The Court of Appeal has dismissed a landlord’s appeal against a finding by the High Court that an indexation clause in the rent review provisions of a lease which, when read literally, repeatedly applied the inflation in subsequent years which had already been applied in earlier years, should be corrected by interpretation.
In 2013 the Defendant granted to the Claimant a lease of 15 acres of formerly agricultural land to be developed 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
The Revised Index Figure was defined to mean the RPI a date shortly before the review date. The Base Index Figure was defined to mean the RPI on a date shortly before the lease commenced.
Read literally, the indexation clause would therefore 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 the rent was merely increased in line with RPI.
The High Court applied the well-known approach set out in the speech of Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38, and found that the indexation provisions in the lease contained a clear mistake, which did not reflect the intentions of the parties, objectively assessed. Read literally the clause produced absurd, irrational and arbitrary results which could not have been intended. 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.
The landlord appealed, on the basis (a) that the Chartbrook approach required modification in the light of the Supreme Court’s decision in Arnold v Britton, so that the rationality (or lack of rationality) of the clause’s operation could not be taken into account in deciding whether a mistake had been made in the drafting of the lease, and (b) that even if there was a mistake, it was not obvious what the parties meant: because the lease referred to “increases” in the rent, they might have intended the review mechanism to be upwards only, in which case there were multiple ways of correcting the mechanism, with arithmetically different results for the passing rent.
The Court of Appeal’s judgment
The Court of Appeal (Nugee LJ, with whom Baker and Males LJJ agreed) dismissed the appeal.
Nugee LJ rejected the submission that Arnold v Britton had modified the Chartbrook principle. Arnold had reiterated that the courts cannot, under the guise of interpretation, rewrite a bargain which appears imprudent or unduly favourable to one side or the other. The Chartbrook principle, by contrast, is concerned not with imprudent provisions, but with irrational ones. There is a dividing line between clauses that appear commercially unattractive or unreasonable for one party, on the one hand, and clauses which are nonsensical or absurd, on the other. Nothing in Arnold v Britton suggested that the Court had redrawn that line.
Turning to the lease, and whether it contained a relevant drafting mistake, Nugee LJ described the rent review mechanism before him as containing “about as plain a case of such a mistake as one could find” (para 35). The formula was both arbitrary and irrational in its operation; it conflicted with other provisions of the lease which indicated that the formula was meant to track RPI; and it was easy to see how the mistake had come about. When considering whether the formula contained a drafting error, it is legitimate to look at the effect of the formula, as long as the distinction between merely imprudent results and nonsensical arbitrary ones is kept in mind.
As to the suggestion that the mechanism might have been intended to be upwards-only, the Court rejected the landlord’s arguments, for the same reason as Fancourt J had done below. The lease did indeed contain linguistic indications that the parties expected the rent to rise at each review, but that was not surprising since price inflation had been a constant of the UK economy since the 1940s. The fact that the parties expected the cost of living to increase each year did not mean that they had intended to make provision to ensure that it must do. It is easy to draft an upwards-only review clause, and the drafter had not done so.