Arnold v Britton [2012] EWHC 2451(Ch) is the third holiday chalet / service charge case we’ve covered in short order (the other two are here and here). Coincidence or evidence of a growth area of work I wonder?

Anyway, back to the case. The issue was whether or not the lease provided for the payment of a service charge as defined by s.18, Landlord and Tenant Act 1985, that is to say, a charge which, inter alia, “varies or may vary according to the relevant costs”.

There were five forms of lease with five forms of clause.

Version 1: “To pay to the Lessors without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for the first three years of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent Three year period or part thereof.”

Version 2: “To pay to the Lessors without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance and renewal of the facilities of the Estate and the provisions of services hereinafter set out the yearly 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 or part thereof.”

Version 3: “To pay to the Lessor without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out the yearly 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 thereof.”

Version 4: “To pay to the Lessor without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out for the yearly 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 thereof.”

There was also a proviso: “To pay to the Lessor without any deduction in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and Value Added tax (if any) for the first Three years of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent Three-year period or part thereof.”

Version 5: “To pay to the Lessors without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance and renewal of the facilities of the Estate and the provisions of services hereinafter set out the yearly sum of £90.00 and Value Added Tax (if any) for the first year of the term hereby granted commencing on 25^th December 1974 increasing thereafter by ten pounds per hundred for every subsequent year or part thereof.”

The trial judge found that these were variable charges within the meaning of s.18, Landlord and Tenant Act 1985. Morgan J disagreed. None of the clauses were variable charges, rather, they were fixed sums which increased in a specified manner and amount at specified times.

It’s an interesting judgment which repays close reading, as Morgan J takes a very careful approach to the analysis of the language. But, I suspect, that part of the case is likely to be of limited wider relevance. What is more important is, I think, two ancillary issues.

Firstly, the judgment contains an interesting passage about profit on service charges. Most lawyers and books (including Woodfall) would say that you can’t have a profit on a service charge (absent clear words) and cite the Fairzone case for that proposition ([1990] 2 EGLR 55). The High Court held that Fairzone was a case on its facts and did not create any binding rule of law. As it happens, however, it would be an unusual service charge clause which provided for a profit to be made, as most refer only to the recovery of “costs” which would not usually mean anything other than actual costs incurred. So, same result, but different reasoning. One suspects Morgan J has long disapproved of the offending passage in Woodfall and has now ensured that it will be amended.

Secondly, there is an interesting side-line about the interpretation of service charge clauses. Again, if asked, most lawyers will tell you that the court/LVT takes a restrictive approach to such clauses and they’ll rely on Gilje, amongst other authorities. Morgan J seems to slightly disapprove of that, saying (at [45]) that the usual rules of construction apply, i.e. that there is no special rule for service charge clauses. But he does go on to note the decision in McHale v Cadogan [2010] 1 EGLR 51, at [17], where Rix LJ held that it was “… the policy of the authorities not to bring within the general words of a service charge clause anything that does not clearly belong there. To put the matter another way, service charge provisions have been construed restrictively.” There is, I think, a tension here between these two approaches and it may be that this is something we have to watch for over the next decade or so.