Supreme Court Rules on Bad Bargain
Published bySteven Docherty
In this article, we provide a summary of a recent case from the UK Supreme Court on the question of landlord recovery of service charges.
The case is important because of the general points which the court made about the consequences when a party enters into a “bad bargain”.
The case is Arnold v Britton & Others, and turned on the interpretation of the clause relating to recovery of service charges by the landlord in a 99 year lease which was entered into in the 1970s. When the lease was entered into, the service charges were £90 per year, but the lease provided that, each year throughout the 99 years of the lease, this would increase at a compound rate of 10%. The service charges payable by the end of the lease would therefore end up at about £550,000 per year! Unsurprisingly, the tenant challenged the formulation, essentially on the grounds that the landlord would obtain a windfall because the actual service costs incurred by the landlord were a lot less.
However, no matter how unfair or obnoxious the compounded charges might seem, the Supreme Court refused to interfere because the clause in question was quite clear as to its terms. The court’s view was that its job is only to interpret the contract, not to re-write it even if it has a catastrophic result for one of the parties.
The judges recognised that, when the lease was entered into, the clause would have made commercial sense – inflation was spiralling in the 1970s, and the compounded increase in service charges was possibly a sensible way of accounting for what would have been the anticipated increases in the cost to the landlord of providing the services. Of course, inflation then came back under control in subsequent years, so the anticipated outcome did not emerge, but the court’s view was that this shouldn’t change the meaning or impact of the clause.
The learning point for all businesses entering into contracts is to think through the possible consequences of a clause, from all angles, before deciding whether to agree. Of course, taking good legal advice is very important here, but the point to remember is that, if a contract ends up having unfair results, the courts might not be able to do anything if the clause was perfectly clear.
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