Disastrous rent review clauses: irrational or imprudent?

In Monsolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961, the Court of Appeal has upheld a judgement that there was a mistake in a rent review clause, even though the wording of the clause was clear. In doing so, it applied the principle established in Chartbrook Ltd v Persimmon Homes Limited [2009] UKHL 38 that "…the literal meaning of a provision can be corrected if it is clear that a mistake has been made, and what the provision was intended to say."

The Court of Appeal in Monsolar v Woden rejected an argument that, as a consequence of the Supreme Court decision in Arnold v Britton [2015] UKSC 36, the Chartbrook principle only applied where a provision was open to more than one possible interpretation. The underlying facts of Monsolar v Woden and Arnold v Britton were similar – both concerned clauses (rent review and service charge clauses, respectively) which, applied literally, would result in the tenant paying huge sums by the end of the lease.

In Arnold v Britton, the court decided that, given the wording of the clause was clear, the court could not intervene to save the tenant from what appeared to be a bad bargain: "…a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight. The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed. Experience shows that it is by no means unknown for people to enter into arrangements which are ill-advised, even ignoring the benefit of wisdom of hindsight, and it is not the function of a court when interpreting an agreement to relieve a party from the consequences of his imprudence or poor advice."

In Monsolar v Woden, the court decided that the position was different and that it could intervene. This was on the basis that "[t]here is… a distinction between a case which concerns a provision which seems merely imprudent and one which appears irrational."

In other words, the courts could not intervene where the effects of the literal wording of the clause were "…commercially unattractive and even unreasonable…" or "…unduly favourable to one side, imprudent or unreasonable…", for example. However, the courts could intervene where the effects were, for example, "arbitrary and irrational" or "nonsensical … lead[ing] to the conclusion that they cannot have been intended". The Court of Appeal confirmed that Arnold v Britton had not affected the court’s power to intervene in these circumstances.

In the lease the Court of Appeal had to consider, the rent review mechanism was set out in a formula. This formula increased the rent payable by reference to RPI. However, taken literally, the effect of the formula (as drafted) was that the rent was required to be increased each year by the change in RPI since the start of the term, rather than increasing the rent by the change in RPI from year-to-year. On one party’s calculations, the result of this was that, by the end of the 25 year lease (based on a historical average for RPI increases), the starting rent of £15,000 per year would have increased to some £76 million, as compared with less than £30,000 if the “simple” RPI increase were applied.

The Court of Appeal decided that this result was so absurd that there must have been a mistake in the drafting. The court drew support for its conclusions from:

• the starting presumption that rent review clauses are intended to reflect changes over time in the value of the property or of money;
• other provisions of the lease which suggested that the intention was that the rent would simply increase in line with RPI;
• the arbitrary effects of the clause, if read literally – for example, that the rent would increase even after a year in which the RPI had fallen (unless RPI had fallen so far as to be below the original level of the RPI); and
• the fact that it was fairly easy to see how a mistake had been made.

The Court of Appeal also agreed that it was clear how the clause should be re-drafted, and so it was able to do so.

Comment

This judgment will provide comfort for parties fearing that, following Arnold v Britton, courts would never intervene to save them from a clearly-worded contractual provision that was incorrectly drafted. However, for the court to be comfortable doing so, the effects of the clause will need to be very obviously a mistake and not what the parties could possibly have intended. Further, the court must be able to identify what the parties must have intended instead.

However, there may well be clauses where it is not so clear-cut whether the disastrous results are irrational or merely imprudent. This will therefore continue to be an issue that parties and courts will have to grapple with.

The best way to avoid this problem is, of course, to ensure that the terms of the agreement properly reflect what has been agreed – including in relation to any formulas used. Where formulas are used, it is often helpful to include a worked example setting out how the parties understand the formula will apply.