The UK Supreme Court recently upheld a term in a lease of holiday chalets requiring the tenant to pay a £90 annual service charge that increased by 10% - calculated on a compound basis - each year for ninety nine years.

In Arnold v Britton and others the judgement stated that the lease term had “an alarming consequence… the service charge would be over £2,500 this year, 2015, and over £550,000 by 2072”. However, the court maintained that the bargain was not unreasonable at the time it was agreed, as subsequent changes in economic conditions have made it seem.

Lord Neuberger’s lead judgement is notable for the court’s comments on the interpretation of commercial contracts. While in other cases commercial common sense has been invoked to allow the court to reach a less severe decision than a strictly literal interpretation of a contract would give, in this case the court set out what restrictions apply to the use of a commercial common sense.

Lord Neuberger noted that when interpreting the meaning of a written contract, the court should identify the objective intention of the parties and that its meaning has to be assessed in the light of:

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 party’s intentions.

Lord Neuberger also made the observation that the reliance placed in some cases on commercial common sense should not undervalue the importance of the natural language of the provision under interpretation.

However, the court conveyed that when it comes to considering centrally relevant words, the worse their drafting, the more ready the court can properly be to depart from their natural meaning.

The judgement also held that commercial common sense is not to be invoked retrospectively; the mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language.

The business community can note that in the case of long term contracts, the circumstances surrounding the clauses can change, and may affect their prejudice either for or against the parties.

Arnold v Britton serves as a caution to those engaging in commercial contracts. Parties must ensure the careful drafting of clauses to accurately reflect the intentions assumed by all participants.