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Chalet Owners Face Compound Interest Catastrophe

In a case which starkly underlines the dramatic and often unforeseen impact that compound interest can have on apparently modest service charges, holiday chalet tenants who could end up paying their landlord more than a million pounds annually have failed in a Court of Appeal bid to escape from their catastrophically bad bargain.

Tenants of the 25 chalets complained that service charges that started out at just £90 per year when the leases were signed in 1974 are projected to balloon to more than £1 million per year 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 rewrite the clear terms of the leases and accepted the landlord’s arguments that the service charges ratchet up by 10 per cent each year, on a compound basis, resulting in the enormous liability in the later years of the 99-year leases.

In dismissing the tenants’ appeal against a High Court ruling which upheld the service charge provisions, the Court of Appeal 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 rewriting’ 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 over the dispute, Lord Justice Davis said, “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.”

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