Summary

The court ruled on the proper interpretation of 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.

Facts

The court was asked to rule on the proper interpretation of a rent review clause in a commercial lease.

The claimant and the defendant were the successors in title to, respectively, the landlord and tenant under a lease of commercial premises dated 23 June 1986. The term of the lease was 25 years from 25 March 1985 and provision was made for rent reviews every five years. The annual rent paid was as follows: from March 1985, £551,000; from March 1990, £1,160,000; from March 1995, £1,160,000; from March 2000, £1,160,000; from September 2005, £965,000. In December 2005, the parties executed a new lease, which was 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 the figures given was £1.2 million. 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.

The claimant's case was as follows: in December 2005, when the new lease was executed, the parties did not yet know what the Initial Rent would be under the new lease; they knew only that it would be the highest of three figures; however, it was clear from the rent review clause that whatever figure was to become the Initial Rent should be multiplied by whatever would be the Index figure at the Review Date divided by 193.1 (the Base Figure); by March 2015, the parties knew that the Initial Rent was £1.2 million and that the Index figure was 256.7; accordingly, the figure produced by applying the stated formula was £1,595,235.63 (£1.2 million x (256.7 divided by 193.1)). The defendant argued that the rent review clause contained an obvious error: instead of saying "the Initial Rent", it should say "the rent payable under the Initial Lease immediately prior to expiry", i.e. £965,000; that accorded with commercial common sense.

Held

There was a presumption that if the rent was index-linked, the parties intended the indexation to increase the rent in line with inflation from the date when the passing rent was fixed. If the rent was to be reviewed from the initial rent, one would expect the indexation to run from the date of the lease; if the rent was to be reviewed from a previous review date, one would expect the indexation to run from the previous review date. It would be as curious to increase the rent by indexation over a longer period as it would be to increase the rent by reference to the market value of a hypothetical lease which was more valuable than the actual lease. The effect of the claimant's construction was that, on the rent review in 2015, the Initial Rent determined in 2010 would be increased by reference to the increase in the Index between September 2005 and February 2015. That was in conflict with the presumption referred to above, but the claimant's construction was the natural and ordinary meaning of the rent review clause. The presumption was rebutted on the facts of the case. The defendant had failed to establish that there was any mistake which should be corrected by construction of the new lease (see paras 21, 31, 63-64 of judgment).

Judgment for claimant