I’ve never liked the Gower. I recognise that, objectively, it’s quite beautiful, but it was ruined for me by a camping holiday as a child. It was cold and wet. The rain was almost biblical in volume. There was nothing to do. And I ran out of books to read. It scarred me.
But NL isn’t here for my therapy. Oh no. We comment on housing law. Which brings me to Arnold v Britton [2013] EWCA Civ 902. We covered the High Court here. It concerns holiday chalets in the Gower. They’re let on long leases with covenants to pay service charges. The question is what sort of s/c and in what sum. There are five different versions but, in essence, the tension in each of them is that they provide for the payment of a “proportionate part” of the expenses, and for payment of a fixed sum which increases by fixed proportions at specified periods. The leaseholders wanted to pay the “proportionate part” and said that this was a variable service charge within the meaning of s.18, Landlord and Tenant Act 1985. The landlord denied this and said that it provided for a fixed charge outside of the 1985 Act.
This was important for two reasons. First, the 1985 Act provides a range of rights to leaseholders in respect of service charges (e.g. right to challenge unreasonable charges). Secondly, the amounts payable under the two different provisions were radically different. The first is, in effect, covering costs whereas the second would, at the end of the leases, involve a service charge of over £1,000,000 p.a. For a holiday chalet. In the Gower.
The Circuit Judge had found for the leaseholders and was, it appears, driven as much by the obvious unfairness of the alternative result. Morgan J in the High Court allowed an appeal; on the normal rules of contractual construction, this was a fixed charge.
The Court of Appeal upheld that conclusion. Whilst, morally, they felt that the leaseholders should be right, the clauses were clear and it would be wrong to re-write the bargain.
Two issues arise in the judgement. First, these leases are, I suspect, now practically worthless (or, at least, have seen their value adversely affected). Who would take an assignment of a lease containing such an onerous clause? The Court suggested that the parties should now do a deal, but I can’t see why the landlord would want to do so. He is, I suspect, now able to make a regular profit under the terms of these leases. The leaseholders are, I suspect, good for the money. They will almost certainly own other property, so he can secure any debts against that other property (and ultimately seek an order for sale). The Court seems to have a much rosier view of human nature than me.
Secondly, there is a very interesting (and not very clear) discussion about the construction of service charge clauses. As we noted in the High Court judgment, Morgan J seems to rally against the orthodox approach, i.e. that s/c covenants are to be interpreted restrictively, see e.g. Gilje. He also dismissed the idea that there was any rule against s/c yielding a profit. The Court of Appeal elided these two concepts together – i.e. there is no rule against profit, but if it appears that a lease permits the same, then it must be examined very closely, since that is not the normal purpose of s/c provisions. There is, I think, more in here but I’ll need to think about this for a bit.
As for my prejudices – well, just another reason not to go back to the Gower (or, at least, not to own one of these chalets). I really feel for the leaseholders here. This is true “rock and a hard place” stuff. Is it worth a roll of the dice on a Supreme Court appeal?
I wondered if the versions lost, at some stage, a clause treating the sums as “on account” but clearly not. I can see how that while it would be an enormous charge, it would put the landlord in the position of being able to reconstruct the park after 99 years.That too would have a logic to it in that that the service charge would increase, accepting years of profit and loss, and ultimately balancing out at the end. The payment of a proportionate part seems to negate that unless it fits in with the overall cashflow of an escalting fixed charge. While it seems a tortured way to achieve something, it does have advantages to both parties unless the LL tries to have his cake and eat it.
While wandering over a roof checking off completed work my memory caught up on this. In the early days of spec built leaseholders I have seen fixed charges which were NOT on account, and were intended to offset the LL’s costs profit and interest as in many cases service charges were charged “in arrear”.
In my first proper job we were instructed by a noteable builder who appointed us as agents ( or fees being recoverable ) as inflation had ravaged the fixed increases.
While this case is unusual, if we are looking at profit in SC, barring a restriction or inclusion, isn’t section 19 intended to cover that – what is fair and reasonable in scope and in cost. If for example agents are retained and paid what is the landlord doing in order to earn a profit? It opens up an interesting area if the overall cost is “F’n’R” but the LL can drive down the cost or get payment terms benefits/rebates because of say buying power. What should be passed on and what can be retained? Certainly in variable SCs in registered rents, profit was quite common in our buildings in the 80/90’s especially where plant had been replaced and was being recovered by depreciation or staged recharges.
“Is it worth a roll of the dice on a Supreme Court appeal?” – quite possibly, permission to appeal was granted on 11/02 by Lords Neuberger, Carnwath and Toulson.
The SC hearing will be on 26 January 2015
https://www.supremecourt.uk/cases/uksc-2013-0193.html
Judgment in SC for Arnold: https://www.supremecourt.uk/cases/docs/uksc-2013-0193-judgment.pdf
Appeal was unsuccessful (by 4-1 majority).