In a case which starkly underlines the dramatic and often unforeseen impact compound interest can have on apparently modest service charges, holiday chalet tenants who could end up paying their landlord more than a million pounds-a-year have failed in a Court of Appeal bid to escape from their catastrophically bad bargain.
Tenants of the 25 chalets complained that service charges which started out at just £90-a-year when leases were signed in 1974 are projected to balloon to £1,025,004 by the time they expire in 2073. They attacked the service charge provisions as ‘commercially absurd’ and making ‘no kind of sense’.
However, whilst recognising the difficulty of the tenants’ position, the Court ruled that it simply could not re-write the clear terms of the leases and accepted the landlord’s arguments that the service charges ratchet up by 10% each year, on a compound basis, resulting in the enormous liability in the final year of the 99-year leases.
In dismissing the tenants’ appeal against a High Court ruling to like effect, the Court agreed that the services that the landlord is required to provide to tenants are 'not particularly extensive' and that she had probably already made 'a very handsome surplus' under the terms of the leases. The Court also acknowledged that, given the enormous impact 'remorseless' compound interest would have on the charges, the tenants’ arguments 'ought to be right'.
However, rejecting the tenants’ plea that their service charges should be ‘capped’, the Court noted that such an interpretation would involve 'unacceptably re-writing' the leases’ clear terms. Whilst the outcome of the case was ‘not at all attractive’, the Court ruled that it would be to distort correct legal principles if new terms were introduced into the leases with the objective of ‘mending a bad bargain’.
Whilst urging the tenants and their landlord to seek a sensible compromise of the dispute, the Court concluded: "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..."