Commercial judge rules landlord of windfarm entitled to additional rent for tenant’s benefits in non-generation periods

About this case:

• Citation:
  [2025] CSOH 62
• Judgment:
  External link
• Court:
  Court of Session Outer House
• Judge:
  Lord Sandison

Pursuer Glenfiddich Wind Ltd leased land to defender Dorenell Windfarm Ltd and claimed that it was entitled to certain sums in terms of the lease due to the defender obtaining certain benefits at times when the windfarm was not generating electricity. The defender denied that, on a proper construction of the lease, the benefits that it gained as a result of the non-generation resulted in payment obligations.

The case was heard by Lord Sandison, with Thomson KC and Ford, solicitor advocate, appearing for the pursuer and Borland KC and T Young, advocate, for the defender.

Constraint benefits

The parties entered into a lease of land at Scaut Hill, Glenfiddich, in November 2015 in order for the defender to construct and operate a windfarm there. Under the rent clause, an index-linked minimum annual rent of £6 million was stipulated, but provisions were made for rent payments to be calculated under reference to the annual gross income received by the defender out of the operation of the windfarm.

By way of a Power Purchase Agreement, the defender agreed to provide an electricity supplier, EDFE, with a certain volume of electricity. It also entered into a Metered Volume Reallocation Notice with EDFE, with the result that the defender was paid by EDFE for energy credited to EDFE by the Transmission System Operator as a result of the defender having at times curtailed its generation. The pursuer contended that this system produced a benefit for the defender which fell to be regarded as a “constraint benefit” under the lease, and thus a part of the defender’s gross income for the purposes of the rent calculation.

Senior counsel for the pursuer submitted that, due to the defender not including these benefits when calculating rent payable, it had underpaid rent in the years 2022, 2023, and 2024. The parties could not sensibly be taken to have intended that, simply by the defender’s decision to divert a valuable asset to EDFE by dint of the MVRN the rent payable under the lease would be materially diminished.

On behalf of the defender, it was submitted that the pursuer was, in truth, simply complaining about a bad bargain. The pursuer claimed it had not realised the defender would be paid in terms of the PPA when not generating electricity and was asking the court to fix its own unilateral error by bringing such revenue within the terms of the lease.

Makes commercial sense

In his decision, Lord Sandison began with general principles of contractual interpretation: “A contract must invariably be construed contextually [and] in interpreting a contractual provision the court should adopt a purposive approach, meaning that it should have regard to the fundamental objectives that reasonable persons in the parties’ position would have had in mind. Put another way, the substance of the parties’ agreement, construed objectively, should prevail over niceties of wording.”

He continued: “Looking at the context in which the language used in the lease falls to be considered, it is apparent, from the very appearance of the concept of constraint benefit as an element within the bundle of things going to make up gross income, that as a matter of principle, at least, gross income was intended to comprehend not only receipts from the actual generation of electricity but to certain kinds of support or advantage that might transpire in relation to a cessation, reduction or constraint in the export of electricity from the windfarm to the transmission system.”

Considering that definition in more detail, Lord Sandison said: “In terms of the PPA, [the defender] received payment from EDFE in respect of the relief which EDFE had received as a result of the constraint decision. Is that a situation falling within the definition of constraint benefit for the purposes of the lease? In my opinion it is not necessary to consider or apply any supposed special rule of law dealing with the diversion of benefits. Rather, the question can be answered by the continued application of familiar principles of construction.”

He explained further: “It is difficult to see why the defender’s voluntary interposition of EDFE into the arrangements which would otherwise have pertained ought to make a difference to the amount of rent payable by the defender, especially since it did itself receive substantial benefit from the situation which it had created. Just as Lord Clarke observed in relation to the functionally somewhat analogous situation which pertained in Aberdeen City Council v Stewart Milne Group (2011), the parties could not sensibly have intended that that benefit should be left out of account in the calculation of the sums due to the pursuer as rent under the lease.”

Lord Sandison concluded: “The proper construction of the definition of constraint benefit is that it encompasses a benefit which accrues to the defender and arises in consequence of a constraint decision. That construction accords with the context and purpose of making benefits flowing to the defender as a result of the TSO’s constraint decisions matters of which account falls to be taken in computing the gross income of the defender from the operation of the windfarm and thus the rent payable under the lease. It makes commercial sense. It does not, in the words of Lord Hope in Stewart Milne, do undue violence to the language used in the lease.”

The court having ruled substantially in favour of the pursuer, the case was thereafter put out by order for the parties to agree the orders required to give effect to the decision.