Where both parties to a contract (or a lease) agree to enter into the document on the basis of what turns out to be a mistaken understanding of the terms of the agreement, the document can be altered in the following situations:
These principles (collectively referred to as the ‘Doctrine of Mistake’) were considered in the recent Court of Appeal case of Monsolar v Woden Park Ltd following an appeal of the first instance decision.
The case concerned a rent review provision drafted by reference to increases in the Retail Prices Index. RPI rent review provisions are frequently used in commercial dealings and offer the attraction of certainty (or at least they should!) that the rent agreed at the outset will increase in line with the cost of living, thereby preserving the value of the landlord’s investment and without the need to undertake a review of the market (as with a market rent review)
The rent review provisions, however, did not apply to simply increase the rent at stated intervals by reference to the Retail Prices Index. Instead, the provisions had the effect of compounding reviews. The increased rent from the prior rent review was itself (as opposed to the initial rent) increased at the subsequent review.
A literal interpretation of the provisions would, when taken with successive annual increases of 5% have resulted after 25 years in an annual rent of slightly in excess of £76,000,000 (as compared to less than £30,000 if the increases weren’t compounded).
The case is of particular interest given the judgment handed down in Arnold v Britton in which the Court refused to rewrite service charge review provisions. That case underlined the fact that simply because a bargain was not one which a reasonable tenant would enter into is not enough to enable the Court to rewrite it.
In order for a Court to intervene, the implications of the relevant clause incorporating the mistake must be that the outcome is not merely “commercially unattractive and even unreasonable” but rather the effect must be to produce a situation which is “nonsensical or absurd”.
The implications of the compounding of the rent reviews were so profound that the Court seems to have had little difficulty in concluding that a mistake has been made in the drafting of the lease and agreeing that a formula which removed the compounding effects of the lease drafting should be reinstated.
The fact this case reached the Court of Appeal and the implications of the effect of compounding rent review serves to emphasise the importance of ensuring that careful drafting is used when using RPI indexation and that the provisions are clearly thought through and work as intended.
If you have any queries concerning the issues raised in this blog, please contact Georgina Savage.