Compounding matters – Court of Appeal finds for solar tenant in 'double compounding' RPI rent review dispute

The Court of Appeal has today handed down judgment in the case of Woden Park Limited v MonSolar IQ Limited, dismissing the appeal by the landlord, Woden Park Limited, in favour of the tenant, MonSolar IQ Limited. The case sees a victory for MonSolar, which was represented by Osborne Clarke in both the High Court and the Court of Appeal.

The "double compounding" rent review provision

The case concerned the correct interpretation of an RPI (retail prices index) rent review clause contained in a solar farm lease.

The parties were in agreement that, if read literally, the rent review clause did not increase the annual rent in line with the RPI increase which had occurred over the previous year, but by the level of RPI increase that had occurred over every previous year of the lease. The effect of this was to "cumulatively compound" the revised rent, with the result that over the course of the lease the annual rent would increase far in excess of inflation, before becoming unaffordable at a point long before the end of the term.

To exemplify the literal effect of the rent review clause the Court of Appeal observed that, over the period May 2013 to May 2020:

• RPI had increased by 16.9% in total; whereas
• the effect of the literal interpretation of the rent review clause saw the annual rent payable under the Lease increase by 83.1%.

In the High Court, as a further example of the literal effect of the rent review clause, MonSolar had observed that if it was assumed that RPI increases during the term of the lease reflected the average annual RPI increases for the 20 years prior to the grant of the lease, then the rent payable by MonSolar would increase from £15,000 per year in the first year of the lease to £76 million per year in the final year.

The dispute

MonSolar's claim in the High Court was that:

• the rent review clause contained a drafting mistake; and
• the court should correct this drafting mistake, so that the annual rent is indexed in line with RPI.

That claim succeeded in the High Court, where the judge found that the rent review clause did contain a drafting mistake and could be corrected so that annual rent increased (or decreased) in line with RPI.

Woden Park appealed this decision on the basis that it was not clear that the rent review clause contained a drafting mistake and that, if there was a drafting mistake, it was not clear how the mistake should be corrected.

The decision

In dismissing the appeal, the Court of Appeal found that the rent review clause contained a drafting error which is "about as a plain a case of such a mistake as one could find". The Court of Appeal held that it was clear that the drafting error should be corrected so that annual rent increased (and decreased) in line with RPI, as per the decision in the High Court.

The court's key findings were that:

1. where a lease contains an RPI rent review clause, it is reasonable to assume that the general purpose of the clause is to increase rent in line with changes in RPI; and
2. where the rent increases produced by an RPI rent review clause are irrational, arbitrary, absurd or nonsensical, it is legitimate to conclude that the parties made a drafting error.

Osborne Clarke comment

This decision is one that will be welcomed by any tenant – whether or not a solar farm operator –  which discovers that its lease contains a double compounding RPI rent review clause.

Historically, where tenants have discovered that their lease contains a RPI rent review provision of this nature, it has not been unusual for landlords to refuse to vary the offending provision (other than in return for a large ransom payment) on the basis that "the lease means what it says".

The Court of Appeal's judgment confirms that it can be legitimate to conclude that the arbitrary and irrational results of a double compounding RPI rent review provision demonstrates that, in fact, the lease does not mean what it says, but rather that the lease contains a drafting error.

Consequently, this decision will give many tenants a strong position from which to approach their landlord to request that erroneous double compounding RPI rent review provisions are varied (without the payment of a premium) so that rent is increased in line with RPI.