Retail Price Index linked rent review clauses

The case of Monsolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ961 concerned the drafting of a Retail Price Index (RPI) linked rent review clause. This case demonstrates the difficulty in drafting such clauses and how care must be taken.

The Facts

The defective clause was included in a 25.5-year lease of land that began in July 2013. The land was used as a solar farm and had an initial rent of £15,000 per annum index linked for the duration of the lease. However, the clause was drafted in such a way that its effect was to compound the rent by cumulative RPI over time, rather than simply adding an index-linked 12-month increase onto the previous year’s rent figure. Meaning the rent rose exponentially throughout the term of the lease. The tenant calculated that following the method in the lease would have meant that in the final year the rent would have been around £76m.

At first instance, the High Court held there was a clear error in drafting and that the clause was arbitrary, irrational and such that neither party could reasonably be seen to have intended such an outcome.

Court’s reasoning

The landlord appealed to the Court of Appeal but the first instance decision was upheld and a distinction was drawn between two situations. Firstly, where there is plainly defective drafting (as in this case) and secondly, deliberate and intentional drafting even if it leads to unfair results (Arnold v Britton [2015] UKSC 36). The Court will intervene in the first situation but not the second.

The Court was satisfied that there was a mistake and that it was clear what the clause had been intended to do. The general purpose of rent-review clauses are long established and linking the clause to the RPI demonstrated that the changes in rent were to reflect changes in the value of money rather than allow the rent to increase by such a large amount year on year. Why would the parties link the clause to the RPI if they intended such large increases? Coupled with the arbitrary and irrational nature of the clause, it was not commercially viable for either party and taking this all into account the Court dismissed the appeal.

Comment

There are a number of key takeaways from this case. The first is that courts will only intervene in situations where there are clear mistakes. If the parties intended the outcome no matter how unfair it is, it is not their role to unwind contracts. This means it is important when drafting contracts and leases to have a clear aim in mind.

Secondly, RPI clauses are tricky to get right. In this case, it appeared the draftsman drew elements from both standard drafting mechanisms and created one that produced an exponential increase. The utmost care needs to be taken when drafting lease clauses and it is equally important to review and consider the mechanics to make sure that it works in the manner intended.

How will Courts approach disputes regarding rent post Covid-19?

The case of S Frances Ltd v The Cavendish Hotel (London) Ltd has had a long and chequered history. Following the Supreme Court finding in favour of the tenant and allowing the lease to be renewed, the issue dealt with most recently was what the new yearly rent should be.

The parties had agreed the majority of the new terms but had to ask the court to rule on four others, one of which was how much rent would be paid per annum in the new agreement. Previously the rent was £220,000 per annum (set back in 2011). However, following the global pandemic, London and other cities have seen a decline in their rental market. After hearing expert evidence from both parties HHJ Parfitt held that the rent going forward will be £102,000 per annum and £160,000 per annum for the five years this case wound its way through the courts.

This is clearly a significant reduction in the rent and it certainly bucks the trend seen over the last decade or so where rental prices have risen consistently. There will always be unique factors that go into these calculations, but in this case, two stood out. Firstly, there were a large number of vacant lots on Jermyn Street and, secondly, there was limited comparable evidence for the judge to draw on.

Comment

This particular part of the long court saga has not created any new legal principles but it offers the first practical insight into how courts will approach rental values following the pandemic, particularly in London, and has shown that judges are willing to reduce yearly rents substantially.

For property owners it is perhaps a warning that it is time to adjust expectations in the short term and possibly try to delay the renewal of leases until the market recovers. For tenants it is a useful negotiation tool that can be wielded effectively if landlords are being unrealistic about the rent review in a falling market.

For further information, please contact Clive Adams via [email protected] or 0203 553 4879.