Paying a premium – beware of service charge clauses

The recent Supreme Court decision of Arnold v Britton highlights the dangers of harsh drafting in service charge clauses.  The Supreme Court upheld a decision that enforced a fixed service charge with annual compounded increases of 10%.  The effect of this 10% compounded increase over the tenants’ 99 year lease was to inflate a £90 service charge to an eye-watering figure of over £1.1 million!

The drafting in Arnold v Britton is a particularly extreme example, but there are several other clauses that tenants should be wary of when entering into leases with service charge provisions, for example:

• Fixing design defects – where defects in design or construction of a building need repairs, tenants should seek to exclude these costs from the service charge.  The landlord should be left to enforce its contractual remedies against its contractors and professional advisors.
• Building improvements – tenants, particularly those whose interest in a property is limited to just a few years (or less), should not be expected to fund capital improvements to a property or works that go beyond normal maintenance, repair or replacement.

• Adding or withdrawing services – the landlord should not have absolute discretion on adding or withdrawing services.  As a minimum there should be a degree of reasonableness and ideally variations to services should only be permitted where the interests of tenants would be better served by the variation.

• Widely drawn ‘sweeper-up’ clauses – tenants should seek to resist widely drafted clauses.  If such a clause is included tenants should seek to limit additional costs to items which are capable of benefitting them and which are in keeping with principles of good estate management.

Arnold v Britton is a clear warning to tenants of the need for careful scrutiny of service charge provisions and a reminder of the potential hidden costs arising from leases.