Lease drafting – a cautionary tale

The importance of ensuring that lease provisions are correctly drafted was recently highlighted by the Supreme Court decision in Arnold v Britton, discusses commercial property partner Nigel Whittaker.

This case related to a number of holiday chalets at Oxwich Leisure Park in Wales which had been let on long leases. There were several versions of the service charge provisions within the various leases but, essentially, each one placed an obligation on the tenant to pay a service charge “in the 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”.

The landlord, Arnold, took the view that the service charge was therefore a fixed sum which would increase at a compound rate of 10% in each year, and this would mean that by 2072 each tenant would have to pay a service charge in excess of £500,000 each year irrespective of what services were actually provided!

The Supreme Court held that Arnold was correct and stated that when interpreting a written contract the court should focus on the facts and circumstances known by the parties at the time the document was executed and the natural and ordinary meaning of the wording. If the words are clear then it would be very difficult for a court to justify departing from them, even if to do so would bring about commercial common sense and assist a party who had made a bad bargain. It is for the court to identify what the parties have agreed and not what the court thinks they should have agreed.

This has, unfortunately, resulted in alarming and financially disastrous consequences for the tenants of these chalets but reinforces the importance of carefully checking the wording of a lease.

Commercial property lead partner, Nigel Whittaker is a “highly regarded property specialist” who acts for a diverse range of business and charity clients as well as investors on the acquisition and disposal of high value commercial premises.

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