The perils of RPI drafting

A recent case concerning the RPI rent review of a solar farm lease found that an obvious drafting error produced an illogical outcome.

Facts

In Monsolar IQ Ltd v Woden Park [2020] EWHC 1407 (Ch), Monsolar was the tenant under a 25 year solar farm lease of bare agricultural land in the Vale of Glamorgan and Woden Park was the landlord. Rent under the lease was £1,000 per acre but reviewed annually in line with the all items retail prices index (RPI). The revised rent was described as:

Rent payable prior to the Review Date (disregarding any suspension of Rent) x Revised Index Figure/Base Index Figure

Base Index Figure is defined as the Index Figure published in respect of the month 2 months before term commencement.

Revised Index Figure is defined as the Index Figure published in respect of the month 2 months before the relevant review date. 

The problem?

At each review date, the passing rent is increased by the aggregate RPI increase over the term of the lease. It means that each year the aggregated RPI increase is applied to the already increased rent, rather than to the initial rent figure. The rent is increased each year by the same factor by which it has already been increased in the past, not only by the new factor reflecting the subsequent increase in the RPI index.

The result would be that if the average RPI over the previous 20 years was applied as an annual rate to the formula for the term of the lease, the rent payable by year 25 would be just over £76 million, compared with less than £30,000 if non-cumulative RPI increases at the same rate were applied.

The landlord said they drafted the lease using precedents from the internet and claimed that the terms of the lease were intended, and the compounding of the indexation clause took account of the fact that electricity would increase in value in excess of inflation.

The tenant claimed that the formula contains an obvious mistake because it produces an absurd result in the exorbitant amount of rent payable by the end of the term. The landlord disagreed and said the formula was unambiguous.

Decision

The court held that the results produced by the cumulative formula were both illogical and arbitrary and there was a clear mistake in the formula. The indexation in this case should be by reference to the increase or decrease in the RPI over the previous year only and not over the entire expired part of the term.

In practice

The court here applied common sense to the obvious drafting error, but it is one to watch out for. RPI is a cumulative index which means that you need to be careful to only apply the increase to the rental figure once. This can be achieved either by applying the RPI increase over the term to the initial rent or, as decided by the court in this case, applying the RPI increase over the rent review period to the passing rent (a preceding year basis). Take care to ensure the formula reflects the heads of terms and that you understand the basis on which it is calculated. If you would like further information please contact Stuart Cleak or Kutahya Cherry.