Commercial Contract and Leases: The Consequences of Bad Advice

Commercial Contract and Leases: The Consequences of Bad Advice

Commercial leases can raise a number of difficult issues that the courts are required to rule upon. 

The expert commercial lawyers at top Bahamas law firm ParrisWhittaker have many years’ experience advising clients on commercial leases and other commercial contracts. A recent Supreme Court case in the UK considered the correct interpretation of a service charge clause within a commercial lease.

What was the case about?

At issue in Arnold v Britton was the correct interpretation of service charge provisions for chalets on a caravan park, each let under a 99-year lease.  The leases required the lessees:

“to pay to the lessors ....a proportionate part of the expenses and outgoings incurred by the lessors in the repair maintenance renewal...and the provision of services hereafter set out the yearly sum of £90 plus VAT (if any) for the first year of the term hereby granted increasing thereafter by ten pounds per hundred for every subsequent year...thereof”.

The appellants (tenants under 24 of the 25 leases) contended that the respondent’s interpretation resulted in such an increasingly absurdly high annual service charge in the later years of each of the 25 leases that it could not be right and sought an alternative interpretation from the court.

However, the Supreme Court agreed with the owner’s interpretation of the clause, even though the consequence was that the annual service charge payable by each tenants would be more than over £500,000 by 2072.

Why did the Court reach this conclusion?

The Court made clear that when interpreting a written contract, the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”. The focus had to be on the meaning of the relevant words, and had to take into account a number of factors including:

  • the natural and ordinary meaning of the clause any other relevant provisions of the lease
  • the overall purpose of the clause and the lease
  • the facts and circumstances known or assumed by the parties at the time that the document was executed, and
  • commercial common sense, but
  • disregarding subjective evidence of any parties’ intentions

The Court pointed out that although commercial common sense is a very important factor, the courts should be slow to reject the natural meaning of the provision as correct. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously as in this case, for one of the parties is not a reason for departing from the natural language.

Common sense is only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people, in the position of the parties as at the date of the contract.

In essence, the purpose of interpretation is to identify what the parties have agreed, not what the Court thinks that they should have agreed.  

What does this mean?

The ruling clarifies that where the parties have used unambiguous language in a contractual clause, the Court will not re-write the contract.  This is the case, even where a literal reading of the wording could have disastrous consequences for one of the parties.  However, where there may be more than one interpretation of the contractual wording – business common sense may then come into play.

Importantly, the Court pointed out: “It is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice.”  Taking expert legal advice before entering into a commercial contract is therefore vital.

How can we help?

Clear, unambiguous contract terms must be negotiated to minimise the risk of future dispute.  If you have any concerns regarding a commercial contract or lease; you are negotiating contractual terms or you are involved in a dispute with a contractual party, contact the expert commercial lawyers at ParrisWhittaker for urgent advice and representation.

1 Arnold v Britton