The High Court in a recent decision has raised doubts about the existence of hitherto generally accepted rules of interpretation of service charge clauses, namely, that landlords should not make a profit and that such clauses should be construed restrictively.
In Arnold -v- Britton (2012), a number of chalets situated in a Swansea leisure park were let on long leases. The landlord provided various services to the lessees who, in return, each covenanted to pay an initial £90 per annum, which figure was to be increased annually by 10%. The question arose as to whether the payment was a service charge within the meaning of s.18 (1) of the Landlord and Tenant Act 1985.
Though there were conflicting decisions on the point, the landlord accepted that the chalets were "dwellings" within the meaning of the 1985 Act. However, he disputed that the 1985 Act applied because the charge did not vary with the cost of the services. The lessees contended that the figure was the cap to a variable service charge.
The Court made some interesting findings relevant to both commercial and residential service charges in reaching its decision on the matter. Firstly, it questioned whether there was a principle of law that a service charge provision should not be construed so as to entitle a landlord to a profit (see, e.g., Jollybird -v- Fairzone (1990)). It said that the general rules applicable to the interpretation of commercial contracts should be applied, that what could be said was that the word "cost" would not normally be construed to include a profit element, and that the typical service charge did not normally provide for the landlord to make a profit in addition to the cost of services.
The Court further questioned the suggestion that service charge provisions should be construed restrictively (see, e.g., McHale -v- Cadogan (2010)). It again referred to the general principles that applied to the interpretation of commercial contracts.
It said that fixed and variable service charge clauses each had their pros and cons and held that, in this instance, the charge was not a variable charge within the meaning of s.18(1).