Who can forget the Supreme Court decision in Arnold v Britton [2015] UKSC 36? In that case, a service charge fixed at £90 per annum was subject to compounded 10% increases, which meant that service charge payments would increase disastrously over time. But the court refused to rewrite the parties’ bargain and gave effect to the natural meaning of the words used in the lease instead.
Monosolar IQ Ltd v Woden Park [2020] EWHC 1407 (Ch) concerned a rent review clause in a 25-year lease of land, which was to become a solar photovoltaic park. The rent reserved by the lease, in the sum of £15,000 pa, was to be increased annually in accordance with the General Index of Retail Prices (RPI) and, read literally, the indexation clause operated as follows.
On the first anniversary of the lease, the rent was to be increased by the RPI 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. On the third anniversary, that rent was to be further increased by the aggregate RPI increase over the first, second and third years of the term – and so on. Applying this cumulative formula, one set of figures put forward by the tenant suggested that the rent could escalate to more than £76m pa by year 25 of the term.
The tenant argued that the formula contained an obvious mistake, which was so “commercially nonsensical that the parties could not have intended it”, and that it could and should be read in its intended sense, and not literally as written: Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101. But the landlord insisted that the language of the lease was unambiguous. The landlord and tenant companies were connected when the lease was granted, and the landlord claimed that its terms reflected their intentions. It argued that the court’s task is to identify what the parties have agreed – and not what the court considered that they should have agreed. It pointed to a break clause enabling the tenant to terminate the lease on six months’ notice, served at any time, and argued that this was available to the tenant if the rent were to escalate unacceptably.
But Fancourt J agreed with the tenant that the rent review formula produced results that were arbitrary and illogical – and distinguished Arnold on the ground that the leases in that case were granted at a time of high inflation. This lease stated that the rent was to be reviewed to reflect increases in the cost of living – which supported the tenant’s argument that something was wrong with the formula. And, although the break clause enabled the tenant to terminate the lease prematurely, it might well have to dismantle its apparatus, reinstate the land and write off costs significantly earlier than planned.
The lease was granted to facilitate the sale of development rights and it was difficult to accept that the landlord could have intended the formula to operate as written, since this would have inhibited a sale to, or affected the price paid by, any well-advised purchaser. Consequently, there must have been a mistake. The parties had clearly intended to index the passing rent by reference to the increase in RPI over the previous year only – and not over the entire expired part of the term.
Allyson Colby, property law consultant
