Extreme Service Charges

In a recent decision of the Supreme Court, Arnold v Britton [2015] UKSC36, the occupiers of some of the holiday chalets at the Oxwich Leisure Park, on the Gower peninsula, lost their appeal to have their leases read in such a way so as to avoid payment of exorbitant service charge. Some of the leases, which were granted in the early 1970's, when inflation was running at higher than 10%, much higher than now, obliged them to pay an initial service charge of £90 increasing year by year by 10%. That may not sound too bad, but the leases were for 99 years, and the annual increase of 10% was on a compound basis. As a result, the service charge payable in 2012 was £3,366 and in the final year (2072) will be £1,025,004. A lot of money to pay for having the grass cut and the paths kept tidy.

The result came about because the parties to these leases took a bet that inflation would continue to run at a relatively high rate and the pound would depreciate annually as a result. If it ran higher than 10%, the owner of the land would lose out; if lower, the leaseholder of the chalet would lose out. But the wording of the lease was unequivocal, it plainly stated the service charge was fixed at £90 for the first year and would escalate at an annual rate of 10% of the amount paid in the previous year throughout the remainder of the lease- a fixed amount increasing annually at the compound rate stipulated therein.

In their appeal, the leaseholders argued that the leases should be read in such a way that the service charge clause imposed a cap on the annual amount payable, so that the annual charge did not exceed the limit but would come in lower, to be fixed at an amount which reflected the cost of the actual services provided. Usually this is the case. Most leases, whether residential or commercial, are drafted to provide for service charge to be paid according to what the landlord actually expends and the cost to be shared equally, or in fair proportions, among the leaseholders, whether in a block of flats or a shopping centre. Indeed, for commercial leases, the RICS has drawn up a code of good practice to promote transparency of accounting, advance estimates, impartial dispute resolution, regular consultation and fairness of allocation where, for example, offices or retail units are of different sizes.

In the residential sector, which includes the leisure park at Oxwich, far-reaching rules and regulations have been introduced by Parliament to ensure that...