21 July 2015

Whoever thought a holiday in Wales could cost so much?

The negotiation and preparation of contracts is an important and necessary aspect of day-to-day life whether it is a business entering into a sale contract, a family purchasing a home or a tenant negotiating a lease. Whilst the terms of a contract are obviously enforceable, it could be seen in previous cases where the meaning of clauses were being disputed that the Courts were bending over backwards to interpret a clause in the way which they believed gave the fairest and most commercially acceptable outcome to the parties.

However, in the recent case of Arnold v Britton and Ors [2015] the Supreme Court made it clear that it is not the function of the Court to rewrite a clearly drafted contract just because the literal interpretation of its terms results in the parties being tied to a prejudicial or uncommercial outcome.

This case concerned contractual service charges payable by 25 long leaseholders of chalets at a holiday park in Wales. The leases for each chalet are for 99 years from 1974. The relevant provision of the leases provided for the lessees to pay as a service charge during the first year of their lease a fixed sum of £90 and for each subsequent year a fixed sum representing a 10% increase on the previous year. The effect of this was that the service charge would increase annually at a compound rate of 10%. As these were long leases, by the time the lease expired in 2073 the annual service charge payable by each leaseholder would be £1,025,004 (and no, that is not a typo!).

The leaseholders claimed that the literal interpretation of the clause resulted in such an outrageous and uncommercial outcome that the provision must be construed with reference to the landlord's costs of maintaining the holiday park and that the fixed sum payable should be a maximum sum payable each year as opposed to the actual sum recoverable.

Sadly for the leaseholders, the Court felt it was powerless to intervene. It said that the contracts were clear and whilst the outcome was unfortunate there was simply no room for any other interpretation. The fact that the leaseholders and their advisors had failed to appreciate the effect that the drafting would have further down the line was irrelevant. The Court will not relieve a party of a bad bargain where the language of the contract is clear.

What this means for all parties who are entering into contractual agreements is that it is absolutely vital that every clause is fully understood and the practical effect of the provisions are taken into account. In long term contracts such as leases, it is hugely important that consideration is given not just to the effect of the drafting at the immediate time but to the position in years to come.

The failure of the leaseholders to identify those risks in Arnold v Britton has resulted in their properties not just becoming valueless, but becoming hugely onerous. This case serves as a stark warning to all parties entering into any contractual arrangements of the importance of taking good advice.

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