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Arnold v Britton – Correct approach to contractual interpretation

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05/02/2016

In the context of a lease service charge dispute, but in a case with far-reaching impact for commercial contracts generally, the Supreme Court confirmed the correct approach to contractual interpretation.

Arnold v Britton concerned the service charge provisions in 25 holiday chalet leases. In accordance with the ordinary natural meaning of the wording of the relevant clause, both the High Court and the Court of Appeal had previously agreed with the landlord that the provisions obliged the tenants to pay a fixed yearly service charge amount which rises at the rate of 10% per annum, irrespective of the cost to the landlord of providing services. That meant, however, that service charges payable per year would top over £½ million by the end of the leases – and these were just modest chalets, the use of which is restricted to half of each year only. In light of the disastrous economic consequences of this interpretation, the tenants appealed. The Supreme Court dismissed the appeal and clarified the correct approach to contractual interpretation.

The property industry and commercial litigation commentators alike had awaited this decision with interest. The main question was whether commercial efficacy would become enshrined in service charge and other commercial contract clauses. The Supreme Court’s answer was that, whilst consideration of commercial common sense can, in the right circumstances, be taken into account, it is not a criterion of contractual interpretation that should undermine the importance of the clear language of a clause. In short, ‘contract is king’.

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