[2015] UKSC 36; [2015] AC 1619; [2015] 2 WLR 1593; [2016] 1 All ER 1; [2015] HLR 31; [2015] 2 P&CR 14; [2015] L&TR 25; [2015] CILL 3689, 10 June 2015
A requirement to pay a proportion of a fixed amount was not a service charge within the meaning of Landlord and Tenant Act 1985 s18. The Supreme Court also gave guidance on the correct approach to construing service charge recovery clauses in leases
Lessees held long leases of chalets on a leisure park. There were 91 chalets held under 21 leases. Each lease contained a covenant by the lessee to pay an annual service charge, typically ‘a proportionate part’ of the cost of providing the services, expressed to be £90 in the first year, rising by 10 per cent each year thereafter. The landlord argued that the leases provided for a fixed service charge of £90 with a yearly increase of 10 per cent. The lessees argued that it meant that they had to pay a fair proportion of the cost of providing the services, up to a maximum of £90 in the first year, that maximum figure rising by 10 per cent each year thereafter. HHJ Jarman QC held that the lessees were obliged to pay a proportionate part of the expenses and outgoings incurred, but limited to the figures in the leases. Morgan J allowed the landlord’s appeal. The Court of Appeal dismissed the lessees’ further appeal.
The Supreme Court dismissed a further appeal. The covenants clearly referred to fixed sums increasing in a specified manner. They were not service charges within the meaning of section 18. It followed that the charges could not be challenged as being unreasonable in amount under Landlord and Tenant Act s19. Further, the interpretation of contractual provisions, including those relating to service charges, involved identifying what the parties had meant through the eyes of a reasonable reader. Except in very unusual cases, that meaning was most obviously to be gleaned from the language of the provision. Although the less clear the relevant words were, the more the court could properly depart from their natural meaning, it was not to embark on an exercise of searching for drafting infelicities in order to facilitate a departure from the natural meaning. Commercial common sense was relevant only to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date on which the contract had been made. It was not the function of a court to relieve a party from the consequences of imprudence or poor advice. Lord Neuberger stated:[17] … First, the reliance placed in some cases on commercial common sense and surrounding circumstances (eg in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.
[18]… Secondly, when it comes to considering the centrally relevant words to be interpreted, I accept that the less clear they are, or, to put it another way, the worse their drafting, the more ready the court can properly be to depart from their natural meaning. That is simply the obverse of the sensible proposition that the clearer the natural meaning the more difficult it is to justify departing from it. However, that does not justify the court embarking on an exercise of searching for, let alone constructing, drafting infelicities in order to facilitate a departure from the natural meaning. If there is a specific error in the drafting, it may often have no relevance to the issue of interpretation which the court has to resolve.
[19] … The third point I should mention is that commercial common sense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language. Commercial common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made. …
[20] … Fourthly, 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.
[21] … The fifth point concerns the facts known to the parties. When interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time that the contract was made, and which were known or reasonably available to both parties. Given that a contract is a bilateral, or synallagmatic, arrangement involving both parties, it cannot be right, when interpreting a contractual provision, to take into account a fact or circumstance known only to one of the parties. …
[23] … Seventhly, reference was made in argument to service charge clauses being construed “restrictively”. I am unconvinced by the notion that service charge clauses are to be subject to any special rule of interpretation. … The origin of the adverb was in a judgment of Rix LJ in McHale v Earl Cadogan [2010] HLR 412, para 17. What he was saying, quite correctly, was that the court should not ‘bring within the general words of a service charge clause anything which does not clearly belong there’.