Traditionally, one of a lawyer's skills is using and manipulating words, but when it comes to dealing with sums, even the most talented wordsmith can falter. All too frequently the lesson from court actions is that more care should have been taken when drafting the documentation involved, and in the case of rent review provisions in leases, extra care is important given the often complex nature of the interplay between the various components to be taken into account or disregarded when identifying what the new rent is to be. How much simpler therefore to provide a formula for calculating what the increase (if any) will be?
That must have seemed like a good idea when the parties in the recent Scottish Inner House case of City Wall Properties (Scotland) Limited v Pearl Assurance plc decided to amend the lease of car parking spaces in Market Street, Aberdeen.
The "car park factor"
City Wall were the landlords of thirty-five car parking spaces, which were subject to a lease which had originally been entered into in April 1978. In 1999 the parties varied the lease to change the passing rent to £26,250 per annum from 1 July 1999 and provide for rent review on every third anniversary of that date in accordance with additional rent review provisions. These provisions provided that the rent should be reviewed "by addition per space of the product of 96 multiplied by the "car park factor" applying at the relevant review date". The car park factor was defined as "the average of increased daily rates (i.e. the 9 hour rate from 0830 to 1730 hours charged to the public) at the Trinity Centre, Bon Accord Centre and the multi-storey College Street public parks in Aberdeen". 96 represented a means of relating the figure of annual rent attributable to each space to the average daily rate per space charged at the comparator car parks.
Meaning of "addition"
As the first rent review approached, it became apparent that the parties disagreed as to the proper construction of the rent review provisions. They agreed that the car park factor was £11.26 per space, but whereas City Wall maintained that the amount of the reviewed rent should be £64,083.60, being the product of the 35 car park spaces, 96 and the car park factor, added to the passing rent, Pearl argued that the reviewed rent should be determined by the product of 96 and the car park factor, for each of the 35 spaces added together, which yielded a rent of £37,833.60, the difference being that the resultant figure did not have to be added to the previous rent, rather that the sum of 96 multiplied by the car park factor be added together 35 times.
Construction of the contract
The rules of construction of contracts by the courts are clear, in that evidence of previous discussions between the parties to the contract, and indications as to their intentions are not admissible to assist in construction, although evidence of this type is admissible to determine the circumstances of the formation of the contract, how the agreement arose and the aim or purpose of the contract as well as what the parties knew of these matters. The modern approach is generally in favour of a commercially sensible construction, given that such an approach is more likely to give effect to the intention of the parties, and therefore words should be construed in the way in which a reasonable commercial person would understand them.
What did the parties intend by the formula?
The court looked at correspondence between the parties relating to the change in the rent review provisions, but could find nothing to indicate that the product of the rent review calculation should be added to the passing rent. While it was accepted that the wording of the clause was ambiguous, and that the phrase "by addition per space" was unusual, it transpired during evidence that correspondence and negotiations largely conducted by the parties' respective surveyors had revolved around the concept that the rent should be "geared" to parking rates in other car parking locations in Aberdeen, with the intention to use an indexation formula to reflect directly increases in car parking rates. That indicated the aim or purpose of the contract and the court could therefore have regard to the evidence to identify that aim or purpose.
The court considered that the use of the formula clearly suggested an indexation process, which would not be consistent with adding the result of the process to the passing rent, which had the effect of more than doubling it. If this had been the intention, there was little justification for using an indexation process, since on each successive rent review, the reviewed rent would bear less and less of a relationship to the car park factor to which the process was intended to relate. It concluded therefore that the rent review provision did not involve the addition of the product of the formula to the passing rent at the date of each review.
Show your workings
Many contracts, not just leases, rely on formulae for calculating figures which are dependant on a variety of factors yet to be determined, and so cannot be stated as an amount. Index linked rent review, floor areas of new buildings, service charges, overage and clawback calculations all lend themselves to this approach, and it can often be a complicated and tortuous process to arrive at a clearly expressed formula that accurately provides the desired result.
Often such calculations are expressed as a formula such as "A equals B divided by C multiplied by D plus E". It's important to make clear which functions take place first: do you add D to E first and multiply C by that amount, or do you multiply C by D and then add E? You see my problem. Back we go to the days of our mathematics lessons and put brackets around appropriate parts of the formula for particular effect. Whenever the formula approach is used, it's imperative to carry out a few test calculations to make sure that the formula works in the way it is intended and does not produce an unexpected effect.
Better still, provide, for illustrative purposes only, a worked example showing how the calculation should be performed. In the case in question, "by addition per space of the product of 96 multiplied by the car park factor" could have been represented by the formula of (A x B) x C, where A is 96, B is the Car Park Factor and C is the number of parking spaces. You do the math.
The full text of the decision in City Wall Properties (Scotland) Limited v Pearl Assurance plc is available from the Scottish Courts website.