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MonSolar v Woden Park [2020] EWHC 1521 (Ch) Fancourt J Summary The High Court considered the proper interpretation and effect of an indexation clause in the rent review provisions of a lease and held that a mistake had been made in drafting the formula such that a literal construction ought not to be applied. Background By a lease dated 8 July 2013 the Defendant demised to the Claimant 15 acres of formerly agricultural land, which was to be used as a solar farm. Rent was payable half yearly in arrears and the was to be reviewed annually by reference to the following formula:
Revised Rent = Rent payable prior to the Review Date (disregarding any suspension of Rent) x Revised Index Figure Base Index Figure
Read literally, the indexation clause would operate as follows: on the first rent review, the rent would increase by the RPI increase over the first year of the term; on the second review, the revised rent would be further increased by the aggregate RPI increase over the first and second years of the term; on the third review, that further revised rent figure would be increased by the aggregate RPI increase over the first, second and third years of the term; and so on for the rest of the term. So, read literally, the formula repeatedly applied inflation occurring in past years again and again in later years. The practical result was that, taking the average rate of inflation over the 20 years prior to the date of the Lease (2.855% p.a.), the rent payable by year 25 of the lease would have risen to more than £76,000,000 pa, as compared with less than £30,000 if RPI were applied. The Claimant contended that, upon an objective construction, there was an obvious mistake of drafting and the lease should be read so that the rent would increase (or decrease) annually (but non-cumulatively) in line with RPI. The Defendant argued that the wording of lease was unambiguous, and the words ought to be given their ordinary meaning even though this might result in an unfavourable result for the tenant. High Court Judgment Applying the approach set out in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 the lease could be interpreted contrary to literal meaning of the words if it was clear that there had been a mistake, and it was also clear what the true meaning of the clause was intended to be. The court held that the indexation provisions in the lease contained a clear mistake, which did not reflect the intentions of the parties, objectively assessed. The formula was inherently arbitrary and irrational and produced absurd results. For example, the formula could generate very different rents in the last years of the lease for the same overall amount of inflation, depending on whether that inflation occurred early or late on in the lease. The formula would also increase the rent after a year of negative inflation, unless inflation in that year had fallen by more than the total inflation which had occurred since the start of the lease. On its true construction the formula meant that the rent passing at the end of each complete year of the term was to be increased or decreased on review in accordance with any proportionate change in the RPI during that year. A declaration was made to that effect. Toby Watkin and Luke Wilcox acted for the successful Claimant.