Q&A: Rent Review Formula

Question

I am concerned that the rent review formula within my lease will generate a reviewed rent which lacks any commercial sense. I believe that the formula contains an obvious mistake. If I cannot rectify the lease, would a court be obliged to apply the literal wording, or would it apply common sense in determining the rent?

Answer

A court or arbitrator is required to apply the ordinary and natural meaning of the rent review provisions (including any formula) unless it concludes that the literal meaning or effect of the provision is irrational, arbitrary, nonsensical or absurd, so that it cannot have been what the parties actually intended. It must also be clear what the parties did actually intend. If these two requirements are satisfied, the court or arbitrator must give the provisions the meaning and effect which the parties actually intended. Otherwise it must give them their literal effect.

Explanation

When a court or arbitrator is interpreting a provision of any instrument, the basic principle is that it must determine what a reasonable person, having all the background knowledge that would have been available to the parties, would have understood the intention of the parties to be in using the language which they did. It does so by focusing on the meaning of the actual words or formulae in their documentary, factual and commercial context. Save in “a very unusual case”, the meaning is to be gleaned from the language of the provision or formula. A reliance on “commercial common sense” cannot be invoked to override the actual language of the provision, as the Supreme Court confirmed in Arnold v Britton [2015] UKSC 36; [2015] EGLR 53.

However, the court or arbitrator may depart from the literal meaning and effect of a clause when it is clear that a mistake has been made by the parties in expressing their intention, and when it is also clear what the parties actually intended. Although this principle is of long standing, it was explored in depth by Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 3 EGLR 119 and is sometimes referred to as the Chartbrook principle. In order to be able to rely on the principle, a party must overcome two hurdles, which may not be easy.

Clear mistake

First, it must show that there has been a “clear” mistake. In some cases this will be straightforward, for example, because the language of the provision is itself nonsensical. It is sometimes said that the mistake must be clear from the document itself, but this means only that a mistake cannot be established by calling evidence that something else was actually intended – a rule referred to as the parole evidence rule. The correction of a mistake by that route would require a claim for rectification.

In a recent case, Monsolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961; [2021] EGLR 35, the Court of Appeal was able to identify a clear mistake in a rent review formula, which was not itself linguistically or mathematically nonsensical, but would have had an absurd and irrational effect on the future rent during the term.

The lease in Monsolar related to a wind farm and, as is common in such leases, the rent review provisions increased the rent annually by reference to the retail price index. However, rather than increasing the passing rent by the amount of any inflation since the last increase, or increasing the starting rent by the total amount of inflation since the start of the lease, the clause applied the total amount of inflation since the start of the lease at each annual review. This would lead to absurd rents by the end of the term. It would potentially mean that the rent could still increase in any year, even if inflation turned negative in later years of the term, and would mean that the rents towards the end of the term would be different for the same overall amount of inflation, depending on whether more of that inflation had occurred early or late in the term.

The Court of Appeal explained that, in order for the Chartbrook principle to apply, it is not sufficient that the possible results of applying the literal wording of a provision should “lack commercial common sense”, or that it would be imprudent for anyone to agree to such a provision. Only if the provision produced results that were “irrational, arbitrary, nonsensical or absurd” could its literal meaning be departed from.

There might be a “fine dividing line” between a case where the outcome appears “commercially unattractive and even unreasonable” and one which appears “nonsensical or absurd”. However, given the effects of the formula on the future rent in Monsolar, the Court of Appeal held that it was “about as plain a case of such a mistake as one could find”.

Clear intention

The second requirement of the Chartbrook principle is that it must also be “clear” what the parties actually intended. If it is clear that a mistake has been made, but not what the parties actually intended, then the literal wording must still be applied.

In Monsolar there were two possible ways to correct the clause. It could be corrected so that it applied only one year’s inflation to the rent fixed at the last review, or so that it applied the total amount of inflation from the start of the lease up to the review date to the original starting rent. However, the Court of Appeal accepted that, because the clause was not an upwards-only review clause, these two corrections would in fact produce identical rents. It was therefore clear what the parties intended, even though that intention could be expressed in two different ways.

As long as it is clear what the actual intention of the parties was, then, as Lord Hoffmann observed in Chartbrook, there is no “limit to the amount of red ink” which the court can use to correct their mistake in expressing their intention.

An original version of this article was first published on Estates Gazette. For more information please contact Lauren Spark or your usual Charles Russell Speechlys contact.