Court corrects ‘irrational’ clause leading to huge rent increases

The Court of Appeal has ruled that an ‘irrational’ clause in a lease that led to exponential growth in rent increases was an error and should be corrected.

The case involved Monsolar IQ Ltd and Woden Park Ltd.

Monsolar agreed a 25.5-year lease to create a solar farm on land owned by Woden.

The lease laid out that the rent should be calculated by reference to the Retail Prices Index (RPI) in such a way that the annual increase in rent was the aggregated increase over all previous years of the term.

This would lead to exponential increases, rather than the increase being relative to the previous year only.

Monsolar took legal action to correct what it described as an obvious error.

The High Court agreed and ruled that the lease should be amended.

The Court of Appeal has upheld that decision. It pointed out that a court could not alter an unambiguous contract provision simply because it provided for one of the parties to pay a high price for something.

The question for the Appeal Court was whether the judge had been right to hold that a literal reading of the formula could not have been intended by the parties and that there must have been a mistake.

It was clear that the lease was as plain a case of drafting error as one could find. The general purpose of rent review clauses was long established.

It was a reasonable working hypothesis when there was a rent review clause based on changes in an index such as RPI that the general purpose was to enable the rent to be increased in line with the index.

If that was not what the parties intended, it was slightly odd that they should have based their rent review provision on the index at all.

The results of applying the formula in the lease literally could aptly be described as arbitrary and irrational, equally as commercially nonsensical or absurd, such that it could not be supposed that rational parties really intended them.

The formula’s effect, literally construed, was that the rent was increased each year by an amount that reflected not the change in RPI for the previous year but the cumulative change in RPI since the start of the term, all of which, apart from that attributable to the latest 12 months, had already been taken into account.

The judge had been right to rule that the drafting error should be corrected.

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