Elmfield Road Ltd v Trillium (Prime) Property GP Ltd [2016] EWHC 3122 (Ch); [2016] PLSCS 350 concerned the interpretation of complex rent review provisions in a reversionary lease, which gave the landlord the choice of the best of three alternative computations. When the time came to review the rent payable under the reversionary lease, the tenant argued that there was an obvious mistake in one of the rent review provisions. The reviewed rent was to be fixed by reference to the RPI, but the way in which the formula was expressed resulted in an element of double-counting.
The tenant argued that this was at odds with the commercial purpose of a rent review clause and asked the court to re-interpret the formula to accord with commercial common sense. It relied on British Gas Corporation v Universities Superannuation Scheme Ltd [1986] 1 WLR 398. In that case, the court stated that rent review clauses are included in leases to reflect changes in the value of money and real increases in the value of property – and not to confer windfalls on, or to artificially inflate rents payable to, landlords.
The judge was prepared to assume that that presumption, about the purpose of rent review clauses, had survived Arnold v Britton [2015] UKSC 36; [2015] EGLR 53, in which the Supreme Court had preferred the natural meaning of the words in the parties’ leases, even though this meant that service charge increments were likely have disastrous consequences, in the long term, for the tenants. Consequently, the judge had to decide whether the circumstances of this case sufficed to rebut that presumption.
After considering the terms of the transaction as a whole, the judge upheld the natural and ordinary meaning of the rent review provision despite the presumption laid down in British Gas. The judge noted that the provision was part of a carefully structured bargain, involving a deed of variation of an existing lease and the grant of the reversionary lease. Each party had made some gains and some losses; the deed of variation had reduced the rent payable for the property for several years and the way in which the rent review provision operated might be the “quid pro quo” for that. Therefore, although the provision resulted in a higher rent than might otherwise have been expected, it did not follow that there was an obvious mistake in the lease.
Could the judge refer to the heads of terms, which were marked “subject to contract” and pre-dated the deed of variation and the grant of the reversionary lease, in order to interpret the rent review provision? The judge decided that the heads of terms were inadmissible. He accepted that he could refer to them in order to understand the genesis and aim of the transaction, to help identify the meaning of a descriptive term, or to establish a relevant background fact known to both parties, but ruled that the points that the tenant was seeking to make, based on the heads of terms, should properly be made in a claim for rectification instead.
Allyson Colby is a property law consultant
