UK Court Of Appeal Corrects Mistake In Rent-Review Clause By Interpretation: MonSolar IQ Ltd v Woden Park Ltd

• Published date: 04 August 2021
• Subject Matter: Litigation, Mediation & Arbitration, Real Estate and Construction, Trials & Appeals & Compensation, Real Estate, Landlord & Tenant - Leases
• Law Firm: Ogier
• Author: Ms Sophie Warburton

Introduction

The job of a court when interpreting a written contract, including a lease, is to work out what the document means, not what either party thinks it means. This is known as the objective theory of contract interpretation. Specifically, it is the meaning that the document would convey to a reasonable person having all the background knowledge that would have been reasonably available to both parties in the situation in which they were at the time of the contract. This includes knowledge to be gained from the whole document and also such other background knowledge as the reasonable person would consider relevant.

A party may apply to the court to rectify a document because it does not reflect the terms the parties actually agreed, or because the document does not reflect the terms one party thought had been agreed, in circumstances where the other party should not be permitted to take advantage of the mistake. Rectification of a document on either of these grounds is beyond the scope of this update.

What happens, however, if the court is satisfied that something has gone wrong with the language? This is difficult to establish because a court does not easily accept that people have made linguistic mistakes, particularly in formal documents. Occasionally though, the court is satisfied that a mistake has been made. This was the case in the recent decision of the UK Court of Appeal in MonSolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961. That case concerned the drafting of a rent-review clause in a lease.

The Court of Appeal decision

The lease provided for annual rent reviews based on movements in the Retail Price Index (RPI). (This can be compared to the Consumer Price Index published by the Statistics Office of the Government of the Cayman Islands.) Typically, the idea of such rent reviews is for the annual rent to keep pace with increases in inflation (although sometimes it may mean the annual rent is decreased because of deflation).

In this case, the rent-adjustment mechanism was reduced to a formula which, effectively, read as follows:

(This is a simplified version of the actual formula.)

The problem with this formula was that the "Base Index Figure" remained the same throughout the life of the lease. Unless corrected, this had the effect of producing cumulative, compounding increases in the annual rent. In other words, assuming the usual upward increases in inflation, the strict application of the formula would lead to cascading increases in...