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Interpreting lease clauses: The power of words

Napthens - July 7th 2015

The Supreme Court has recently upheld the Court of Appeal decision in Arnold v Britton [2015] on the interpretation of a service charge clause in a lease – a decision which illustrates how the courts will enforce the literal meaning of words used in a lease, even if to do so would lead to a potentially absurd commercial result.

This case (originally heard in 2013) concerned a dispute over the service charge on a number of holiday chalets in South Wales.

The service charge began at £90 per year which increased at a compound rate of 10% every year for some chalets and every three years for others. This fixed annual increase meant that by 2072 each tenant could be paying a service charge of £550,000 per annum. The tenants argued that this interpretation would eventually result in such an absurdly high annual service charge that it couldn’t be correct. However, the Supreme Court upheld the literal meaning and held in favour of the landlord.

Although the case is primarily relevant to services charges in residential leases, the courts are likely to interpret such clauses in a similar, if not stricter way in a commercial landlord and tenant context.

Regardless of whether a contractual agreement (including a lease term) may seem unconscionable and/or uncommercial for one party, this case is a very strong indication that (aside from exceptional circumstances) where the wording of a clause is clear, commercial considerations will not overrule the interpretation of the parties’ intentions as determined from the words used.

This decision also highlights the importance of obtaining advice at the outset of negotiations and to ensure that you understand the nature and long-term effect of each clause in a lease or any written agreement before putting pen to paper.