires payment of a fixed annual sum of £90 increasing by 10 % each year on a compound basis; the Respondent is entitled to recover that sum, and the letting-scheme argument fails.

Implications: The Appellants remain liable for escalating service charges that will rise steeply over the remainder of the 99-year terms. The decision endorses a strict textual approach to lease interpretation and signals judicial reluctance to override clear, albeit onerous, contractual language. No new rule of law was created, but the case highlights potential gaps in statutory protection for residential tenants facing fixed but escalating service charges.