Sun rays don't mean rent raise -unintended consequences of rent review provisions for solar farm

Background

The case of Monsolar IQ Ltd v Woden Park Ltd involved the interpretation of the annual rent review provisions of a lease granted over bare agricultural land for a term of 25 years and six months for the development and use of a solar farm.

Both the landlord and tenant issued a claim for a determination of the same issue which was what the rent review provisions in the lease meant. Mr Justice Fancourt found that the tenant was correct that there was a clear mistake in the rent review provisions which, if interpreted literally, gave an absurd result which the parties could not have intended. He found that they should be rectified by construction.

Although this case was unusual (as the landlord and tenant entities were controlled by the same person when the lease was entered into) issues arising from index rent review provisions are not uncommon and as such the decision brings some hope to parties where the drafting has gone wrong.

Relevant provisions of the lease

1. Rent was defined by the lease as A x B where A was the area of the demise in acres (in this instance 15 acres) and B was £1,000.00 – i.e. £1,000.00 per acre.
2. The Rent was payable half yearly in arrears to be reviewed annually on the anniversary of the grant of the lease (the “Review Date”). With regard to the review the lease stated: The Rent payable under this Lease will be reviewed in accordance with this paragraph 3 on each of the Review Dates and such Rent payable from and including each such Review Date shall be the Revised Rent which shall be calculated as follow: Revised Rent – Rent payable prior to the Review Date (disregarding any suspension of Rent) x Revised Index Figure ”.
3. “Base Index Figure” was defined as “the Index Figure published in respect of the month two months before the commencement of the Term.
4. “Revised Index Figure” was defined as “the Index Figure published in respect of the month two months before the relevant Review Date”
5. “Index Figure” was defined by reference to the General Index of Retail.
6. No premium was paid for the grant of the lease and there was a tenant break option at any time during the term on six months’ prior notice.

The issues

It was accepted by the tenant that on a literal interpretation of the indexation clause the rent would be increased on the first Review Date by the RPI increase over the first year of the term. On the second Review date the Revised Rent is further increased by the aggregate RPI increase over the first and second years. On the third Review Date the further Revised Rent is again increased by the aggregate RPI increase and so on throughout the 25 year term.

This resulted in a situation where the rent was not merely compounded year on year but also increased again, year on year, by the same factor for which the rent was originally increased. In this instance, assuming an average RPI increase of 2.855%p.a. the tenant calculated that the rent would increase from £15,000 to just over £76,000,000 by the end of the term.

With non-cumulative RPI increases this increase is significantly less at around £30,000 by year 25.

The tenant’s case was that there was a clear mistake in the indexation formula so that the lease should be read in its intended sense rather than literally. It argued this was an obvious mistake because of the arbitrary and absurd results created by following the formula.

The landlord disputed this stating that there was no obvious mistake and that the outcome of the application of the formula shouldn’t be a factor in reaching any decision. In the alternative they argued that if the outcome of the application of the formula was relevant it didn’t produce such an absurd result that an objective observer would conclude there was a mistake.

Decision

There have been a number of recent cases on interpretation all of which make clear that the Court will not re-write a bad bargain just because it goes against commercial common sense. However, the judge in this instance decided that it was clear from the face of the document there was a mistake as the use of the RPI index was to track an increase in line with that but that the effect of the clause was in fact to achieve something different. The judge felt this position was clear and justifiable on the basis of the lease as a whole and by reference to certain other provisions where RPI was referred to.

This was the case even where there was a rolling break option for the tenant. This was because not only did it not mitigate the arbitrary result of the review but also didn’t properly account for the fact that the tenant would be penalised for the initial value of the installation and set-up and the likely requirement to decommission and make good on vacating.

The decision reached was unusual. It was only because the literal interpretation of the clause produced an absurd result which was inconsistent with its self-expressed intention (that the rent should keep pace with the cost of living) that the Judge felt able to re-write it. He also found that there was only one credible meaning which the clause was meant to have so he didn’t have to decide between a number of competing alternatives.

The court didn’t find entirely in favour of the tenant and wasn’t persuaded by their call for simple indexation on the basis that the wording of the clause as a whole didn’t appear to reflect this outcome. Instead it ordered that the rent passing in the year running up to each Review Date should be increased or decreased in accordance with any proportionate change in RPI during that year. The measure of that is now to be by reference to the difference between the RPI two months before each Review Date and two months before the previous Review Date.

Commentary

Rent reviews are notoriously difficult and can, when documented, result in an outcome that doesn’t reflect the intention of the parties. The scenario set out in this case, or versions of it, is something we have seen on a number of leases for solar farms. As this is still a relatively nascent industry this is something to be aware of when undertaking due diligence on assignment or when purchasing corporate entities.

Whilst every case will depend on its own facts, this decision should give some comfort to both landlords and tenants faced with this scenario given the court’s commercial approach.

However, a word of warning that it doesn’t give a carte blanche to all such applications. It will still be for the person bringing the claim to show that there was a mistake, either by reference to the words used or as a result of the absurd outcome. With regard to the what constitutes an absurd outcome this case gives some indication as to the level of absurdity required (considerable) as well as providing guidance as to the nature of the arguments that might be made on interpretation where there might be more than one credible alternative meaning.