That was what happened in Arnold v Britton & others [2015] UKSC 36. 91 long leases were granted of chalets in a holiday park on the Gower Peninsula in South Wales, 25 of which contained a service charge provision in the following terms (with minor variations):
"To pay to the Lessor without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and renewal of the facilities of the Estate and the provision of services hereinafter set out the yearly sum of Ninety Pounds and Value Added tax (if any) for the first Year of the term hereby granted increasing thereafter by Ten Pounds per hundred for every subsequent year or part thereof."
21 of such leases were granted between 1977 and 1991. The other 70 leases had been granted between 1974 and 1977 and provided for the service charge to increase by 10% every 3 years rather than every 1 year. 4 of those 70 were then varied between 1988 and 2002 to provide for the yearly rather than 3 yearly increases. Because of the compounding effect of the wording over the 99 year term of the leases, by expiry of all the leases in 2072 those with yearly increases would be paying over £550,000 per year by way of service charge, whilst those with 3 yearly increases would be paying about £1,900 per year.
The Lessees with the leases providing for yearly service charge increases therefore sought to challenge the service charge clause in the courts. The County Court judge decided in their favour, interpreting the clause as meaning they had to pay a "proportionate part" of the costs to the Lessor, capped by the formula in the second part of the clause. On appeal, the High Court judge, the Court of Appeal and the Supreme Court (by a 4 to 1 majority) all decided that the meaning of the clause was clear: that the Lessees had to pay a fixed service charge of £90 compounding by 10% yearly. Only Lord Carnwarth in the Supreme Court disagreed, preferring the County Court judge's interpretation.
Lord Neuberger, giving the leading judgement in the Supreme Court, was clear that where the natural meaning of the words used by the parties was clear, there was no room for the court to depart from them by reference to principles such as commercial common sense: "while commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice. Accordingly, when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party."
He also pointed out that the purpose of a fixed service charge clause was to provide certainty and avoid arguments over the lessor's actual expenditure and its reasonableness, and that inflation had been running at well over 10% per annum between 1974 and 1981, and over 15% per annum for six of those eight years; although it was less than 10% per annum after 1981. In other words, although it was ill-advised for the then lessees to have entered into leases in such terms, it was understandable in the circumstances of the time.
The Lessor had also (perhaps wisely) indicated that she was prepared to renegotiate the 25 leases to a formula linked to the Consumer Price Inflation index, so a just result may ultimately be achieved.
It is good to be able to advise clients that the clear words of their contracts will be enforced by the courts if necessary. The tricky bit, of course, is knowing when the words are clear. 8 out of 10 learned judges thought they were perfectly clear in this case, but 2 thought they were sufficiently unclear to permit an alternative interpretation. Does that mean they were only 80% clear?
