An end to leaseholders relying on "restrictive" interpretation of residential leases

An end to leaseholders relying on "restrictive" interpretation of residential leases as Supreme Court hands down Arnold v Britton?

The Supreme Court has handed down its long awaited judgment in the case of Arnold v Britton [2015] UKSC 36 where the interpretation of a clause relating to the annual increase in value of fixed service charges was considered.

In a case first heard on 26 January 2015, Lord Neuberger, sitting with Lords Sumption, Carnwath, Hughes and Hodge, dismissed the lessees appeal which centred on the wording of a clause contained in 25 of the 91 leases relating to chalets in a caravan park in South Wales.

The 25 leases contained variants of a provision which required the lessees to pay, for the first year of the term, a fixed sum of £90 per annum and, for each ensuing year, a fixed sum representing a 10% increase on the previous year. The landlord contended that this clause should be taken at face value and not interpreted restrictively, in favour of the lessees.

However, the lessees’ case was that the landlord’s interpretation meant that their service charge contributions escalated at such an “increasingly absurdly high annual [rate]” that it could not possibly be right. They argued that, when read properly, the clause required each lessee to pay a fair proportion of the landlord’s costs of providing the services, up to a maximum of £90 per year and increasing each year by 10% on a compound basis.

The issue in this appeal is whether the landlord’s interpretation of the clause is correct.

When interpreting a residential lease, as with any written contract, the court must identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties, would have understood them to be using the language in the contract to mean”, focusing on the meaning of the words in their documentary, factual and commercial context (but disregarding subject evidence of the parties actual intentions, which is inadmissible as evidence).  

There is no special rule that residential leases should be interpreted restrictively. They should be interpreted in the same way as any standard commercial contract.

In handing down judgment, Lord Neuberger said: “Despite the unattractive consequences, particularly for a lessee holding a chalet under one of the 25 leases, I am unconvinced by [the lessees’] argument. It involves departing from the natural meaning of clause 3(2) in each of those leases, and it involves inserting words which are not there.”

For advice on how this judgment impacts upon your properties, or those of your clients, please contact Roger Hardwick, Head of Residential Leasehold.