Monsolar IQ Ltd v Woden Park Ltd

A contractual provision may be given a corrective construction where it is clear from the document and its context that something has gone wrong with the language, and clear what a reasonable person would have understood the parties to mean. A commercially harsh outcome alone is insufficient. Here, an indexation formula was irrational and arbitrary because it repeatedly reapplied earlier movements in the retail prices index. The court therefore construed it so that the rent passing immediately before each review date was adjusted by the RPI movement during the preceding year.

The parties were landlord and tenant under a 25-year commercial lease of agricultural land for a solar photovoltaic development. The lease contained an annual rent-review formula based on the Retail Prices Index. Read literally, the formula repeatedly applied aggregate historic RPI movements, producing potentially exponential rent increases.

The tenant sought a declaration that the clause contained an obvious drafting mistake and should instead provide for non-cumulative indexation of the original rent. The landlord maintained that the wording was clear and merely commercially disadvantageous. The issue was whether the clause should be corrected, and, if so, what construction objectively reflected the parties’ intention.

1. Corrective construction. The court applied the principles in Investors Compensation Scheme Ltd v West Bromwich Building Society and Chartbrook Ltd v Persimmon Homes Ltd. The natural and ordinary meaning normally governs, but the court may correct contractual language where it is clear that something has gone wrong and clear what a reasonable person would have understood the parties to mean. The exercise remains one of interpretation of the contract in its context.
2. Mistake established. The literal formula was irrational and arbitrary. It adjusted rent principally by reference to RPI movements already reflected in the rent, rather than by reference to the movement during the preceding year. It could increase rent even when RPI had fallen and made the final rent depend arbitrarily on when increases occurred. The provisions in paragraph 4.2 of the Sixth Schedule, referring to reflecting increases in the cost of living, supported the conclusion that the formula contained a mistake.
3. The court distinguished the harsh but rational fixed-increase mechanism in Arnold v Britton. A break option did not cure the irrational operation of the formula. The relevant commercial background, including the non-arm’s-length creation of the lease as part of a proposed sale of development rights, was admissible and supported the same conclusion.
4. Intended meaning. The wording showed that the rent payable immediately before each review date, rather than the original rent, was to be indexed. The proper correction was annual cumulative indexation by reference only to the RPI change during the preceding year. For the first review, the comparison was with the index two months before commencement; thereafter, it was with the index two months before the preceding review date.
5. A declaration was made accordingly.