MonSolar v Woden Park (2021) – Casting sunlight on absurd formulae

MonSolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961

Summary

An appeal by a Landlord in the Court of Appeal was dismissed, on the grounds that an indexation clause in a rent review – when read literally – produced an “arbitrary and irrational” result, did not have an intentional exponential increase due to calculations involving an aggregation of the previous years’ RPI. Original judgement was found to be correct and it was clear how the rent review clause should be corrected, as per the Chartbrook principle.

The judgment can be found here.

Introduction

15 acres of formerly agricultural land in Woden Park was leased by Woden Park Ltd (the “Defendant”/“Landlord”) to MonSolar (the “Claimant”/“Tenant”) for 25 years and 6 months for the purpose of developing a solar farm. The price was £1,000 per acre, per annum. Rent was to be calculated via the following formula (“the Formula”):

Revised Index Figure was RPI before the review date and Base Index Figure was the RPI on a date just before the lease commenced. When read literally, the RPI was repeatedly applied in the year it occurred and every-year-after, meaning rent at 25 years would amount to >£76,000,000 pa, as opposed to <£30,000 pa if rent was increased in accordance with RPI.

It is worth noting that efforts were made to find out whether intentions and results of the formula matched intentions of both parties involved, not whether it was open to two different interpretations by either party.

In a previous hearing at the High Court (MonSolar IQ Ltd v Woden Park [2020] EWHC 1521), it was ruled that there was a mistake in the rent review clause, with its drafting of the formula. Two corrections were proposed to rectify the formula:

MonSolar provided a correction of the Formula, “Correction A”:

Fancourt J gave a differing correction, “Correction B”:

Fancourt J ruled in MonSolar’s favour, stating that there was a mistake in the rent review clause, in its drafting of the Formula. He preferred Correction B and offered this as the solution.

The Landlord/Woden Park Ltd appealed on two grounds:

First Issue – Woden Park Ltd stated that it was not clear that the Formula contained a drafting error. They also stated that the Chartbrook principle – made ‘prominent’ from Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, in which clear mistakes in the drafting of a document could be rectified with what they were intended – should be altered under the Supreme Court’s decision in Arnold v Britton [2015] UKSC 36 (see our blog), so that rationality was not taken into account.

Second Issue – they also specified that if there was an error, it was not clear what either party intended especially since the lease contract mentioned “increases”: potentially indicating an upwards-only review mechanism.

Judgement

First Issue – the Court of Appeal held that it was “abundantly clear” that the rent review formula contained a drafting error. In accordance with the decision of Fancourt J, the Court stated that literally applying the rent review formula was “arbitrary and irrational”. Ground 1 of the appeal was subsequently dismissed.

Second Issue – ground 2 of the appeal was also dismissed, with the Court once again agreeing with Fancourt J, but instead stating that the two offered possible corrections (‘Correction A’ and ‘Correction B’) both produced the same result. No intentional mention of an upwards-only mechanism was found to be present in the contract.

It was stated from the outset that all parties involved acknowledged that the rent review clause was unclear. In the High Court, it was shown that Correction A and B were the same as both parties forgot to note that RPI is, in itself, compounded. This was the only source of contention between the Judges, who both ruled in favour of the Tenant.

The Chartbrook principle was found to be applicable here, as both cover the implications of arbitrary and irrational clauses. The Judge condemned the use of the Chartbrook principle in the context of Arnold v Britton, and rejected the idea that this case had modified the principle. The former is very much focussed on irrational clauses, rather than those that are “imprudent” – as discussed in Arnold v Britton.

The suggestion that the mechanism had been drafted to be upwards-only was refuted, and it was clear that the true construction of the formula was meant to be increased or decreased each year in accordance with RPI through that year only. Whilst there was semantic allusion to “increases” in revised rent price each year, this was not found to be ill-intended but instead understandable since price inflation had been steady in the post-1940s UK economy.

Application

This case confirmed that the Chartbrook principle should not be changed in the face of Arnold v Britton, when the clause is arbitrary and irrational. Practical application of this case should offer guidance on whether indexation clauses are indeed arbitrary and irrational, and how to proceed in the instance that they are.

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