Chalet rents to reach £1million

Posted: 4th December 2012

Holiday chalet owners made a 'bad bargain' which could see them paying more than a million pounds each to their landlord annually - but will have to live with that after a High Court ruling which underlines the inherent dangers of predicting inflation rates in long leases.

Mobile home parkResidents of modest homes at the Oxwich Leisure Park, Oxwich, Gower, Swansea, argued that charges which started out at just £90-a-year when leases for the chalets were signed in 1974 will balloon to £1,025,004 by the time they expire in 2073.

However, the High Court accepted arguments put forward by the landlord of the 91-chalet park that, under the terms of the leases, the £90 figure ratchets up by 10% each year, on a compound basis, resulting in the surprising final figure at the end of the 99-year leases.

The 25 tenants involved in the case - who currently pay about £3,000-a-year to their landlord - pleaded that the landlord's interpretation of their leases was not in accordance with business common sense and would result in her making excessive profits for the provision of ‘fairly limited’ services.

However, ruling in the landlord's favour, Mr Justice Morgan said that her interpretation was in line with the ‘more natural meaning’ of the words used in the five different versions of the leases and served a legitimate commercial purpose in allowing her to recover an initial fixed sum, adjusted for inflation in later years. He noted that, when the leases were first executed, the inflation rate based on RPI stood at 16% and continued in double figures until falling off dramatically in the 2000s.

The judge ruled: ‘I do not consider that I can arrive at the result contended for by the lessees consistently with the general principles as to construction which I am bound to apply. In any case, 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. The landlord is not free to disregard the percentage because it turns out to be inadequate. The tenant is not free to disregard the fixed percentage because it turns out to be too high.’

The judge also ruled that the tenants cannot benefit from the protections provided by the Landlord and Tenant Act 1985 because the charges are ‘fixed’ and do not vary with the cost of the relevant services and therefore do not fall within the definition of ‘service charges’ within the meaning of section 18(1).