England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CARDIFF DISTRICT REGISTRY
MORGAN J
HC06C02169

		Royal Courts of Justice Strand, London, WC2A 2LL
		22/07/2013

Lord Justice Davis :

1. This case, which comes before the court on appeal from a decision of Morgan J dated 3 December 2012, raises points of interpretation of certain service charge clauses. The clauses are contained in long leases granted in respect of 25 properties, being holiday chalets at Oxwich Leisure Park, Oxwich, Gower, near Swansea. For reasons which remain unexplained, the clauses are not in precisely the same terms for each lease – there are five different versions extant.
2. The essential issue, in short, is whether – as the claimant lessor says – the clauses provide for annual compounded increases, at the rate of 10%, in the charges payable; or whether – as the defendant lessees say – the charges are subject to a cap. The judge (reversing the decision of the judge in the county court) found in favour of the lessor.
3. To make sense of the arguments it is appropriate to turn straightaway to the various versions of the leases.

Version 1

4. The first version of the lease is exemplified by that dated 9 August 1977. It relates to chalet 40. There are three other leases currently vested in some of the defendants on like terms, variously granted between 11 August 1977 and July 1980.
5. The lease was a building lease for which no premium was paid. In its recitals it is stated that: "It is intended to erect chalets on the Estate upon terms similar in all respects to the present demise".
6. By the lease, the chalet, a car parking space and some further land was demised for a term of 99 years from 25 December 1974. Among other things, rights of passage, rights to use sewers and pipes and the right to use an identified recreation area were granted to the lessee. The rent reserved was £10 per annum increasing thereafter by £5 for every subsequent 21 year period or part thereof, payable by equal half-yearly payments.
7. Clause 3 contains a number of covenants on the part of the lessee. The first is a covenant to pay the rent. The second – central to these proceedings – is in the following terms:

"(2) To pay to the Lessors without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for the first three years of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent three year period or part thereof."

8. A number of other covenants on the part of the lessee are then set out. Amongst other things, the permitted use was as a holiday residence for a single family only during the months of March to October in each year.
9. There were also covenants on the part of the lessor contained in clause 4. These are in the following terms:

"4. The Lessors hereby jointly and severally covenant with the Lessee as follows:

(i) To construct and maintain in a reasonable state of repair the roads and footways coloured Brown on the said plans up to but not thereafter (if at all) the same becomes maintainable at the public expense.

(ii) To mow the lawn or grass and prune the trees (if any) on the parts coloured Green on the said plans but this is not to imply the replacing of the turf or reseeding of grass and fertilizing of soil or replanting of trees.

(iii) To keep the recreation ground coloured Yellow on the said lay-out plan in a reasonable state or repair and maintenance for the common benefit and enjoyment of the Lessors and all Lessees on the Estate.

(iv) To keep fences drains channels sewers pipes wires ducts and conduits other than those maintainable by the Lessees in good and tenantable repair.

(v) To issue regulations from time to time for the common benefit of all occupiers of chalets on the Estate concerning the use of the recreation ground the parking of vehicles the collection of refuse the control and keeping of domestic pets and animals the use of and payment for the use of the swimming pool (if any) and other additional facilities that may be provided on the Estate at present or at any future time.

(vi) To arrange for the collection of refuse from predetermined places twice a week the time and places to be indicated in accordance with sub-clause (v) above.

(vii) To patrol the Estate twice by day and once at night in order to discourage vandalism or theft or breaking in during the period the demised premises shall be unoccupied but this is not to imply any liability on the part of the Lessors or their employees or agents.

(viii) That the Leases granted by the Lessors of all other plots on or comprised in the estate shall contain covenants on the part of the Lessees thereof to observe the like obligations as are contained herein or obligations as similar thereto as the circumstances permit.

(ix) That the Lessee paying the rent and other payments hereby reserved and performing and observing the several covenants on his part and the conditions herein contained shall peaceably hold and enjoy the demised premises and the rights hereby granted during the said term without any lawful interruption from or by the Lessors or any person lawfully claiming under or in trust for them."

There was also a forfeiture clause in standard wide terms.

Version 2

10. The second version of the lease is exemplified by that dated 22 September 1980, relating to chalet 76 and parking space. On this occasion, a premium of £13,000 was payable. There are 13 other leases of this kind vested in various of the defendants, variously granted between August 1980 and February 1983. It is identical to version 1 save as to the service charge provisions in clause 3(2), which reads as follows:

"(2) To pay to the Lessors without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance and renewal of the facilities of the Estate and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for the first year of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent year or part thereof."

The essential difference is that, first, the word "as" appears before the words "a proportionate part"; and second, the identified sum of £90 is linked to the first year (not first three years) of the term and thereafter increasing by £10 for every subsequent year (not subsequent three years).

Version 3

11. The third version of the lease is exemplified in that dated 1 July 1985, relating to chalet 96 and car-parking space. The premium was £16,500. There are two other leases of this kind, granted between July 1985 and January 1988. In this form of lease, the recital now says: "It is intended to erect chalets on the Estate upon terms similar in respects to the present demise". The word "all" has thus been removed. Clause 3.2 is in these terms:

"(2) To pay to the Lessors without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for the first year of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent year thereof."

Version 4

12. The fourth version of the lease is exemplified in that dated 22 March 1991, relating to chalet 29 and car-parking space. The named lessees were Mr and Mrs Short. The premium payable was £16,000. There are three other leases of this kind, granted between December 1988 and March 1991. The recital is the same as in version 3 and the provisions are, save as to clause 3(2), also otherwise the same. Clause 3(2) in this version of the lease reads as follows:

"(2) To pay to the Lessor without any deductions in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out for the yearly sum of Ninety Pounds and value added tax (if any) for the first year of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent year thereof."

The difference here is that the word "for" has been added before the words "the yearly sum of Ninety pounds…" In addition, however, there is a proviso to this lease which reads as follows:

"Provided always and it is hereby expressly agreed that whilst the term hereby created is vested in the said William Richard Short and the said Janice Short or the survivor of them then maintenance shall be calculated as follows:-

To pay to the Lessor without any deduction in addition to the said rent a proportionate part of the expenses and outgoings incurred by the Lessor in the repair maintenance renewal and the provision of services hereinafter set out the yearly sum of Ninety Pounds and value added tax (if any) for the first three years of the term hereby granted increasing thereafter by Ten Pounds per Hundred for every subsequent three year period or part thereof."

We gather that the lease has for some time ceased to be vested in Mr and Mrs Short (the original lessees).

Version 5

13. The fifth version is that exemplified in a Deed of Variation dated 20 August 2000. That operated to vary the version of the lease dated 9 August 1977 (that is, version 1). The Deed of Variation revised the extent of the land demised and involved a surrender of part by the lessee. A similar deed was entered into in respect of three other of the chalets. In particular, for present purposes, a new clause 3(2) was substituted for the original clause 3(2) and expressed to be as though it had been originally contained in the lease. The new sub-clause reads as follows:

"3(2) To pay to the Lessors without any deductions in addition to the said rent as a proportionate part of the expenses and outgoings incurred by the Lessors in the repair maintenance and renewal of the facilities of the Estate and the provision of services hereinafter set out the yearly sum of £90.00 and Value Added Tax (if any) for the first year of the term hereby granted commencing on 25^th December 1974 increasing thereafter by ten pounds per hundred for every subsequent year or part thereof."

Thus the ostensible effect is that the tenant is to pay the service charge there provided by reference to a yearly period rather than (as before) a three yearly period.

The background facts

14. It is regrettably the case that absolutely no evidence has been adduced to explain the surrounding circumstances in which these various leases, and Deeds of Variation, were made. Thus there is nothing to show how the specified sum of £90 was originally alighted upon. There is nothing to show why some versions of the leases connote potential increase over a three year period and others over a one year period. There is nothing to show why various of the lessees were prepared to enter into the Deed of Variation of the kind dated 20 August 2000.
15. The 43 defendants, between them holding as lessees under versions of the lease as set out above, are lessees of 25 chalets. There are, however, as we were told, altogether 91 chalets in total. The remaining 66 chalets are, we were also told, held on terms of version 1 of the lease but without the Deed of Variation: that is to say, subject to a service charge clause potentially increasing by reference to a three year (not one year) period. Why four of the leases of that particular version were altered by the Deed of Variation, but the others were not is, as I have said, unexplained by any evidence. Nor is there any explanation as to just how the lessor had from time to time come to grant leases containing differing service charge clauses, especially in the light of the lessor's covenant contained in clause 4(viii) of each lease.
16. There were placed before the judge in the county court, without objection, inflation figures for the relevant periods, by reference to the Retail Price Index. In 1974, so it appears, the annual rate of change was 16%. In 1975, 1976 and 1977 the rates of change were 24.2%, 16.5% and 15.8% respectively. In 1980, 1985, 1991 and 2000 the annual rates of change were 18%, 6.1%, 5.9% and 3% respectively.
17. One other point may be noted. It is the lessees' case that the service charge provisions, properly construed, give rise to a variable service charge and thus are within the ambit of s.18(1) of the Landlord and Tenant Act 1985 (as amended). It is the lessor's case, on the other hand, that the service charge provisions, properly construed, give rise to a fixed service charge and thus are not within the ambit of s.18(1) of the Landlord and Tenant Act 1985. These consequences, depending on the proper construction, are agreed between the parties. What most emphatically is not agreed is whether on their proper construction the service charge provisions give rise to a variable service charge or a fixed service charge.
18. How the dispute came to a head is also not in evidence. As Morgan J found, and as is the likely inference, initially the various lessees would have paid the service charge in accordance with the lessor's interpretation; that is to say, increasing at a compounded rate of 10% per annum (or, as the case may be, with the other 66 leases, every three years) from a starting point of £90 in 1974.
19. The figures before us are illustrative of the consequences. For a lease on a one year compounded uplift, the annual service charge payable was, for the year end 2012, some £3,060. At the same compounded annual rate of increase, the projected annual sum payable for service charges in the last year of the term stands to be some £1,025,004: this for modest holiday chalets, the use of which is restricted to half of each year. The lessees understandably place much emphasis on that.
20. The current lessor has not produced any accounts to show what her annual costs in providing services to the Estate have been. The services which the lessor has covenanted to provide are not particularly extensive although they can by no means be described as negligible. But the figures given above lead to a clear conclusion, by inference, that the lessor is, at least in respect of these particular leases, already making a very handsome surplus out of the operation of clause 3(2), on the lessor's interpretation of that clause: and stands to make ever greater sums (if, at least, inflation remains low) in the future. No doubt this, in part at least, explains the lessor's disinclination to volunteer production of the relevant accounts. In fairness, however, the position may be very different under the 66 other leases with three year uplifts.

The proceedings below

21. The dispute having arisen, Part 8 proceedings were commenced by the current freehold owner and lessor, Mrs Arnold, in the Swansea County Court on 7 December 2011.
22. The accompanying particulars bluntly summarised the essence of the lessor's case in this way:

"On its true construction, clause 3(2) of the leases obliges a lessee to pay a fixed yearly payment which rises at the rate of 10% per annum. This fixed sum is payable irrespective of the cost to the lessor of providing the relevant services set out at clause 4 of the lease."

Declaratory relief was sought to the effect that, first, on its true construction clause 3(2) obliged the lessees to pay a fixed sum of £90 per annum in the first year of the term and thereafter a fixed sum rising by the rate of 10% per annum; and, second, that the sum payable pursuant to clause 3(2) was not a service charge within the meaning of s.18 of the Landlord and Tenant Act 1985.

23. The lessees of the 25 chalets joined as defendants disputed that interpretation. Their response was to the effect that clause 3(2) of the leases gave rise to a variable service charge provision, subject to a cap of £90 in the first year of the term and thereafter to a cap rising by the rate of 10% per annum. (There was and is no dispute that, either way, any such increase is on a compound basis.)
24. The hearing of the case was before HHJ Jarman QC, sitting in Cardiff. He gave an ex tempore judgment on 1 June 2012. He summarised the background and the terms of the various leases and also reviewed applicable principles of interpretation. He indicated that "it is not a very plain clause to construe" and "whichever construction is adopted would cause some infelicity of language, perhaps more so on the tenants' construction than that of the landlord", accepting that on the tenants' construction the court would have to imply words into the clause which were not there. The judge did not seek to distinguish, in this regard, between the various versions of the sub-clause.
25. What was clearly decisive for the judge was the fact that the lessor stood to make very substantial sums on her interpretation of the sub-clause, when the sub-clause was, as the judge indicated, designed to "provide a proportionate part of the landlord's expense of carrying out the rather limited obligations". He robustly considered such an outcome "offends not only commercial common sense but ordinary common sense". He acknowledged an interpretation in favour of the tenants may mean difficulties of calculation: but that "should not dictate a conclusion other than the one of commercial sense". He granted declarations in favour of the tenants accordingly.
26. The lessor appealed. The matter came before Morgan J, sitting in the Chancery Division in the Cardiff District Registry on 9 November 2012. By a reserved judgment dated 3 December 2012 ([2012] EWHC 3451 (Ch)) he allowed the appeal and granted the declarations sought by the lessor.
27. The judgment of Morgan J is characteristically thorough, clear and well-marshalled. In it he comprehensively analysed the competing arguments and the relevant principles of construction. He also considered various cases illustrating the differing kinds of service charge clauses that may be found. He understandably lamented the lack of any surrounding evidence.
28. In paragraph 46 he reviewed some of the kinds of service charge clauses that may be found in leases. He noted the advantage of a fixed charge being certainty and the avoidance of complication; a corresponding disadvantage being that a fixed amount may over-compensate or under-compensate a landlord for his costs in the performance of his obligations. He noted that variable service charges can be so framed as to avoid over-compensation or under-compensation (and so, in that sense, may seem "fairer"): but involve more uncertainty and more room for dispute (hence, indeed, the need for legislation). Having so indicated, among other things he noted (paragraph 48) that:

"There are obvious dangers in providing for a fixed percentage by way of annual, or periodic, increase. In truth, it is not possible to predict the amount of inflation over a long period into the future."

He went on in paragraph 49 to say this:

"If the parties do adopt a fixed percentage increase to provide for future inflation, their choice may turn out to over-provide or under-provide for inflation. But if that is what they have done, then they are bound by the consequences. The landlord is not free to disregard the fixed percentage because it turns out to be inadequate. The tenant is not free to disregard the fixed percentage because it turns out to be too high…"

29. He went on to consider each of the different versions of the lease. Taking version 1, he correctly noted that the problem was to identify the object of the verb "to pay". He considered the more natural reading was that the object of the verb "to pay" was the £90 etc. The purpose of the words referring to a proportionate part of the expenses and outgoings incurred was, he considered, to identify the character of the payment and performed a "useful function" for that purpose. He considered – departing from HHJ Jarman QC in this regard – that such a conclusion did not lack commercial purpose. At the general rate of inflation at the time, the fixed percentages – especially for the leases with a three year period – were favourable to the lessee: and if, in the result, that had by 2012 worked out very badly for the lessees on this particular version of the lease, that was a consequence of inflation being by its very nature unpredictable: and the court could not, in effect, legitimately manipulate the process of construction so as to mend what had turned out to be a bad bargain by a process of interpretation.
30. He construed all the other relevant versions of the leases so as to give rise to the same result.
31. From that decision, the lessees now appeal by leave of Lewison LJ (who noted the potential implications for the lessees if the lessor's interpretation was right).
32. This court sat in Cardiff. Before us the lessees were represented by Mr Morshead QC with Mr Crozier (neither of whom appeared below). The lessor was represented by Mr Daiches, who had appeared before Morgan J but not before HHJ Jarman QC. I would pay tribute to the conspicuously careful and thorough arguments, both written and oral, which counsel advanced before us.

The principles of interpretation

33. We received a great deal of argument as to the applicable principles of interpretation, with copious citation of authority. With all respect to counsel, I do not propose myself to review at any great length the various authorities cited to us. This is for two reasons. The first is that the principles are, by now, so very well established and familiar. The second is that over-elaborate citation of such authorities carries with it a danger of obfuscating the task in hand: which is, ultimately, to interpret the words used, set in their context.
34. The principal (and familiar) authorities cited to us – with particular passages explored in extenso in argument – were Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896; Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101; Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988; and Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900. I have borne them all in mind.
35. These cases do, among other things, draw out the potential difference between cases of ambiguity and cases of mistake. In the former, where the wording is ambiguous the court generally seeks to achieve the most commercially sensible result which the words are capable of bearing. In the latter, something must clearly have gone wrong with the wording in question and it also must be clear, set in context, what was intended.
36. Two other points are well established. First, it is not ordinarily enough that the parties simply have failed to provide for or anticipate a particular circumstance. Second, the court is not permitted to improve upon an instrument which it is required to construe: its task is to discover what the instrument, read as a whole and set in its surrounding circumstances, means. As Lord Hoffmann said in the Belize case (at paragraph 16): "[the court] cannot introduce terms to make it fairer or more reasonable".
37. Mr Morshead also enjoined us to bear in mind the interpretative principle against redundancy and the interpretative principle in favour of harmony (see Lewison on the Interpretation of Contracts 5^th edition at p.343 and pp 506-508). I have done.
38. Mr Morshead further proposed as a principle that service charge clauses are to be construed restrictively and should not be construed, in the absence of clear wording, so as to entitle the landlord to a profit over and above his actual outlay in providing the contracted services: see Woodfall Vol I para 7. 175. In McHale v Earl Cadogan [2010] 1 EGLR 51 Rix LJ (at paragraph 17) said:

"… it is the policy of the authorities not to bring within the general words of a service charge clause anything that does not clearly belong there. To put the matter another way, service charge provisions have been construed restrictively."

39. I agree, however, with Morgan J that a service charge clause in a lease is not subject to any special principle. Typically – at all events nowadays – a clause which is designed to be a service charge clause can be taken not normally to be intended to provide to a landlord a profit over and above the cost of the services provided (or, for that matter, a loss). Such a clause, if it potentially gives rise to such a result, therefore must be closely read to see if the wording requires such a conclusion. That is what Rix LJ was, as a matter of description, indicating: and that is simply a facet of the ordinary process of construction, having regard to the presumed commercial objective of such a clause used in the particular case. But ultimately it all depends on the meaning of the language, set in context and having regard to the commercial purpose. As Morgan J put it in his judgment at paragraph 43:

"I do not see why a service charge clause in a lease should be subject to a special principle… I consider that what is required is that the court must examine the wording of the charging provision, in its context and against all the admissible background and in the light of the apparent commercial purpose of the clause, and then decide what the provision means and how it operates."

I agree with that statement.

Submissions

40. Mr Morshead much stressed what he said was the commercial absurdity of an outcome in favour of the lessor. The service charge, for these chalets, is already over £3,000 per annum for relatively limited services and when the chalets may be occupied for only half the year. It stands to rise to over £1 million by the end of the 99 year term. He says that accords with no kind of sense.
41. Mr Morshead rightly acknowledged that commercial documents cannot be interpreted in the light of hindsight: that, over the years, the outcome may have become a bad outcome for the lessees of itself cannot, he rightly accepted, require (or entitle) the courts to mend the bargain to make it "fairer". But he submitted that such an outcome was at least foreseeable at the time these leases were entered into. If so unjust and unreasonable an outcome (as he submitted it to be) has in fact eventuated then it was foreseeable at the time these leases were made that such an unjust and unreasonable outcome was capable of eventuating. The court should, he said, lean in its interpretation against an outcome that could lead to injustice and unreasonableness, if only because the parties objectively could not have been taken to have intended an unjust and unreasonable outcome.
42. For the purposes of his argument, Mr Morshead focused in particular on version 3 of the lease. He did so submitting that it was "convenient" to do so, whilst candidly acknowledging that this was potentially the version most favourable to his argument. As he said, if he could not succeed on that version of the lease he could not expect to succeed on the other versions of the lease. Nevertheless each of the versions has to be considered. Moreover – and particularly in the light of clause 4(viii) – I incline to think that the existence of other leases with differing service charge clauses cannot, objectively speaking, be taken as known to the original lessees or be regarded as an admissible surrounding circumstance: although I do not think this point ultimately can affect the outcome in any event.
43. To resolve what he said was an absurd result, Mr Morshead submitted that the second part of clause 3(2) was indeed to be regarded as, and read as, a cap. He further submitted that the approach of Morgan J was in effect to deprive the first part of the sub-clause of any real meaning. He stressed, in particular, the words "proportionate part" and "incurred": to which, he complained, Morgan J had had insufficient regard. He said that, so far from the lessees paying a proportionate part of what has (actually) been incurred by the lessor in respect of expenses and outgoings, on the construction of the judge the lessees will be paying not simply a disproportionate but an arbitrary part of what will not have (actually) been incurred at all. Thus, any correlation between expenses actually incurred and service charges payable would, on the lessor's construction, be almost entirely adventitious: since a "remorseless multiplier" of 10% per annum (as representing a notional change in the value of money) could not be expected, save by out and out coincidence, to match the incurred cost of the provision of the contracted services. He therefore said that, on the lessor's argument, the words "a proportionate part of expenses and outgoings incurred" will, so far from describing the character of the covenanted payment, have misdescribed its character. Moreover, he queried, if a surplus arises (on the judge's interpretation) then how is it to be dealt with? It cannot, he asserted, be assumed to belong to the lessor. But any such difficulty is avoided by reading the second part of the sub-clause as a cap. He further stressed that the process of interpretation in this regard must be "iterative" (in the word used in the authorities).
44. For his part, Mr Daiches submitted that the approach and conclusion of Morgan J were right. Naturally read (taking version 3 as the example) the words "the yearly sum of £90 etc" were the object of the verb "to pay": and there is neither evident ambiguity nor mistake in the wording. Further, such a conclusion is not absurd. At the time these leases were made – and being at a time when the drafting of service charge clauses was not necessarily very sophisticated – inflation was a known feature. Of course the rate of inflation could not be foreseen over the term: but the parties had chosen to put their estimate at 10% per annum in these versions of the lease. He further pointed out that, had inflation exceeded 10%, the result could have been adverse to the lessor. Thus the parties had chosen by this kind of fixed increase service charge clause to (in his words) "trade accuracy for certainty". That cannot possibly, he said, be commercially absurd. He further said that version 2, which includes the word "as", simply makes explicit what is in any event to be taken as the implicit position under version 3: and it cannot possibly be said that there is a mistake or ambiguity in such version. He also strongly cautioned against the use of hindsight, emphasising (correctly) that the matter must be assessed as at the time the leases were made.

Disposition

45. Simply having regard to the figures advanced, an initial gut reaction is that the lessees' argument, in terms of result, ought to be right. But, on reflection, I do not think that is the proper outcome for this case. It seems to me that to reach such a conclusion would involve subverting the proper process of construction of the language actually used and would in truth involve the court rewriting the bargain the parties have made.
46. I will express my reasons for my conclusion relatively shortly. I do so because, having read and re-read the judgment of Morgan J, I am convinced that his essential reasoning was correct. There is not much purpose in rephrasing at very great length, in my own words, what Morgan J has already said by way of reasoning.
47. I will start with version 3, in accordance with Mr Morshead's approach.
48. In this version, Mr Morshead is at least in a position to start by saying that something seems to have gone wrong with the language. It seems to me, however, that, naturally read, the words "the yearly sum of £90 etc" are to be taken as the object of the verb "to pay". So to hold does not consign the first part of the sub-clause to mere surplusage. On the contrary, it would, in my view, be odd in the extreme not to include words identifying the character of the payment to be made. That is the function of these words. I agree with Morgan J on this. If that involves notionally writing in, for clarification of the syntax, the word "as" before the words "a proportionate part" then that seems to me to be an entirely natural approach as a matter of the ordinary process of interpretation.
49. I also do not think the words "a proportionate part" can bear the weight Mr Morshead would give them. On the contrary, their sense is clear enough when one considers that this is an estate whereby other lessees also are contributing to the overall service charge: which is in consequence to be apportioned between them. The words "a proportionate part", in such a context, are not inconsistent with a fixed service charge. I do understand the emphasis placed on the word "incurred". That is the language of actual outlay. But, as I see it, that word, set in context, is entirely explicable when one appreciates that this part of the sub-clause identifies the character of the payment being made.
50. As I have indicated, I take the view, with all respect, that the lessees' argument does involve unacceptably rewriting the sub-clause. I simply do not see how one can legitimately spell out the existence of a "cap" from the words used. That whole concept simply is not there. It certainly involves writing in words that are not there. That would not necessarily deter me if the sense of the sub-clause required it. But it does not. I cannot think that, objectively speaking, such a cap is what the parties would reasonably have understood the document to convey at the time it was entered into.
51. In effect, the lessees' argument involves trying to turn this service charge clause into another kind of service charge clause. The paradigm no doubt is a clause which gives the landlord no more than – and no less than – his actual outlay on the contractual services. But many such clauses in leases achieve no such thing. A fixed service charge is one example. Even a conventional RPI linked service charge clause may or may not provide commensurate recompense to a landlord. It all depends on whether the RPI matches the actual annual outlay on services; and that cannot be surely predicted.
52. For that reason, I was ultimately not much moved by Mr Morshead's complaint that the result would, by reference to the lessor's actual annual outlay, be adventitious and arbitrary. Lack of correspondence between outlay and receipt is the almost inevitable consequence of such a clause if the parties have elected for a fixed charge formula. It has a similarity with a liquidated damages clause: it represents the parties' estimate at the outset for the future with neither guarantee nor even expectation of entire coincidence with the eventual outcome. But the advantage is certainty. The parties know from the outset where they stand. Moreover, it is a surrounding circumstance legitimately to be taken into account here that the leases were made at a time of inflation – in some years, very significant inflation – which the parties, objectively and commercially speaking, could be expected to want to confront. They chose to do so by this particular formula of increase. In this regard it is also a point of comment that the arguments on absurdity were notably muted with regard to those versions (version 1) which were not altered: that is, those giving a triennial increase of 10% - potentially, indeed, very favourable to the lessees concerned. From the tables provided to us, lessees under such a version of the lease were paying in 2012 a current yearly service charge of just some £282: as compared to the £3,060 paid by the defendants in these proceedings under these versions of the service charge clause with an annual increase.
53. There are further difficulties for the lessees' interpretation.

i) First, if the second part of the sub-clause is to be taken as a cap, how is the "proportionate part" of the expenses incurred then to be decided? Mr Morshead acknowledged this was a potential difficulty. But he said it could be resolved, if need be in the county court. Maybe so. But the lessor's interpretation involves no such difficulty.

ii) Second, what would the position be had inflation regularly exceeded 10% per annum? On the lessor's approach, that is simply borne by the lessor – it is part of the "swings and roundabouts". That makes commercial sense. On the lessees' approach, however, there is no such corresponding risk to them. Thus the lessor is limited to his actual outlay if inflation is low but exposed if inflation is sufficiently high so as to exceed 10%. That seems, objectively speaking, commercially surprising. I would attach some importance to this point. The prima facie attraction of Mr Morshead's argument, and its emphasis on the words "proportionate part" and "incurred", was that it makes this sub-clause seem to correspond more closely with the "fair" kind of service charge whereby the lessor recovers no more and no less than his actual outlay on services. But that attraction is much reduced when it is appreciated that, on this interpretation, the lessor – and foreseeably so at the time of the leases – can never in any year recover more than his outlay but may, depending on inflation and other events, recover less. Mr Morshead acknowledged this difficulty in the lessees' interpretation. He acknowledged it did not make entire commercial sense. He suggested, however, that the lessor was at least in some degree in control of the situation as being the provider of the services. That riposte is of limited weight in my view: the fact remains that the lessor is contractually obliged to provide the stipulated services.

iii) As to the question of surplus, it seems to me clear enough that the wording conveys the meaning that the sum of £90 etc accrues to the lessor. That gives rise to no difficulty in practical terms. But the alternative construction gives rise to the problems of ascertainment of the appropriate "proportionate part" outlined above.

iv) Mr Morshead at one stage suggested, basing himself on an observation by Lord Hoffmann in one of the authorities, that the choice was between "two unnatural meanings" of the sub-clause: and the one giving the most sensible outcome should thus be selected. But I think that the above considerations, taken along with the other difficulties, in truth go to show that the lessees' interpretation involves much the less natural meaning (indeed, I would say untenable meaning) as well as by no means necessarily yielding the most sensible outcome, as judged at the time the leases were made.

54. If this is the right interpretation for version 3 then the same result must follow for the other versions of the lease. In fact, version 2 and version 5, which include the word "as" before the words "a proportionate part", convey, on the face of the document, no real ambiguity at all. It is making entirely explicit what the character of the payment of the £90 etc is. To the extent that the argument then has to be in reality that there is a mistake that in my view and for the reasons given above, is not sustainable. Indeed, it is noticeable that the lessees' arguments have varied from time to time as to how the sub-clause should be read: for instance, whether the words "up to" are notionally written in before the words "Ninety pounds" – thereby creating a variable charge even for the first year of the term – or before the words "ten pounds per hundred" – thereby creating a fixed charge for the first year and a variable charge thereafter. At one stage, in the written argument – although disclaimed in oral argument – it even was apparently suggested on behalf of the lessees that the second part of the sub-clause should be rejected as "repugnant" to the first part and repugnant to the notion of a "proportionate part of the expenses and outgoings incurred". These variations in approach at all events hardly give rise to confidence in the notion that there has clearly been a mistake and, if there has, that it is clear how it is, by process of interpretation, to be corrected.
55. As to version 4, the addition of the word "for" – if not to be regarded as inadvertent surplusage – can only operate to support the lessor's construction: as does the inclusion of the (now lapsed) proviso.

Conclusion

56. I revert to the "merits". Any conclusion that means the holders of these particular leases are (currently) required to pay over £3,000 per annum for the relatively limited services provided for these holiday chalets, and with potential remorseless compounded increases thereafter, is not at all attractive. I am well aware of that. But, as I have sought to show, it is the result of the bargain made: and the court cannot properly, under the guise of a process of interpretation, introduce new and other terms to mend a bad bargain: which is, in reality, what the court is being asked to do. To do so would involve distortion of all correct legal principles. Whatever the hopes and aspirations of these lessees, understandable though they may be, the court cannot simply come up with some "fair" result irrespective of the terms of the contract and in the absence of any claim for rectification. Moreover, Mr Daiches was entitled to point out that the "merits" may have looked very different had inflation continued in the interim at rates corresponding to those experienced in the late 1970s: and do in fact look very different in the version of the lease containing the triennial increase.
57. It is a great shame that the parties have not thus far been able to reach a sensible compromise. Looking ahead, it is hoped one can yet be achieved. The sums involved, and their potential consistent increase, may even, in extremis, force some of these lessees into surrender or forfeiture. But that will not necessarily be a one-way ticket for yet greater prosperity for the lessor, given both the existence of clause 4(viii) and the local publicity this case doubtless will have generated with regard to the terms of these leases. This matter, in my view, cries out, even now, for a fair-minded and sensible negotiated solution involving all lessees on the Estate.
58. In the result, however, I conclude that, for the reasons given above and for the much fuller reasons given by Morgan J, the lessor's interpretation has to be accepted. I would for my part therefore dismiss this appeal.

Lord Justice Lloyd Jones

59. I agree.

Lord Justice Richards

60. I also agree.