The legal press was recently hot with discussion of the Supreme Court’s judgment in the case of Arnold v Britton and others, a case which had climbed from the County Court in 2012, all the way to the top. It concerned the interpretation of service charge clauses in 25 long leases of holiday chalets in a leisure park in Gower, South Wales, some of which were granted in the 1970s. Each lease contained a landlord's covenant to provide services to the park, and a tenant covenant to pay a fixed annual sum for those services, rather than the actual cost incurred, as might be more typical in a commercial lease. The annual sum would increase at a compound rate of 10% every year of the 99 year term; in other leases the increase was applied every three years. Applying that annual interest, the annual service charge payable by some tenants in 2015 was already £2,500. By lease expiry in 2072, the payment for services would be a colossal £550,000.

Undoubtedly, the tenants were paying escalating and disproportionate sums for limited services, far beyond their actual cost. However, the case was not about fairness. The Lords Justices were required to consider only what the law allowed them to rule. The clauses, whilst not perfect, were unambiguous enough that their natural meaning was not in doubt. The leases were granted at a time of significant and spiralling inflation. In that context, the parties had evidently chosen a fixed sum with fixed annual increases. From the terms of the leases, the tenants would have known on the first day of the lease what the annual payments would be, and indeed, they benefited from that low rate of increase in the early years of the term. The landlord had, by agreeing the terms, accepted the risk that, should inflation continue at the prevailing rates, he might not recover the full amount that he might spend in providing the services he was obliged to.

Whilst recognising that the consequences of the clauses, which at first sight seem fairly anodyne, could be catastrophic for the tenants, the Court ruled that this did not justify departing from the natural meaning of the clauses. Contracts, including leases, are deals that may in due course prove to benefit or prejudice one party or another, perhaps more than either might have expected at the outset. Although it is natural to have sympathy for the tenants' predicament, why should a party have a remedy because later events in the surrounding world have proved that the original decision to enter into a contract on negotiated terms was imprudent? As was made clear by the Supreme Court, it is not the role of the judiciary to correct a bad bargain. Finding in favour of the tenants might have public support on the facts of this case. However, the Supreme Court would have had to interfere on the grounds of public policy if it were to do anything but uphold the decision of the High Court and Court of Appeal. The Lords Justices would have been painfully aware of the ramifications on the law as a whole of finding otherwise.

The wording of the service charge clauses in this case is unusual. But this type of periodically staged increase is certainly not unique in leases. It can sometimes be seen in rent review clauses, e.g. in investment head leases where an upwards only review is also linked to a rate of indexation (favourable or otherwise), rather than by reference to the open market. A comparable situation can arise with overage provisions, which provide for a payment by the investment buyer of land to the (selling) original owner on the happening of a later event - often the grant of a planning permission in respect of the investment buyer's land - where the sum to be paid to the original owner is based on the valuation of land but with the benefit of the planning permission. An investment buyer may find that they have made themselves liable for a payment of unpredictable size by obtaining the planning permission, which payment will have been triggered whether or not the development goes ahead.   Another example is options, which in their various forms act both as a way of profiting from an astute estimation of how the market will play out in months or years to come, by definition to the counterparty's detriment, and also so that a party to an existing commitment can hedge against adverse future risks. The Courts are not there to assist parties who end up with liabilities as a result.

The chalet tenants will be bound by their leases unless they agree a surrender or variation with their landlords, both of which can only be achieved by negotiation with the landlord, presumably on commercial terms with the landlord in a strong position. Parties who find themselves in similar situations could consider whether the document reflects their actual intention at the moment of entering into the contract, and, if not, whether a claim of rectification might be brought. They might also consider whether any misrepresentations were made, or assurances given, by the other party to the contract which they relied on when entering into the contract. This might give rise to a claim in estoppel or for misrepresentation.

Finally, where a party to a contract finds that the deal done has unexpected consequences, it is worth considering whether legal or other advisors should have spotted the issue and advised on it before the agreement was entered into. If so, there might be the potential for a claim against the advisors for professional negligence.

Matthew Bonye is a Partner and head of the real estate dispute resolution group at Herbert Smith Freehills LLP.