Whether you are a landlord planning major works, a managing agent setting a budget or a leaseholder looking at a demand, the service charge clause in the lease decides what can be recovered. On 10 June 2015 the Supreme Court gave judgment in Arnold v Britton, and it made clear that a court will not rewrite a badly drafted clause just because it has turned out badly for one side.
What the case was about
The leases were of holiday chalets in a leisure park. Each lease set a fixed annual service charge that increased by ten per cent every year, compounding. When the leases were granted that might have looked sensible. Decades later, with inflation far lower than the drafters expected, the charge was heading towards sums out of all proportion to the cost of the services.
The leaseholders argued that the clause should be read as a proportionate share of costs, capped at the stated figure. By a majority of four to one, the Supreme Court disagreed. Lord Neuberger said that commercial common sense matters, but it should not be used to undervalue the natural meaning of the words, and that a bad bargain is not a reason to depart from what the parties agreed.
What it means in practice
- Read the lease before you plan. Check that each element of a programme, whether repair, renewal or improvement, is recoverable under the wording.
- Check the apportionment. Fixed percentages, floor area shares and “fair proportion” clauses produce different results, and the court will apply what is written.
- Do not rely on rescue. If a clause is unclear, the remedy is a variation or proper advice, not an assumption that a tribunal will read it generously.
- Plan ahead. A long term maintenance plan, set against the lease, shows leaseholders what is coming and why it is chargeable.
For leaseholders
The same principle cuts both ways. If the lease does not allow a cost to be charged, a landlord cannot recover it simply because it would be sensible. Asking to see the clause relied on is a fair and reasonable question.
Our Major Works and Planned Preventative Maintenance services start with the lease. See how we built a ten year maintenance plan for a managing agent, and how two mansion blocks were taken through one programme.