“Arbitrary and irrational” clause corrected through interpretation
11 July 2021
When faced with a clear and unambiguous rent review formula that led to arbitrary and irrational results the Court of Appeal held that the formula was a clear mistake which could be corrected through interpretation.
Under the rent review formula in a lease, rent increased exponentially if the Retail Price Index increased. The tenant successfully obtained a court order that the formula should be changed so that rent increased in line with the RPI, on the basis of what is sometimes called the Chartbrook principle that a clear mistake in the drafting of a document can be corrected as a matter of interpretation.
The landlord appealed the court’s decision arguing:
- The Chartbrook principle must be read in light of Arnold v Britton and the idea that the parties’ bargain cannot be re-written in the name of commercial good sense. The formula was clear and unambiguous, so it was irrelevant whether its result was arbitrary and irrational.
- It was not clear how the formula should be corrected since there were several possibilities.
The Court of Appeal upheld the judge’s decision. Arnold v Britton did not qualify or depart from Chartbrook. Rather, case law distinguished between, on one hand, provisions that were merely imprudent or unreasonable, and on the other hand, provisions that were irrational, arbitrary, nonsensical or absurd. The formula was clearly a drafting error, as it was impossible to think that any rational parties would have intended it:
- It did not reflect the general ordinary purpose of rent review clauses, echoed by other wording in the lease.
- The result of applying the formula literally was irrational, arbitrary, commercially nonsensical or absurd.
- There was a plausible explanation of how the error occurred.
Moreover, it was clear how the formula should be corrected.
[Ed. from a casual glance the facts seem to echo those in Arnold v Britton. There, the court was prepared to hold the lessees to a compound increase in service charges for holiday chalets in the Gower Peninsular even though this meant they radically exceeded the cost of providing the services. The difference is that here, the court felt it could see clearly that a mistake had been made (there was double-counting in the formula) and how to correct it.]
Judgment: Monsolar v Woden Park