Landlord and tenant – Commercial lease – Rent review clause – Construction – Parties seeking determination of proper interpretation of rent review clause providing for review of rent by reference to retail prices index rather than market rents – Whether lease containing error in formula for rent review – Judgment for claimant
By a sub-underlease the claimant’s predecessor in title let the property known as Unicorn House, Bromley to the defendant’s predecessor. The lease was for a term of 25 years from 25 March 1985 with an annual rent of £551,000. The lease provided for an upwards-only review to the open market rent at every fifth anniversary, with a final review on 20 March 2010 (five days before the end of the term). It was agreed that the reviewed rent from 25 March 1990 would be £1.16m. The reviewed rent from 25 March 2000 was to remain at that figure. It appeared that the rent review for 1990 was never activated but the parties were content for the rent to remain as it was.
In December 2005, the lease was varied and added a new provision that, for the period commencing 29 September 2005 and ending 24 March 2010, the rent would be £965,000 per annum. The final rent review on 20 March 2010 was deleted. On the same day documents were executed recording that 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 (subject to a break clause and an option to take a new lease). By clause 3.3 of the 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.
An issue arose as to the proper interpretation of the rent review clause. The claimant 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 £1.2 million and that the Index figure was 256.7; accordingly, the figure produced by applying the stated formula was £1,595,235.63 (£1.2m x (256.7 divided by 193.1)). The defendant contended, among other things, that the rent review clause contained an error in that, instead of saying “the Initial Rent”, it should have said “the rent payable under the Initial Lease immediately prior to expiry”, ie £965,000, an interpretation which accorded with commercial common sense.
Held: Judgment was given for the claimant.
(1) The overall purpose of the clause and of the new lease as a whole was to recalibrate an existing landlord and tenant relationship. It was impossible to reach any conclusion from the documents as to the parties’ shared intention with regard to indexation of rent. It might well be that it was unusual for rents to be reviewed by reference to the index rather than market rents. However, there was a presumption that, if the rent was index-linked, the parties intended the indexation to increase the rent in line with inflation from the date when the passing rent was fixed. If the rent was to be reviewed from the initial rent, one would expect the indexation to run from the date of the lease; if the rent was to be reviewed from a previous review date, one would expect the indexation to run from the previous review date. It would be as curious to increase the rent by indexation over a longer period as to increase the rent by reference to the market value of a hypothetical lease which was more valuable than the actual lease: British Gas Corporation v Universities Superannuation Scheme Ltd [1986] 1 WLR 398 applied.
(2) The unusual facts of the present case were far removed from the typical case, such as British Gas, where the only transaction between the parties was the grant of a long lease in exchange for a rent; and the parties contemplated at the outset that the value of the rent would or might have been eroded by the time of the rent review. The rent review provision was but one part of a complex overall transaction in which each party made some gains and some losses. It was not clear which party was the net winner, nor that they had in mind any particular pattern in respect of rent increases between 2005 and 2010 and between 2010 and the review dates. The effect of the claimant’s construction was that, on the rent review in 2015, the initial rent determined in 2010 would be increased by reference to the increase in the index between September 2005 and February 2015. That was in conflict with the presumption as to the purpose of rent review provisions but the claimant’s construction was the natural and ordinary meaning of the rent review clause. Accordingly, the presumption was rebutted on the facts of the present case. The defendant had failed to establish any mistake which had to be corrected by construction of the new lease.
Timothy Fancourt QC (instructed by Nabarro LLP) appeared for the claimant; Timothy Dutton QC (instructed by the DLA Piper UK LLP) appeared for the defendant.
Eileen O’Grady, barrister
Click here to read a transcript of Elmfield Road Ltd v Trillium (Prime) Property GP Ltd
