Legal Q&A: service contract terms

Question

I have a 125-year lease of a flat in a large block which provides for the payment of a service charge to maintain the communal areas of the building. The service charge was £70 in the first year of the term but the lease provides for it to increase “by five pounds per hundred for every subsequent year”. My landlord says this means that the service charge increases on a compound basis by 5% every year. This interpretation will have disastrous financial consequences for me if correct. Is this what the provision really means?

The lease also contains a provision requiring me to keep the property in good repair and condition. One wall in the kitchen has been damaged by smoke and I believe I need to remove part of the wall and replace it to comply with this clause. There are patterned tiles on the wall I would like to keep once removed. Do they belong to me or my landlord? I don’t believe they are valuable, does that make a difference?

Answer

The court will decide what a reasonable person would understand the service charge provision to mean. The court will find that your landlord’s interpretation is correct if the language used unambiguously supports it. If there is ambiguity the court will take the commercial consequences into account and might interpret the provision more favourably to you. There is unlikely to be a term in your lease dealing with ownership of the tiles so the court will imply a term. The default position is the tiles belong to the landlord.  

Explanation

The court will decide what the service charge provision in your lease means by reference to what a reasonable person having all the background knowledge of the parties would understand it to mean: Chartbrook v Persimmon Homes [2009] UKHL 38; [2009] 27 EG 9. Unfortunately, the court could find that your landlord’s interpretation is correct. The facts of your case are similar to those in Arnold v Britton [2015] UKSC 36; [2015] EGLR 53, which concerned the interpretation of service charge contribution provisions in leases of chalets in a caravan park. The relevant clause indicated that an initial service charge of £90 would increase on a compound basis by 10% every three years or, in some cases, every year.

The appellant lessees argued that the consequences of this interpretation meant it could not be right, since it imposed an obligation to pay an absurdly high sum. The Supreme Court disagreed. Finding for the respondent, Lord Neuberger made three points about the extent to which the court should take the commercial consequences into account:

(i) The reliance placed in some cases on commercial common sense should not be invoked to undervalue the importance of the language, over which the parties had control;

(ii) Commercial common sense cannot be invoked retrospectively. A contractual arrangement working out disastrously for one party does not justify departing from the language; and

(iii) Commercial common sense is a very important factor, but a court should be slow to reject the natural meaning of a provision simply because it was an imprudent term for one of the parties to have agreed. The court cannot re-write a term to assist an unwise party or penalise an astute one.

The emphasis placed on the importance of language over commercial considerations in Arnold means that a court examining the provision in your lease could be more reluctant to depart from the natural meaning than before it was decided. If the term is unambiguous the court will probably favour your landlord’s interpretation, despite the disastrous financial consequences for you. If there is ambiguity in the language the court will take those consequences into account and you might succeed.

If the court does find in your landlord’s favour, you could try to negotiate a variation of the lease. Keep an eye out for legislative reform: Lord Hodge commented in Arnold that parliament could consider extending provisions protecting tenants against unreasonable service charges; and the government’s consultation paper Tackling unfair practices in the leasehold market is currently examining similar problems associated with “doubling” ground rent provisions.

The question of the wall tiles is more difficult. While there will be clauses in your lease of some relevance, such as restrictions on alterations and obligations to repair, there is unlikely to be anything specific about ownership of the tiles. Therefore the court will be required to imply a wholly new term. A similar question arose in The Creative Foundation v Dreamland Leisure Ltd and others [2015] EWHC 2556 (Ch); [2015] EGLR 63, the well-known case about the Banksy mural removed by the tenant from the outside wall of a building in Folkestone and taken to an art gallery in New York. A valuation of almost half a million pounds had been put on the mural. Unsurprisingly there was a dispute as to who owned it. The case gave rise to some interesting arguments about how the existing lease clauses might be applied and, more importantly, what term the court might imply to answer the question.

The principles to be applied regarding the implication of terms in written agreements are set out in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10. This provides a clear distinction between cases where existing terms are to be interpreted and those where there are no terms in the agreement dealing with the question. As shown in Arnold, where there are clear terms, the court’s ability to interfere is extremely limited. However, where there isn’t a term dealing with the question, the court can imply a term but must have close regard to the terms of the lease.

In Creative Foundation the court found that the mural belonged to the landlord. In doing so it was said that the value of the mural was a relevant consideration. Further, in default of a specific provision, every part of the property belongs to the landlord. The tenant only has an interest for a period of time; in that case 20 years. Your case can be distinguished on both grounds – you have a much longer lease and the tiles are unlikely to have any value. They may also have been installed by a former tenant, as opposed to a third party. Therefore, you may be safe in keeping the tiles but would need to carefully check your lease to ensure there is nothing else that might lead to a different conclusion.

This article was written by James Souter  and Madeline Dixon (Enterprise Chambers). For more information please contact James on +44 (0)20 7427 6716 or james.souter@crsblaw.com