Get your ducks in a row: Drafting rent review provisions in leases
20 Apr 2022
Rent review provisions in a lease set out the terms on which the annual rent payable will be reviewed. The way in which such rent will be reviewed is agreed between the Landlord and the Tenant when negotiating the terms of the transaction.
The case of Monsolar IQ Ltd v Woden Park Ltd  EWCA Civ 961 highlights the importance of ensuring the drafting of rent review provisions are clear.
A Landlord granted a lease of a solar farm to a Tenant for a term of 25 years and 6 months.
The rent payable under the lease was subject to an annual review each year of the term. The formula used at review was:
Revised Rent = Rent payable prior to the Review Date x Revised Index Figure / Base Index Figure.
Under this formula, on the first rent review, the rent would increase by the Retail Price Index (RPI) in that year but at each subsequent rent review, the rent would increase by the aggregate RPI of the current year and each previous year of the term.
Based on the above formula, the Tenant calculated that the rent would increase from £15,000 to just over £76 million by the end of the term rather than approximately £30,000 if the RPI was non-cumulative.
The Tenant argued that there was a clear mistake in the drafting and that this was not what the parties had intended.
On appeal, the Landlord argued that the rationality of the clause should not be a determining factor and that it was not clear what the parties meant, they may have intended the rent review to be upwards only.
The High Court concluded that the formula taken literally would produce irrational and arbitrary results that could not have been intended, and the RPI should only apply to the reviewed rent each year allowing for the rent to increase or decrease.
The Court of Appeal dismissed the Landlord’s appeal on the same grounds as the High Court decision.
Where a clear mistake has been made resulting in absurd outcomes, the court may correct a provision, but it is unlikely to intervene where the provisions are merely commercially unattractive or unfavourable to one of the parties.
Landlords and Tenants should not rely on the possibility of the court modifying a provision but should ensure the drafting clearly reflect their intentions and seek advice from a rent review surveyor before entering into a commercial lease. This will avoid disputes arising regarding the interpretation of such clauses.
Caution should always be taken when drafting rent review provisions to ensure the intentions of the parties are adequately reflected. If in doubt, always seek legal advice.
For more information, please contact Sarah Benjamin: email@example.com / ddi: 0203 096 0850