If a court were to be asked to interpret a letter from Mrs Malaprop, it would surely establish the true meaning of references to “an allegory on the Nile” or “the very pineapple of politeness” by using corrective construction – a process used to good effect in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] PLSCS 150 to correct an obvious mistake in a date, and in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101; [2009] 3 EGLR 119 to correct an obvious mistake in a payment formula. But when is a mistake “obvious”?
One might have thought that an annual 10% increase in service charges for holiday chalets – which, thanks to the compound nature of such increases, would raise the annual charge from £90 to more than £1m by the end of the tenants’ 99-year leases – would qualify. However, the Supreme Court refused to “rewrite the bargain” in Arnold v Britton [2015] UKSC 36; [2015] EGLR 53 and gave effect to the natural meaning of the words used by the parties instead.
Heffalump trap
Some may consider the decision in Monsolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961; [2021] PLSCS 115 equally surprising. The litigation concerned a rent review provision in a 25-year lease of a solar photovoltaic park. On the first anniversary, the annual rent of £15,000 was to be increased by the Retail Price Index increase over the first year of the term. On the second anniversary, it was to be increased again by the aggregate RPI increase over the first and second years of the term. And so on.
The draftsperson had combined alternative methods of drafting an RPI clause, despite warnings in several publications, with the result that, if inflation were high at the beginning of the term and low at the end, the overall rent would be considerably higher than if inflation were low at the beginning and high at the end. Also, the rent could continue to rise if there were a period of inflation followed by a fall in RPI. Indeed, the tenant had suggested that the rent could top £76m by the end of the term.
The tenant argued that the formula was obviously mistaken because it produced a result that was “commercially nonsensical”. But the landlord argued that the lease was unambiguous. It claimed that the wording was intentional and pointed to a break clause enabling the tenant to terminate the lease on six months’ notice, which could be triggered at any time if the rent were to escalate (although the tenant would have to dismantle its apparatus and write off costs significantly earlier than planned).
Dividing line
Lord Justice Nugee spoke for the Court of Appeal. He accepted that the mere fact that a bargain may have been unwise does not enable the court to rewrite it. But he cited the distinction made in Sugarman v CJS Investments Ltd [2014] EWCA Civ 1239; [2014] 3 EGLR 127 between cases in which the result appears “commercially unattractive and even unreasonable” and those where it appears “nonsensical or absurd”.
He added that there was nothing in Arnold to suggest that the dividing line between a provision that was unduly favourable to one side, imprudent or unreasonable and one that produces irrational, arbitrary, nonsensical or absurd results had been redrawn.
There had clearly been a mistake. The purpose of rent reviews based on changes in an index such as RPI is, ordinarily, to reflect changes in the value of money. And, if that was not what the parties intended, it was odd that they had based their formula on the index at all. Furthermore, the results of applying the formula were not just imprudent. They were irrational, and it was impossible to believe that the parties had intended the rent to increase annually, on each occasion by an amount reflecting the cumulative change in RPI since the beginning of the term.
The court can correct an obvious mistake if the cure for that mistake is clear. And Nugee LJ explained that the fact that there may be two different ways of correcting an error is unimportant if they both have the same effect. In this case, the method chosen might make a difference if the lease had required upwards-only rent reviews. But it did not do so and there was nothing to suggest that this was yet another mistake. So it did not matter which of the available methods the court chose.
Postscript
Where does this leave us? The lease was clear and unambiguous. But the court chose to distinguish Britvic plc v Britvic Pensions Ltd [2021] EWCA Civ 867, which will be the subject of a future Legal Note.
Why? A reference in the rent review formula to increases in the cost of living facilitated the conclusion that its application produced nonsensical results, as did the fact that the lease was granted to enable development rights to be sold. The parties, who had been associated, could not have intended to incorporate a provision that might have prevented a sale to a purchaser who was well advised.
But one could be forgiven for asking why the owners of the holiday chalets in Arnold were treated less sympathetically. It is not always easy to “reprehend”, as Mrs Malaprop might say, which mistakes the court will consider obvious and what will be considered merely imprudent or unreasonable, as opposed to irrational or absurd.
Key points
- Corrective construction is available when there is an obvious mistake in a document, if the cure for that mistake is clear
- The Court of Appeal has applied this “Chartbrook principle” to correct a rent review provision that produced a result that was commercially nonsensical
Allyson Colby is a property law consultant
