Words matter – interpreting clauses in a lease

Background

A persistent and difficult question for lawyers to answer when differences arise over the terms of documents in private agreements is what do they mean? The correct approach to answering this question is to apply the principles set out by the Supreme Court in its judgments in the past decade most notably those in Arnold v Britton [2015] AC 1619 (“Arnold”) and Wood v Capita Insurance Services Limited [2017] AC 1173 (“Wood”). These principles were summarised by Lord Hamblen in Sara & Hossein when delivering the judgment of the majority, at para. 29:

“(1) The contract must be interpreted objectively by asking what a reasonable person, with all the background knowledge which would reasonably have been available to the parties when they entered into the contract, would have understood the language of the contract to mean.

(2) The court must consider the contract as a whole and, depending on the nature, formality and quality of its drafting, give more or less weight to elements of the wider context in reaching its view as to its objective meaning.

(3) Interpretation is a unitary exercise which involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its implications and consequences are investigated.”

The case

Sara & Hossein is the most recent example of the Supreme Court having to decide the meaning and effect of a key provision in a document (in fact two leases) where the terms of that provision were short and concise. They stated that the landlord should provide a certificate within a specified time “as to the amount of the total cost and the sum payable by the tenant” in respect of the service charge calculated under the terms of the lease “and in the absence of manifest or mathematical error or fraud such certificate shall be conclusive.”

The simple mathematical total of these keywords is 22, ten of which fall within the express defence to the conclusiveness of the certificate. The dispute turned on whether the certificate was conclusive in terms of the amount payable (the landlord’s argument) or whether the certificate was conclusive as to the amount of the costs incurred by the landlord under the service charge provisions, but not as to what the tenant was liable to pay (the tenant’s argument).

The majority judgment of the Supreme Court delivered by Lord Hamblen held that neither party’s case on interpretation was satisfactory when applying the principles of interpretation set out above. The tension between the rival interpretations was created by the conflict between the consequence of the tenant’s case which was summarised as “argue now, pay later” and the landlord’s case which was summarised as “pay now, argue never” following the receipt of the certificate. The judgment of the majority was that there was an alternative interpretation which avoided that conflict. Giving effect to the words “sum payable by the tenant” protected the landlord’s concern about delays in receipt and cash flow and enabled the tenant to contest arguable claims after payment. This was held to be consistent with other provisions of the service charge terms which enabled the tenant to exercise its rights, for example, to inspect the landlord’s vouchers and receipts on which the service charge and the certificate were based. It was also held by the majority that the word “conclusive” did not state how the certificate was to be conclusive.

The court held that in the wider context of the lease, the meaning of the key words was directed towards the obligation to make the payment under the certificate without determining any questions which the tenant might raise as to the ultimate underlying liability for the service charge: such as “pay now, argue later”.

Comment

Three points can be derived from the decision. Each may be thought to be significant when tackling the task of interpretation in our own cases.

1 The meaning of words should not be taken as “obvious” without close examination and application of the principles of interpretation.

2 Frequently used terms (often in “boilerplate” clauses) may not always lead to the same, or necessarily obvious result as a matter of interpretation as in other cases.

3 The court will not remake the parties’ agreement simply because that might achieve a more commercial result.

This third point is made against the background of the decision of first, the majority in the Supreme Court on the interpretation of the certification provision which is summarised above and secondly, the dissenting judgment of Lord Briggs. His judgment is founded upon the proposition that “the uncommerciality of the prima facie meaning of contractual words only yields to a more commercial alternative if there is some basis in the language of the contract as a peg upon which that alternative can properly be hung.”

On the facts, Lord Briggs considered that the ordinary meaning of the words in the lease pointed to the landlord’s construction and that the construction put forward by the tenant found no support from the language of the lease. This meant that the majority conclusion of the court in favour of interpreting the relevant terms as a “pay now, argue later” provision was not a conclusion which Lord Briggs could reach.

Conclusion

It is tempting to treat the judgment of the Supreme Court in Sara & Hossain as yet another example of the application of the well-settled principles set out in Arnold and in Wood in the last decade. But familiarity with those principles should not lead either to carelessness in their application, or to a sense of exhaustion when undertaking the journey of interpretation. One important element of the decision is the dissenting judgment of Lord Briggs as it brings into focus the danger of departing from the language of the document in order to mend the parties’ bargain.