Landlord wins dispute over ‘£500,000 a year’ service charges

A landlord has won a legal dispute that could see 21 tenants eventually having to pay more than £500,000 a year each in service charges.

The case illustrates the danger of entering into agreements that seem a good idea at the time but may have unforeseen consequences long into the future.

The court heard that 21 tenants had taken out 99-year leases on holiday chalets back in the 1970s. Inflation was running high at the time and the leases contained clauses stating that the tenants should pay a “proportionate part” of the cost of providing services. This was set at £90 in the first year, rising by 10% a year for the duration of the lease.

The effect of compound interest meant that the tenants were eventually paying far more than the actual cost of the services provided. They argued that the leases should be interpreted as meaning that they only paid a “proportion” of the cost of services and that the 10% increase should be seen as maximum cap, not as an automatic payment.

The case went to the Supreme Court which ruled against the tenants. It held that the wording of the leases meant that the tenants agreed to the 10% annual increase, which had appeared an attractive deal in the 1970s when the rate of inflation was often much higher than that.

Although that meant that for a lease granted in 1980, the service charge would be over £550,000 per annum by 2072, there was no reason to depart from the natural meaning of the agreement.

The court would not reject the natural meaning of a term simply because it seemed imprudent for the parties to have agreed it, and it could only take into account facts or circumstances known to both parties when the contract was made.

Please contact Janice Young if you would like more information about the issues raised in this article or any aspect of commercial property law.