Rent review: does exactly what it says on the paper

Summary

Trillium (Prime) Property GP Ltd (“Trillium”) appealed a High Court decision, which held that the figure to be applied to a rent review mechanism was the Initial Rent (£1,200,000) instead of the passing rent under the previous lease (£965,000).

The Court of Appeal dismissed Trillium’s appeal and upheld the High Court decision, in favour of Elmfield Road Ltd (“Elmfield”).

There was no ambiguity in the language of the rent review provision in the lease, and the court applied the literal interpretation of the rent review provision (Trillium (Prime) Property GP Limited v Elmfield Road Limited [2018]).

The rent review provisions

The rent payable under the previous lease was £965,000.

“Initial Rent” was defined in the reversionary lease as being the greatest of 3 options:

1. The rent first reserved under the previous lease subject to such increase calculated in accordance with; paragraph 3 of the First Schedule.
2. £1,200,000 per annum exclusive of VAT.
3. The open market rent as determined in accordance with the …Third Schedule.

Paragraph 3 of the First Schedule provided

Base Figure: 193.1

Until the first Review Date the annual Rent would be the Initial Rent and thereafter during each successive Review Period the annual rent will be … the greater of:

1. the annual rent reserved under this Lease immediately before the relevant Review Date.
2. the revised rent ascertained in accordance with this clause.

The annual Rent for any Review Period is to be determined at the relevant Review Date by multiplying the Initial Rent by the Index for the month preceding the relevant Review Date and dividing the result by the Base Figure.

The parties agreed that the Initial Rent payable from the rent commencement date of the reversionary lease was £1,200,000 per annum exclusive of VAT.

The Base Figure was the index figure in the Retail Price Index as at September 2005, which was the date from which the rent under the previous lease was payable.

It was agreed that the RPI index figure for the month preceding the review date in 2015 was 256.7.

Applying the rent review provision

The crux of the dispute rested on which figure was to be applied for indexation in calculating the reviewed rent from 25 March 2015. Trillium argued that the figure was the passing rent under the lease before the reversionary lease. Elmfield argued that the figure was the Initial Rent, as per the wording of the reversionary lease.

• Elmfield’s calculation: £1,200,000 x (256.7 ÷ 193.1) = £1,595,235.63.
• Trillium’s calculation: £965,000 x (256.7 ÷ 193.1) = £1,282,835.31.

Arguments raised by Trillium

Trillium argued:

• There was an ambiguity in the language of the lease which prevented the rent review clause being read literally.
• The Base Figure was as at September 2005. Therefore, index linking should be applied to the amount payable at the time and not the Initial Rent. Taking the Initial Rent as the starting figure would essentially overcompensate the landlord for inflation, and create a chronological inconsistency.
• Even if the language of the lease was unambiguous, the lease drafting contained a clear mistake based on the commercial background and unfavourable consequences of the literal interpretation of the clause.

Decision

The Court of Appeal rejected Trillium’s arguments and held that:

• There was no ambiguity in the language of the rent review provision. The lease clearly stated “Initial Rent” and the definition was clear.
• Trillium’s interpretation that the Initial Rent played no part in the rent review (except that it acted as a floor for the reviewed rent) was improbable as it was in direct contradiction to the express method given under the lease.
• For the court to correct a mistake by construction, it must be shown that there was a clear mistake and that it was clear what a reasonable person would have understood the parties to have meant by the drafting. There was more than one possible solution to the mistake that Trillium alleged. Therefore, it could not be said what the reasonable person would have understood the parties to have meant.
• Furthermore, the mistake was not in the drafting, but rather a failure by Trillium to think through the consequences in agreeing to the rent review clause. The court cannot resolve this issue through contractual interpretation.
• Even if the term was an imprudent one for a party to have agreed, or had disastrous consequences, that was no reason to depart from the clear language of the words of the contract – especially one that was professionally drafted (Arnold v Britton and Wood v Capita applied).

Points to note

• This case is yet another in a long line of authority showing that the court will give effect to the clear language of the contract.
• Contracting parties (and their lawyers) should read and fully understand the mechanisms of rent review provisions to be agreed (especially if they are bespoke and complex).
• An hour spent on running the numbers through a rent review formula may avoid hundreds more spent on litigation!