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'Simple' Clause in Commercial Property Lease Triggers High Court Dispute

Commercial property leases can be long and complex documents, but it is often their most apparently simple clauses that give rise to dispute. That was certainly so in a High Court case concerning an airport hotel owner who was required to pay for its gas and electricity supplies 'at no more than the prevailing commercial rates'.

The owner argued that the utility bills presented to it by its landlord – the airport's operator – should be calculated in line with prevailing commercial rates paid for the supply of electricity and gas from an ordinary public network. Increased market competition, largely arising from privatisation of public utilities, had led to a substantial reduction in such rates since the lease was signed.

The operator, however, supplied the hotel with electricity and gas via its own private utility network. In line with Civil Aviation Authority rules, that network was designed to be safer and to have greater resilience than a public network and was significantly more costly to run. The operator argued that, under the terms of the lease, it was entitled to pass those costs on to the owner in full.

Ruling on the matter, the Court noted that, although simple on its face, the relevant clause suffered from a serious defect in that it did not identify a hypothetical market or comparator to which the phrase 'prevailing commercial rates' could be applied.

Employing business common sense, and taking account of the factual position when the terms of the lease were agreed in the 1990s, the Court preferred the operator's arguments. It noted that no steps were taken at the time to connect the hotel to the public network, nor was there any attempt to negotiate a right to do so.

The owner's argument that the public network should be treated as a comparator did not reflect the reality of the arrangements contracted for under the lease. Several other major UK airports also operated private utility networks and that provided a market by reference to which a prevailing commercial rate for the hotel's gas and electricity supplies could be readily calculated.