The meaning of a contract can often pose difficult questions of interpretation. The Supreme Court decision in Arnold v Britton in 2015 re-set the legal test for interpreting contracts, with the overarching theme that the wording used should be given its natural and ordinary meaning, even where this may defy commercial common sense.
We’re now seeing how the courts approach interpretation in a post-Arnold v Britton world. The recent decision of the High Court in Elmfield Road Limited v Trillium (Prime) Property GP Limited  involved its application to interpretation of a rent review clause.
The tenant claimed there was an obvious mistake in the lease
Nabarro acted for the successful landlord in the Elmfield Road case, where the court was asked to interpret provisions for an index-linked rent review in accordance with the formula set out in the lease. The tenant, Trillium, accepted that a literal construction of the formula produced the rental figure the landlord claimed. However, it argued that there was an obvious mistake in the formula which should, as a matter of construction, be corrected.
Interpretation of rent review clauses has been traditionally based on the (rebuttable) presumption that the commercial purpose of the review is to enable a landlord to obtain a market rent to reflect increases in the value of money and real increases in the value of property over a long term. The judge found the presumption applied equally to reviews by indexation as to open market reviews based on a hypothetical lease. While recognising the force of the argument that since Arnold v Britton the courts may place greater emphasis on the natural meaning of the words, but without expressing a concluded view, the Judge assumed that the presumption had not been weakened by Arnold v Britton.
On the facts of this case the Judge held that the presumption was rebutted and, applying the test in Arnold v Britton, found that the natural and ordinary meaning of the formula was as set out in the lease.
Since Arnold v Britton, the scope for challenging interpretation of a contract where clear language has been used is significantly more difficult. Rent review cases throw up their fair share of interpretation issues. Whilst the presumption of the commercial purpose of a rent review clause remains relevant, clear language which is at odds with the presumption seems likely to prevail.
Trillium entered into a reversionary lease of large office premises in Bromley in 2005. This formed part of a series of transactions, all of which completed on the same date between Trillium, the previous landlord and also between the previous landlord and the then tenant of the premises, a Government department.
The transactions delivered gains (as well as losses) to each party, including a substantially reduced rent payable by the former tenant under the previous lease. This all formed part of the facts and circumstances known to the parties at the time the reversionary lease was entered into, and was relevant to the question of interpretation.
The term of the reversionary lease commenced in March 2010 and contained provisions for a day-one determination of the initial rent to the higher of three alternatives:
a) indexation in accordance with the formula in paragraph 3, schedule 1 of the lease (the Formula);
b) an open market rent determined in accordance with the third schedule of the lease; and
c) the sum of £1.2m.
The Formula provided for review of the initial rent (i.e. the 2010 rent) by reference to the increase in the index since 2005. It referred only to the reviews due in 2015 and 2020.
Trillium argued that:
the Formula was intended to do “double-duty” – i.e. to determine the initial rent in 2005 under option a) hence, it argued, a 2005 index figure was used in the Formula, as well as to calculate the rent due on subsequent reviews;
the Formula contained an obvious mistake as it did not work for calculation of the initial rent, and at rent review was indexing a 2010 rent by reference to a 2005 index figure resulting in double-counting. This was at odds with the presumption of the commercial purpose of a rent review clause;
the Formula should be construed as substituting the initial rent determined under the reversionary lease in 2010 for the 2005 rent payable before expiry of the previous lease in order to correct the mistake.
The commercial purpose of a rent review clause
Interpretation of rent review clauses has been traditionally approached on the presumption that the purpose of such a clause is to enable the landlord to obtain the market rent for the premises, if let on the open market at the review date, to reflect the changes in the value of money and real increases in the value of property during a long term (British Gas Corporation v Universities Superannuation Scheme Ltd ).
The presumption arose in a case dealing with construction of a rent review clause where rent was being determined by reference to a hypothetical lease. The judge found that the presumption was of wider application and held that there is a presumption that if the rent is index-linked the parties intend indexation to increase rent in line with inflation. However, that presumption may be rebutted and here, based on the facts of the case, he found that it was.
The judge, posing the question of whether this presumption might be regarded as weakened by Arnold v Britton, commented that he could see the force of the argument that courts today should place greater emphasis on the natural meaning of the words, but did not express a concluded view. However, he “assumed” that Arnold v Britton had made no real difference in respect of the presumption.
The Arnold v Britton test
Arnold v Britton set out a five-stage process of interpretation, which process includes looking at the overall purpose of the clause and the lease, and commercial common sense. However, the Supreme Court clearly stated that commercial common sense and surrounding circumstances should not undervalue the importance of the language used and the clearer the natural meaning the more difficult it is to justify departing from it. This suggests that where clear wording is used this should trump the presumption.
The judge applied the Arnold v Britton test
Applying the legal test in Arnold v Britton, the judge found that the natural and ordinary meaning of the Formula was as set out in the lease, there was no obvious mistake and that the tension between the Formula and the provision for determining the initial rent did not have any bearing on the natural meaning of the Formula.
Arnold v Britton has provided the metaphorical key to unlocking questions of interpretation, but as every contract is interpreted on its own words and surrounding facts and circumstances the scope for dispute will continue. Persuading a court to depart from the natural and ordinary meaning of the language where clear wording is used will require compelling evidence.