Monsolar IQ Ltd v Woden Park Ltd: Interpretation of rent review provisions upheld by the Court of Appeal

In our previous Legal Update we discussed the decision in June 2020 of Mr Justice Fancourt in the unusual case of Monsolar IQ Ltd v Woden Park Ltd on the interpretation of an index linked rent review clause. The court found in favour of the tenant on the majority of its arguments and ordered that the effect of the wording in the lease was to provide for an upward or downward review in accordance with any proportionate change in RPI during the preceding year.

Woden Park were granted permission to appeal and the decision of the Court of Appeal was handed down on Tuesday.

Summary

The Court of Appeal agreed with Mr Justice Fancourt’s decision at first instance and dismissed the appeal. The upholding of the first instance decision should give some comfort to both landlords and tenants faced with drafting that on its literal reading creates results that are irrational and arbitrary.

It has been said that he first instance decision does not sit well with the Supreme Court’s judgment in Arnold v Britton. The Court of Appeal’s judgment provides some clarity on this issue.

The construction of written agreements

The Court of Appeal reiterated that this was not a case where the contractual provision in question was open to two possible interpretations. Rather, it was common ground that the rent review formula was clear and unambiguous. The question was whether the result of that formula matched the intention of the parties.

The Court of Appeal restated that it was the Chartbrook principle that was relevant here, under which the literal meaning of a provision can be corrected if it is clear both that a mistake has been made, and what the provision was intended to say.

Woden Park contended that this principle now had to be read in light of the decision in Arnold v Britton, which focused on a strict interpretation of the language used by the parties notwithstanding arguments as to the surrounding circumstances and commercial common sense.

The Court of Appeal held that nothing decided in Arnold v Britton qualified or departed from the approach in Chartbrook. The Court held that the reasoning in Arnold v Britton did not really apply where the parties have made a drafting mistake (and as such where the very question is whether the language really reflects what the parties intended).

The Court of Appeal confirmed that there is a distinction between a case which concerns a provision which ‘seems merely imprudent’ and once ‘which appears irrational’.

The Court of Appeal concluded that ‘there is nothing in Arnold v Britton which suggests that this dividing line between on the one hand a provision which is unduly favourable to one side, imprudent or unreasonable, and on the other hand one that produces irrational, arbitrary, nonsensical or absurd results has been redrawn.’

Grounds of Appeal

Ground 1: is it clear that there was a mistake?

The Court of Appeal held that it was ‘abundantly clear’ that the rent review formula contained a drafting error and that it was ‘about as plain a case of such a mistake as one could find’. The Court agreed with Mr Justice Fancourt’s decision that applying the rent review formula literally was arbitrary and irrational. Ground 1 of the appeal was therefore dismissed.

Ground 2: is it clear how the mistake should be corrected?

The Court of Appeal agreed with Mr Justice Fancourt’s decision that there were two possible ways of correcting the error and that both produced the same result. The Court rejected submissions on the part of Woden Park that the review was intended to be upwards only as such a provision would have nothing to do with correcting the mistake that was made. Ground 2 of the appeal was dismissed.

Commentary

Although the facts of the case were unusual, the issues arising from drafting and interpreting index rent review provisions are not uncommon. As such this judgment brings hope to parties where the drafting has “gone wrong”. This is an issue that we have seen in nascent industries such as the renewable energy sector and is something that should be considered at the outset of any transaction as well as on assignment or acquisition.

So whilst the judgment does give some comfort, the point remains that this was a case where the drafting had clearly gone wrong – in this case as a result of the absurd outcome, although it might also be by reference to the words used. A warning though perhaps to landlords who try to benefit from drafting in index-linked rental provisions that seek to achieve a duplication in rental increase and exponential rise by basing the increase in the index on the index figure at the start of the lease but applying it to the passing rent, an approach we have seen in the past and which might give rise to similarly absurd results. That doesn’t mean that all such applications will be successful, and it will very much depend on the facts of each case but in the right circumstances this judgment at least supports a commercial approach to the issue.