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Complex Rent Review clauses and obvious errors

The court was asked to rule on the proper interpretation of a rent review clause in a lease and found for the landlord in Elmfield Road Ltd v Trillium (Prime) Property.

The term of the lease was 25 years from 25 March 1985 with rent reviews every five years. The annual rent payable started at £551,00 in March 1985 and had increased to £965,000 by September 2005 where it remained until the end of that lease. 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. The rent review clause was stated 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 rent was due for review in early 2015. The landlord’s view was that the parties had expressly agreed that the Initial Rent was £1.2 million. The Index figure calculated from the Retail Prices Index for this review was 256.7. Accordingly, the rent on review would have to be £1,595,235.63 (£1.2 million x (256.7 divided by 193.1)). The tenant argued that the rent review clause in the renewed lease 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. The tenant was of the view that the landlord’s interpretation did not accord with commercial common sense as no reasonable tenant would have agreed to this structure.

The court held that the whilst the rent review provisions were unusual and provided for a greater increase in rent than standard indexation would have produced, it was not possible to say with any certainty that it was irrational or an obvious mistake considering the other terms of the transaction. Therefore, the court held that the strict terms of the review provision should apply.

The retail prices index is commonly used in both commercial and residential leases as a means of dealing with rent increases. The clauses however are often not well drafted and many people do not fully understand or consider how the retail prices index works and what the implications of its use are.

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