Signing an agreement for service charges and ground rent that increases by a fixed amount each year was a gamble for tenants of chalets at a holiday park that has left them with huge bills, according to judges at the Supreme Court.
Tenants at Oxwich Leisure Park on the picturesque Gower Peninsula in South Wales signed up between 1978 and 1991 for an initial £90 a year service charge increasing at 10% a year.
At that time, 10% inflation was seen as reasonable as the annual rate was 16%, but since then has dropped to zero.
The Supreme Court was told the service charge for the 25 tenants was now between £2,500 and £3,000 a year and would rise to just over £1 million by 2072, when many of the leases expire.
However, in dismissing the appeal, the judges agreed by a majority of four to one that the clause in the agreement detailing how to calculate the charge was lawful, but signing up did not follow commercial common sense.
The chalet owners argued the service charges were unreasonable and allowed the landlord, Paddy Arnold, to make excessive profits at their expense.
The service charge covered the landlord’s costs of providing what the tenants described as limited services needed to repair and maintain the holiday park.
Delivering the verdict, Judge Lord Neuberger said:
“The figure calculated for the 99th year of the term appears so high because that year is still a long way away and one is inclined to assume that inflation will not apply at 10% per annum for all of that time.
“That shows that the lessees made a bad bargain when they allowed for a 10% per annum inflation adjustment, but that is what they did.
“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.”