Court of Appeal Corrects ‘Absurd’ Drafting Error in Commercial Lease

Judges will generally interpret a commercial lease or any other legal document in accordance with its strict wording – but they are able to make an exception in the event of an obvious drafting error. In a recent case reviewed by Sharon Tait, the Court of Appeal did just that in relieving a tenant of the crushing consequences of an absurd rent review clause.

The case concerned a lease of 15 acres of land granted by a company to a tenant who used it as a solar farm. The lease was for a term of 25 years and 6 months and stipulated an initial rent of £15,000. It included a formula by which the rent payable was to be reviewed on an annual basis.

There was no dispute that the formula was clear and unambiguous on its face. On a literal reading, it meant that the rent would be recalculated annually by reference to a percentage reflecting the cumulative increases in the Retail Price Index (RPI) in all previous years since the start of the lease.

On the basis of average annual increases in the RPI over the preceding 20 years, the tenant estimated that application of the formula would result in its rent being increased to just over £76 million by year 25 of the term.

After the tenant launched proceedings, a judge corrected what he found to be a clear drafting error. He granted a declaration that the rent should increase with the RPI on a non-cumulative basis. If the RPI continued on its average trajectory, that would result in an annual rent of less than £30,000 at the end of the term.

Dismissing the company’s challenge to that outcome, the Court acknowledged that the RPI can, in the rare event of deflation, go down. It was, however, abundantly clear that the literal application of the formula would lead to an absurd, arbitrary and commercially nonsensical result. It was impossible to imagine that any rational landlord or tenant would have intended such a consequence. The Court noted that, although the error was obvious enough when pointed out, it was easy to believe that a draftsperson might not have noticed it at the time.

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