Landlord and tenant – Commercial lease – Rent review clause – Construction – Parties seeking determination of proper interpretation of rent review clause providing for review by reference to retail prices index rather than market rents – Court giving judgment for respondent landlord – Tenant appealing – Whether lease containing error in formula for rent review – Appeal dismissed
The respondent’s predecessor in title let the property known as Unicorn House, Bromley to the appellant’s predecessor for a term of 25 years from 25 March 1985. The lease provided for an upwards-only review to the open market rent every five years, with a final review on 20 March 2010. It was agreed that the reviewed rent from 25 March 1990 would be £1.16m In December 2005, the lease was varied so that, for the period commencing 29 September 2005 and ending 24 March 2010, the rent would be £965,000 pa. The final rent review on 20 March 2010 was deleted. The yearly rent from 25 March 2000 to 28 September 2005 was to remain at £1.16m. A reversionary lease was also signed for a term commencing on 25 March 2010 (upon expiry of the initial lease) and expiring on 31 March 2022. By para 3.3 of the first schedule to new lease, the annual rent for any review period was to be determined by multiplying the initial rent by the retail prices index for the month preceding the relevant review date and dividing the result by the base figure. In July 2010, the parties signed a memorandum stating that the initial rent was to be £1.2m a year from 25 March 2010, meaning that there was no need to undertake the calculations envisaged by the definition of “initial rent”.
An issue arose as to the proper interpretation of the rent review clause. The respondent stated that in December 2005, when the new lease was executed, the parties did not yet know what the initial rent would be, only that it would be the highest figure of three alternatives multiplied by the index figure at the review date divided by the base figure of 193.1 as at September 2005. By March 2015, the parties knew that the initial rent was £1.2m and that the Index figure was 256.7 and the figure produced by applying the stated formula was £1,595,235.63 (£1.2m x (256.7 divided by 193.1)). The appellant contended that there was ambiguity in language of the lease which precluded the court from applying the literal meaning of para 3.3. Since the base figure of 193.1 was agreed to have been the base figure as at September 2005, the index-linked figure was the amount of rent that was payable at that date. That amount was £965,000 rather than £1.2m.
The High Court ruled in favour of the respondent: [2016] EWHC 3122 (Ch); [2016] PLSCS 350. The appellant appealed.
Held: The appeal was dismissed.
(1) The ambiguity on which the appellant relied was not an ambiguity in the language of para 3.3 as applied to the rent review. The meaning of the defined term “initial rent” was clear. Nor was it an ambiguity in the application of para 3.3 for that purpose which was a simple arithmetical calculation. At the heart of the appellant’s argument was the assertion that para 3.3 overcompensated the landlord for changes in the value of money. Instead of taking the rent payable at the expiry of the initial lease as the multiplicand, para 3.3 took the initial rent under the new lease as the multiplicand, but then index-linked it by reference to inflation since 2005 rather than 2010. The appellant’s interpretation entailed the proposition that once the initial rent had been determined, it played no part in the rent review process, except in so far as it acted as the “floor” below which the reviewed rent could not drop. That seemed a very improbable interpretation of the rent review clause. It would be highly unusual for a rent review clause to operate by reference to a figure which did not feature in the lease and which bore no relation to the rent actually payable for the time being under the lease. Moreover, it sat unhappily with the instruction in the reddendum that what was to be reviewed was the initial rent (as defined), rather than a wholly extraneous figure. More fundamentally, it was in direct contradiction of the express instruction that the multiplicand was the initial rent. Where parties had gone to the trouble to define terms, it was all the more difficult to avoid giving effect to their chosen definition.
(2) The appellant had argued that, even if the language of the clause was apparently unambiguous, the commercial background and the commercial consequences of the literal interpretation showed that something had gone wrong with the language of the clause. In those circumstances, the court could correct the mistake as a matter of interpretation. What was necessary to bring that principle into play was (a) that it should be clear that something had gone with the language and (b) that it was clear what a reasonable person would have understood the parties to have meant. The problem with that argument was that, if anything had gone wrong with the rent review provisions, it was a failure to think through the consequences of what the parties agreed, rather than any deficiencies in drafting. A failure of that kind could not be solved by the process of interpretation. Further, the alleged error might not lie in the rent review provisions at all; but in the parties’ expectation that para 3 could be operated in fixing the initial rent under option (a). There was more than one possible solution to the alleged drafting error. It was not clear what a reasonable person would have understood the parties to have meant. In addition, there was no way of knowing whether the sum of £965,000 was or was not the market rental value of the property in September 2005. The fact that a contract term was an imprudent one for a party to have agreed or that it had worked out badly or even disastrously was no warrant for departing from the clear language of the contract, especially when that contract had been professionally drafted: Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 applied.
Timothy Dutton QC (instructed by DLA Piper LLP) appeared for the appellant; Guy Fetherstonhaugh QC (instructed by CMS Cameron McKenna Nabarro Olswang LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Elmfield Road Ltd v Trillium (Prime) Property GP Ltd
