Trillium (Prime) Property GP Ltd v Elmfield Road Ltd (2018)
The court interpreted a rent review clause which provided for the rent to be reviewed by reference to the Retail Prices Index rather than by reference to market rents. There was no ambiguity in the language of the clause which precluded the court from applying its literal meaning, and no drafting error which could be corrected as a matter of interpretation.
A tenant appealed against a decision concerning the proper interpretation of a rent review clause.
The parties had entered into a lease of commercial premises. Its term was 25 years from 25 March 1985 and provision was made for rent reviews every five years. A reduction in rent for the period from 29 September 2005 to 24 March 2010 had been agreed at £965,000. In December 2005, the parties executed a new lease, to commence on 25 March 2010 (on the expiry of the initial lease) and expire on 31 March 2022. It contained a rent review clause in the following terms: "The annual Rent for any Review Period is to be determined at the relevant Review Date by multiplying the Initial Rent by the Index for the month preceding the relevant Review Date and dividing the result by the Base Figure". The Base Figure was specified as 193.1 and the Index was the "index figure of the Index of Retail Prices". The "Initial Rent" was defined as being the highest of three figures or calculations, one of which was £1.2 million per annum. The Base Figure of 193.1 was the index figure of the RPI at the date when the reduced rent of £965,000 became payable. In July 2010, the parties signed a memorandum stating that the initial rent was to be £1.2 million a year from 25 March 2010, meaning that there was no need to undertake the calculations envisaged by the definition of the expression "Initial Rent". When the rent review calculation was undertaken for March 2015, the agreed figure of £1.2 million as the Initial Rent resulted in annual rent of £1,595,235.63.
The tenant submitted that there was ambiguity in the language of the lease which precluded the court from applying the literal meaning of the rent review clause. It argued that since the Base Figure of 193.1 was agreed to have been the Base Figure as at September 2005 when the reduced rent of £965,000 became payable, what should be index-linked was the amount of rent payable at that date, namely £965,000 rather than £1.2 million. It argued that it was necessary to read the rent review clause as though it required the indexation of £965,000.
Ambiguity - There was no ambiguity in the language of the rent review clause. The meaning of the defined term "Initial Rent" was clear. Nor was there any ambiguity in the application of the clause. The tenant asserted that the rent review clause overcompensated the landlord for changes in the value of money. Instead of taking the rent payable at the expiry of the initial lease as the multiplicand, it took the initial rent under the new lease as the multiplicand, but then index-linked it by reference to inflation since 2005 rather than by reference to inflation since 2010. The tenant's interpretation entailed the proposition that once the Initial Rent had been determined it played no part in the rent review process, except insofar as it acted as the "floor" below which the reviewed rent could not drop. That seemed to be a very improbable interpretation of the clause. First, it would be highly unusual for a rent review clause to operate by reference to a figure which did not feature in the lease and which bore no relation to the rent actually payable for the time being under the lease. It also sat unhappily with the instruction in the lease that what was to be reviewed was the Initial Rent, as defined, rather than a wholly extraneous figure. Further, it was in direct contradiction of the express instruction that the multiplicand was the Initial Rent. Where parties had gone to the trouble to define terms, it was all the more difficult to avoid giving effect to their chosen definition (see paras 10, 12-14 of judgment).
Commercial common sense - The tenant argued that even if the language of the clause was unambiguous, the commercial background and the commercial consequences of the literal interpretation showed that something had gone wrong with the language of the clause. For the court to be able to correct such a mistake as a matter of interpretation it was necessary (a) that it should be clear that something had gone wrong with the language, and (b) that it was clear what a reasonable person would have understood the parties to have meant, Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38 applied. The problem with that argument was that if anything had gone wrong with the rent review provisions, that was a failure to think through the consequences of what the parties agreed, rather than any deficiency in drafting. A failure of that kind could not be solved by the process of interpretation. Further, there was more than one possible solution to the alleged drafting error and it could not be said that it was clear what a reasonable person would have understood the parties to have meant. Further, there was no way of knowing whether the sum of £965,000 was the market rental value of the property in September 2005. The fact that a contract term was an imprudent one for a party to have agreed, or that it had worked out badly, was no reason to depart from the clear language of the contract (paras 15-18).