Landlord and tenant — Claim for rectification succeeds on appeal — Scheme by which a lessee and underlessee were to share increases of rents paid by an occupying subunderlessee in the proportions of 65% and 35% — Owing to a common mistake which affected both the agreement for the underlease and the underlease itself the lessee did not become entitled to its 65% of the increase pari passu with the increase payable under the subunderlease, but about 6¾ years later — It was clearly intended by the parties that the dates and payments should dovetail, so that the 65% should be passed on to the lessee as and when the increases were received from the subunderlessee — Harman J had rejected the claim for rectification as he considered that the common mistake related to the terms of the subunderlease and not to the terms of the underlease which it was sought to rectify — The Court of Appeal held that this was too narrow a view — The contractual provision which failed because of the parties’ mistake was a clause in the agreement for the underlease and ultimately in the underlease itself — Both should be rectified — Lessees’ claim to rectification granted — Appeal allowed
This was an
appeal by the Co-operative Insurance Society Ltd, lessees of a site in the
King’s Cross Road in Islington, from a decision of Harman J on December 7 1982
rejecting their claim against their underlessees, Centremoor Ltd, for
rectification of the underlease and of an agreement preliminary thereto. The
freeholders, the New River Co, and the subunderlessees, Scottish &
Newcastle Breweries Ltd, were not parties to the proceedings. The project which
gave rise to the dispute was the building of an hotel now known as the Royal
Scot Hotel.
John Colyer QC
and Bertram Maddocks (instructed by W R Kirk) appeared on behalf of the
appellants; Mark Littman QC and Charles Aldous (instructed by Victor Mishcon
& Co) represented the respondents.
Giving the
first judgment at the invitation of Eveleigh LJ, DILLON LJ said: By their
pleadings in this action the plaintiffs, Co-operative Insurance Society Ltd
(CIS) put forward certain claims as to the construction of an underlease dated
March 22 1974 and made between CIS of the one part and the defendants,
Centremoor Ltd, of the other part, and alternatively claimed rectification of
the underlease and, if and so far as necessary, also rectification of a draft
thereof annexed to an agreement between the same parties dated July 1 1970. At
the trial of the action Harman J rejected all the plaintiffs’ claims and by his
order of December 7 1982 he dismissed the action. This appeal is concerned only
with the claim for rectification and not with the issues of construction
decided by the judge.
The underlease
in question is one of a complex of documents which were concerned with the
development of a site in the King’s Cross Road in Islington by the building of
an hotel now known as the Royal Scot Hotel. The development project involved
four parties, and their respective interests were intended to be provided for
by the creation of appropriate headleasehold, underleasehold and
subunderleasehold terms under three contemporaneous agreements entered into on
July 1 1970. The four parties involved in the project were the following:
1. The owner of the freehold of the site, the
New River Company, who had to grant a sufficiently long headlease at a ground
rent to make the project viable.
2. The financier — in the event CIS — who had
to provide the money needed to acquire any outstanding third party interests in
the site, clear the site and build the new hotel.
3. The developer, Centremoor, who put the
whole scheme together and naturally expected a profit from it, and
4. The hotel operator, in the event Scottish
& Newcastle Breweries Ltd, who would from the profitable operation of the
new hotel pay the rents which would give the three other parties their
respective returns from the scheme. The general intention was as follows:
The freeholder
was to grant a headlease to CIS, which was in turn to grant an underlease to
Centremoor, which was in turn to grant a subunderlease to the operator.
The return to
the freeholder was to be a ground rent, fixed for 14 years after a peppercorn
rent construction period, then raised by a fixed sum for the next seven years
and then revised at the end of the first 21 years from the end of the
peppercorn period and at the end of each subsequent 21 years so as to be an
agreed fraction of the then current rack rental. This indexed ground rent, as
it has been called, was payable by CIS to the freeholder under the headlease
and was to be recouped to CIS by Centremoor as a separate rent under the
underlease to Centremoor. It was not passed on, or intended to be passed on, to
the operator as a separate rent under the subunderlease, but was no doubt
regarded by Centremoor as amply covered by the substantial rent payable by the
operator under the subunderlease.
The
subunderlease to the operator provided for a substantial initial rent and was
to include seven-year rent reviews calculated from the 14th year onwards by
reference to current hotel room rents. The precise formula does not matter.
The return to
CIS, apart from protection against the ground rent payable to the freeholder,
was to be 9% on its total outlay of money to finance the development with
rolled-up interest, and also 65% of the increases in the rents payable under
the subunderlease as a result of the rent reviews which I have mentioned.
The return to
Centremoor lay firstly in the difference between, on the one hand, the initial
rent payable by the operator and, on the other hand, the aggregate of the 9% on
CIS’s outlay payable to CIS and the ground rent and, secondly, in the remaining
35% of the increases in the rents payable under the subunderlease as a result of
the rent reviews in the subunderlease.
In view of the
decision in Joscelyne v Nissen [1970] 2 QB 86 we can take it in
this court (although Mr Littman for Centremoor desires to keep the point open
for argument if this case should go to the House of Lords) that a claimant for
rectification has to show a common continuing intention of the parties,
outwardly expressed or communicated between them, which is not reflected in the
concluded instrument which they have executed, but does not have to show that
that common continuing intention amounted to a complete concluded contract
antecedent to the instrument which it is sought to have rectified. Such a
common continuing intention is conveniently referred to as an ‘agreement’ in
inverted commas.
In the present
case CIS put forward as the ‘agreement’ on which they rely certain heads of
terms which were drafted by their surveyor, Mr Roach, in February 1970 after a
meeting in Manchester and which were assented to in principle by Centremoor.
The particular
point to which the claim for rectification is directed is whether CIS should
receive its 65% of the increases on rent review in the rents payable under the
subunderlease as and when the increases take effect under the subunderlease and
pari passu with Centremoor’s receipt of the remaining 35%, or whether,
as the concluded documents have achieved, CIS is only to receive its 65% six
and three-quarter years (less a few days) after the relevant increase has taken
effect under the subunderlease, Centremoor retaining 100% of the increase in
the meantime.
As it seems to
me, the 65:35 split between CIS and Centremoor obviously envisaged that the
split would take effect as and when each increase took effect under the
subunderlease — as it was put in a letter of May 12 1970 CIS was to receive 65%
of any enhancement in the rent payable by the operator — and not that
Centremoor would take 100% of every enhancement for six and three-quarter years
(less a few days) and CIS would only then get its 65%. The learned judge found
that it was the clear understanding of CIS and Centremoor at all times from
February 1970 down to July 1 1970 that CIS should take its 65% of the increases
of rent and Centremoor should take its 35% pari passu as and when the
increases took effect under the subunderlease. That finding has not been
challenged on this appeal and it is amply supported by the heads of terms, to
the detailed provisions of which I shall have to refer later, by certain
calculations based on estimated figures set out at the end of the heads of
terms in order to avoid any misunderstanding and by Centremoor’s own estimates
or appraisals of the value of its investment prepared consistently from 1970
through to 1974.
The documents
as executed do not give CIS its 65% pari passu with Centremoor’s
entitlement to its 35%. They give 100% of each increase to Centremoor for six
and three-quarter years (less a few days) before CIS can participate. This is
the effect of incompetence on the part of the solicitors concerned in the
preparation of the agreements of July 1 1970 with the annexed drafts of the
underlease and subunderlease which were intended primarily to give effect to
the ‘agreement’ in the heads of terms.
Since,
therefore, rectification is an equitable remedy designed to achieve a measure
of justice where one party is relying on the letter of a document which fails
to give effect to the true ‘agreement’ between the parties, it would seem at
first glance that the present is a classic case for granting that remedy. It is
therefore necessary to look more closely to see what happened that led the
judge to refuse the remedy and to see why Mr Littman asserts for Centremoor
that rectification is not permissible.
I start by
referring to the relevant provisions of the heads of terms. These, as prepared
by CIS’s surveyor in February 1970, took May 1 1972 as an assumed date when the
building of the hotel would be complete and (a) the operator would be let into
occupation, (b) the underlease for 99 years would be granted by CIS to
Centremoor and (c) the subunderlease would be granted by Centremoor to the
operator for an equivalent term.
Relevant
clauses are as follows:
(6) The Head lease shall be in the form of a
ground lease from the present freeholders understood to be the New River
Company; it shall comprise the whole site with vacant possession and shall be
for a term of 125 years from April 1 1970 at a rent of a peppercorn for the
first two years and thereafter for the next 14 years at a fixed rent of £15,000
per annum rising to £20,000 per annum for the following 7 years. Thereafter
there shall be provision for rent reviews every 21 years on the basis of the
proportion that the first ground rent of £15,000 bears to the first rack rental
chargeable by the company to the immediate underlessee.
(14) Upon completion of the development the
Society shall grant to the company an underlease of the whole development upon
the following terms and conditions:¾
|
a. Term of years. |
99 years from May 1 1972 |
|
b. (i) Basic rent |
For the first seven years an |
|
(ii) |
An amount equal to the |
|
c. Rent review |
From the eighth year to the |
(15) Upon completion of the
grant of the underlease your company shall grant, upon terms to be approved by
the Society, a subunderlease to the BOAC Associated Companies Ltd or, in the
event of any unforeseen change in circumstances between the commencement of the
development and completion, to an approved company.
The term of
this subunderlease shall be for a term of not less than 99 years (less ten
days) at an initial rent of not less than £185,000 per annum for the first
seven years rising to a rent of not less than £234,000 per annum for the second
seven years with provision for rent reviews thereafter at every seventh year.
All such rental increases from the end of the second seventh year period shall be
calculated to bear the same proportion as does the operating room charge or
rate to the general public at the end of the fourteenth year to the charge or
rate at the beginning of the first year of the term.
(16) In order to avoid any misunderstanding between
us I have set out below my calculations based upon the estimates at present
available. The final figures are bound to differ in detail but the basis of our
calculations will remain and be used to arrive at the final figures to be
inserted in the eventual underlease.
It is
understood that the two-year building period is ignored and that the years
mentioned are those calculated from the date of completion of the development
for the grant of the underlease to be effected.
Estimated
figures are then set out.
It is apparent
that though the underlease and the subunderlease were to be for 99 years, or 99
years (less 10 days) from the completion of the development, the ground rent
under the headlease was to be payable from an earlier date, put as April 1
1972.
In fact it was
appreciated soon after the production of the heads of terms that the term of
the headlease was to be 125 years from December 25 1969, the peppercorn rent
period was to run to March 24 1972 and the ground rent under the headlease was
to be payable from March 25 1972. There was some correspondence between Mr T J
Burfield of Centremoor and representatives of CIS about the desirability of
persuading the freeholder to agree to the rent dates and rent review dates
being harmonised. In view of this, and as the underlease from CIS to Centremoor
had to pass on to Centremoor the liability for the ground rent under the
headlease, it is not surprising that when the agreement of July 1 1970 between
CIS and Centremoor and the annexed draft of the underlease were prepared, the
commencement of the 99-year term to be granted to Centremoor by the underlease
was dated back to commence on March 25 1972, thus easily picking up the
liability to pay the ground rent under the headlease. In addition,
unfortunately, clause 3(i) of the underlease, which was the clause to provide
for rent revision under the underlease so as to give CIS its 65% of the rent
increases under the subunderlease was also drafted so as to be geared to March
25 1972. In its form in the draft underlease annexed to the agreement of July 1
1970 clause 3(i) reads as follows:
The
additional rent to be paid for each period of seven years during the said term
(the first such period to commence on the Twenty fifth day of March One
thousand nine hundred and seventy nine and the last such period to commence at
the beginning of the ninety ninth year of the said term and continue until the
expiration thereof) will be a yearly rent equal to 65% of the amount (if any)
by which the yearly rent reserved at the commencement of each such period by
the subunderlease of the demised premises which the Lessee is under contract to
grant to Scottish & Newcastle Breweries Ltd exceeds the initial rent (as
thereby defined) reserved by such subunderlease.
However,
nobody noticed either at July 1 1970 or at any time before early 1975 that the
arrangement for the subunderlease remained as envisaged by the heads of terms.
The agreement of July 1 1970 between Centremoor and the operator provided for
the subunderlease to be granted within 14 days of the issue of the architect’s
certificate of practical completion of the development, and it was to be
granted for a term of 99 years from the completion of those works. In line with
this intention the date in the draft of the subunderlease, being unknown, was
left blank and provision was made, as envisaged in the heads of terms, for rent
reviews at seven-yearly intervals from the commencement of the term granted by
the subunderlease.
The facts can
be completed quite shortly.
The architect
gave his certificate of practical completion of the works (ignoring certain
extra works required by Scottish & Newcastle which are irrelevant) on June
23 1972, as of June 24. Centremoor and Scottish & Newcastle consequently
agreed on July 1 1972 as the appropriate date for the commencement of the term
of the subunderlease (and nothing turns on any difference between July 1 and
June 23 or 24). The headlease to CIS was granted on June 5 1973 and the
underlease from CIS to Centremoor was granted on April 22 1974 for a term of 99
years from March 25 1972 and with the vital clause 3(i) in the form set out
above. The subunderlease from Centremoor to Scottish & Newcastle was
granted on January 27 1975 for a term running from July 1 1972 and with rent
reviews geared to July 1. (There was a difficulty about the length of the term
of the subunderlease in that the dating back of the term of the underlease to
March 25 1972 meant that Centremoor had agreed to grant to Scottish &
Newcastle a longer term than it was getting, but this was adjusted so that
Centremoor reserved a nominal reversion.)
The rent revision under clause 3(i) of the underlease thus does not
coincide with the rent reviews under the subunderlease. Each revision under
clause 3(i) of the underlease can only pick up the increase from the previous
rent review under the subunderlease, nearly six and three-quarter years before,
with the results I have already indicated. Indeed it is apparent that on the
forms of the documents as executed on July 1 1970 there was at best a
364-to-one likelihood that the terms would not coincide; they would have
coincided only if the development of the new hotel had been completed
significantly earlier than expected, on March 25 1972.
In these
circumstances CIS claim rectification of clause 3(i) of the underlease so as to
make the rent revisions under the underlease coincide with the rent reviews
under the subunderlease as envisaged in the heads of terms. The revised form of
clause 3(i) suggested is as follows:
The
additional rent to be paid for each period of seven years during the said term
(the first such period to commence on the seventh anniversary of the
commencement of the term of the subunderlease hereinafter referred to (‘the
sub-term’) and the last such period to commence at the beginning of the 92nd
year of the said sub-term and continue until the expiration of the sub-term)
will be a yearly rent equal to 65% of the amount (if any) by which the yearly
rent reserved at the commencement of each such period by the subunderlease of
the demised premises which the lessee is under contract to grant to Scottish
& Newcastle Breweries Ltd exceeds the initial rent (as thereby defined) by
such subunderlease.
Mr Colyer, for
CIS, attacked Harman J’s judgment on the ground that in the latter pages he
made certain findings of fact which were inconsistent with his earlier, and
correct, finding that it was the intention of the parties throughout under
their ‘agreement’ that CIS should take its 65% of the increases of rent under
the subunderlease and Centremoor should take its 35% pari passu as and when the
increases of rent took effect under the subunderlease. In particular he
attacked a finding of the learned judge that he was not satisfied that the
draft of clause 3(i) of the underlease as put forward at July 1 1970 did not
represent CIS’s real intention and he attacked the conclusion of the judge that
the parties had ‘no specific or particular intention about the term now sought
to be rectified’.
I do not for
my part see any inconsistency in the judge’s findings, nor do I think that the
judge was saying that the claim for rectification must fail because the parties
did not have an ‘agreement’ or common continuing intention in the precise words
of the form of clause 3(i) which CIS is now putting forward. That would be too
narrow a view of the law of rectification and would be inconsistent with such
cases as Jervis v Howle & Talke Colliery Co Ltd [1937] 1 Ch
67, where rectification was allowed where parties, having ‘agreed’ on what they
wanted to achieve, did not have in mind the correct form of words to achieve
that end, but used the wrong words which failed to achieve what they had
‘agreed’. The observations of Simonds J in Crane v Hegeman-Harris Inc
as reported in the note at [1971] 1 WLR 1390 at p 1399 D-F appear to confirm
that the exact form of words in which the common intention is to be expressed
is immaterial if in substance and in detail the common intention can be
ascertained.
As I read the
learned judge’s judgment, however, what he is saying is that at July 1 1970,
when the agreement for the underlease was executed, both CIS and Centremoor
intended that it should bear the form it did with clause 3(i) related to March
25 date. They so intended because they intended that the rent revisions in all
the leases should take effect at March 25. They supposed — without, I
interject, adequate consideration and wholly failing to understand the terms of
the agreement for the subunderlease — that the blank in the subunderlease would
be filled in by inserting March 25 1972. Therefore the mistake which has led to
injustice to CIS was a mistake in the drafting of the subunderlease and the
agreement for the subunderlease and not a mistake in the drafting of the
underlease. Therefore the mistake cannot be rectified since — and here I
amplify the reasons — (a) CIS was not a party to the subunderlease and Scottish
& Newcastle are not parties to these proceedings and (b) Scottish &
Newcastle never addressed their mind to the possibility of dating back the date
of commencement of the term of the subunderlease, which would at the least have
required a rent-free period from March 25 1972 to the completion or deemed
completion of the development.
The learned
judge supports this conclusion by stating that it would not have been correct
to say that both parties had a continuing intention that the underlease from
CIS to Centremoor must contain a clause tied to the term of the subunderlease
to Scottish & Newcastle, and by stating that it had been the understanding from
the outset that the dates for the review of rent in the subunderlease should
coincide with those in the underlease to Centremoor. This appears to be saying
that the common intention was that the subunderlease should coincide with the
underlease and not that the underlease should coincide with the subunderlease.
Therefore any mistake was in the subunderlease and not in the underlease.
I find this a
difficult concept — since if, as was clearly the case, the ‘agreement’ was that
the dates for review in the underlease and the subunderlease should coincide,
the intention must have been that
therefore matter which is to coincide with which, since each is to coincide
with the other.
Of course CIS
intended at July 1 1970 that the term of the underlease should run from March
25 1972 and that clause 3(i) should take the form it took. But CIS so intended
in the mistaken belief that the coincidence of review dates in the underlease
and subunderlease would not be affected. That is a mistake in the underlease,
in making a change from the coincidence of review dates required by the
‘agreement’ without carrying it to its proper conclusion, as much as a mistake
in the subunderlease. I do not see why a mistakenly half-carried-out intention
to arrange that the terms in all three documents — headlease, underlease and
subunderlease — should coincide, should prevent the court giving effect to the
original clear intention, which was a main part of ‘the agreement’ that the
revision dates under the underlease and the review dates under the
subunderlease should coincide.
The second
point taken by Mr Littman for Centremoor is that the rectification sought would
involve a departure from ‘the agreement’ in the heads of terms, in that under
the heads of terms, and under the underlease as granted, any rent revision
under the underlease is to take effect at the end of a year of the term of the
underlease, viz on March 25, whereas if rectification is granted it will take
effect in the course of a year of the term, viz on July 1. It is therefore
submitted that, as a matter of law, the rectification sought is impermissible.
The point stems from the same ill-fated attempt to bring the terms of the
underlease and subunderlease into line with the term of the headlease from the
end of the peppercorn rent period under the headlease, and the submission would
appear to involve the contention that unless the court of equity can correct
all the consequences of a blundering draftsman’s mistake it is powerless to
correct any of them. As I see it, the rectification sought will be in line with
the heads of terms in making the revisions of rent under the underlease
coincide with the rent reviews under the subunderlease. It will also, in so far
as that is of any significance, be in line with the heads of terms in making
the rent periods under the underlease run, as with the subunderlease, from an
anniversary of the completion of the development. That under the heads of terms
each rent revision should take effect on an anniversary of the commencement of
the term of the underlease because the term was to run from the completion of
the development is, as it seems to me, mere machinery and there is no evidence
to show that it was regarded as a point of substance by the parties.
Mr Littman
naturally also relies on Lord Nottingham’s well-known statement that ‘equity
mends no man’s bargain’. In the context of rectification, this means that
equity cannot make for the parties a better ‘agreement’ than they have made for
themselves. But it can mend the expression of the bargain, where by
incompetence of drafting or other mistake the formal document as executed fails
to give effect to ‘the agreement’, the true intention of the parties. The
mistake which equity can correct is a mistake in giving effect to ‘the
agreement’ between the parties and not a mistake in making that ‘agreement’.
Thus the case of Barrow v Barrow (1854) 18 Beav 529 on which Mr
Littman relies is distinguishable; in that case rectification was not available
because — albeit through a mistake — it had never been part of ‘the agreement’
between the parties that the particular interest of the wife should be settled
by the marriage settlement, but here it clearly was part of ‘the agreement’,
and an important part of it, that the rent revision under the underlease and
the rent reviews under the subunderlease should coincide.
I do not for
my part find anything in the points which weighed with the learned judge
against CIS or in Mr Littman’s other points, taken singly or together,
sufficient to outweigh the inequity that Centremoor are seeking to take
advantage of incompetent draftsmanship to hold on to a benefit, the receipt of
100% of every increase of rent under the subunderlease for the first six and
three-quarter years less a few days, which under the heads of terms Centremoor
were plainly never intended to have.
Cases of
rectification depend primarily on the facts. In the present case the facts are
somewhat complex, which was no doubt why no one realised until 1975 that a
mistake had been made. But it is clear beyond peradventure that it was part of
‘the agreement’ between the parties that the revision of rent under the
underlease and the rent reviews under the subunderlease should coincide and CIS
should receive its 65% of rent increases pari passu with Centremoor’s
receipt of Centremoor’s 35%. Clause 3(i) of the underlease is the vital clause
for achieving this and it is because clause 3(i) as drafted has departed from
the coincidence of review dates envisaged by the heads of terms that difficulty
has arisen. In Jervis’ case, already cited, Clauson J summed the
position up concisely as follows at p 71:
The
plaintiff’s case is that the rectification for which he asks will bring the
lease into precise conformity with the intention of the parties. I find as a
fact, and without the slightest hesitation, that there is what Lord Thurlow LC,
in the year 1784, called, in Shelburne v Inchiquin 1 Bro CC 338,
341, ‘strong irrefragable evidence’ that when the parties executed the lease
they thought that its effect would be what in fact it would be if the lease
were rectified as the plaintiff asks: and I am bound to direct rectification in
accordance with the plaintiff’s claim.
I would apply
that passage to the present case, and I would rectify the underlease and the
draft of it annexed to the agreement of July 1 1970 as prayed.
I would for my
part allow this appeal.
Agreeing, KERR
LJ said: The facts have been fully stated by Dillon LJ and I am in entire agreement
with his judgment. I only add some remarks of my own since we are differing
from Harman J, who clearly considered that the plea for rectification in this
case involved an impermissible extension of this remedy. In my view, however,
this is not so; indeed, when the facts are stripped to their essentials, I
think that this is a classic case which justifies the existence and application
of this beneficial remedy without any extension of the law.
One starts
with the fact that the two crucial ingredients for rectification are clearly
present in this case and are indeed common ground. First, the terms of the
underlying ‘agreement’ between the parties are not in dispute, since they are
recorded in the ‘Heads of Terms of Agreement’ which were negotiated in detail
and on which CIS and Centremoor were thereafter fully in accord. The material
term for present purposes was that the parties intended and agreed that as and
when Centremoor would receive 100% of the ‘additional rent’ pursuant to the
subunderlease to be concluded between them and the hotel operator — originally
envisaged as BOAC but finally Scottish & Newcastle Breweries Ltd —
Centremoor would retain 35% of this and pass on the balance of 65% to CIS
pursuant to the underlease which they were to hold from CIS. The second crucial
ingredient is that the formal documents which were subsequently executed in
order to give effect to this term failed to do so owing to the occurrence of a
common mistake. Their effect was that the balance of 65% would not fall to be
passed on as and when received, but in each case only about six and
three-quarter years later.
It follows
that the basis for rectifying the contractual documents is clearly present in
this case. The only unusual feature, and the apparent complexity of the case,
lies in the difficulty of isolating the cause of the mistake and pinpointing
the provision in the contractual documents which would require to be altered in
order to give effect to the parties’ ‘agreement’ which, by a common mistake,
was not carried into effect.
In the skilful
argument of Mr Littman QC, which persuaded the learned judge to refuse
rectification, he maintained that the mistake related to the terms of the
subunderlease, because this was not aligned with the relevant dates of the
underlease, as explained below. Accordingly, as he submitted, rectification was
not possible, since CIS are not a party to the subunderlease. However, I cannot
accept that this is a sufficient ground for enabling Centremoor to retain an
uncovenanted benefit which had clearly not been intended by either of the
parties in the bargain which they had made. I think that this argument involves
a confusion between the mistake itself, ie the failure to give effect to the
parties’ ‘agreement’ by means of the contractual documents, and the
circumstances which caused this mistake to be made, but which did not in
themselves involve any departure from the parties’ ‘agreement’.
I have already
referred sufficiently to the parties’ ‘agreement’ regarding the passing on to
CIS of 65% of the ‘additional rent’ as and when this was received by Centremoor
from the operator. The provision designed to give effect to this was clause
3(i) of the underlease. In the event, however, it failed to do so. I must
therefore deal with the circumstances which caused this to happen. Although
attribution of blame for the occurrence of a material common mistake plays no
part in the decision whether or not rectification should be granted, it is of
some relevance in this case to bear in mind
parties and the contracts to enable this development to take place and to reach
fruition. It was their concept, and it was they, as the developers, who made
the initial arrangements with the owners of the freehold, New River Co Ltd, and
who negotiated with the potential operators of the proposed hotel. They then
brought in CIS to provide the necessary finance, and they were then again the
moving spirit in arranging the necessary chain of agreements for the headlease,
underlease and subunderlease to give effect to the project. These agreements
were intended to fit in with each other, and the ultimate terms of the
agreement for the subunderlease — which is now said to have contained the
material mistake — were wholly within the control of Centremoor, although also
subject to the approval of CIS. Against this background the arguments against
the exercise of the discretion to grant rectification lie ill in the mouth of
Centremoor and lack any intrinsic merits to weigh with the court, unless, of
course, the remedy of rectification is unavailable as a matter of law or on the
facts of the case.
I therefore
turn to the facts as to what the mistake was and how it came to be made. Mr
Littman submits, in effect, that the material mistake was that the operative
‘anniversary date’ for the review of the ‘additional rent’ in the subunderlease
did not coincide with the corresponding ‘anniversary date’ of March 25, which
had already been inserted in clause 3(i) of the agreement for the underlease
between CIS and Centremoor on July 1 1970. He submits that the insertion of the
date of March 25 in clause 3(i) did not in itself involve any mistake by anyone
but corresponded with the intention of both parties. Where they were mistaken,
he submits, was in thinking that the same date of review would appear in the
subunderlease, or in failing to realise that the same date would almost
certainly not appear in the subunderlease, since this was to run from a date
based upon the architect’s certificate of practical completion and not from
March 25, the date in clause 3(i) of the underlease. Therefore, as he submitted,
the admitted common mistake only arose in the context of the terms of the
subunderlease between Centremoor and Scottish & Newcastle and not in the
context of clause 3(i) of the underlease. This, in effect, was the submission
which Harman J accepted. Mr Littman also submitted on this appeal that CIS and
Centremoor had intended throughout that the anniversary dates for all rent
reviews should coincide with the anniversary dates of the commencement of the
headlease, underlease and subunderlease, which were also to coincide inter
se, so that in each case there would always be one annual rent (albeit
composed of different elements), and that it was never contemplated that the
total amount of the rent should change during the currency of any rental year.
I cannot, with
respect, accept any of these submissions as a ground for refusing the
rectification of clause 3(i) of the underlease which the plaintiffs seek. My
reason, in essence, is that although the parties no doubt envisaged that the
headlease, underlease and subunderlease would dovetail in the way submitted by
Mr Littman, this was merely what they had loosely envisaged; not what they had
‘agreed’ in the heads of terms. What they had ‘agreed’ was that 65% of the
additional rent was to be passed on by Centremoor to CIS as and when this was
received by Centremoor. The dovetailing of anniversary dates was merely
envisaged as the machinery for carrying this ‘agreement’ into effect. In the
event, this machinery broke down owing to a common mistake. When the
contractual documents were signed on July 1 1970 it was overlooked that the
subunderlease inevitably contained a blank for the date of its commencement,
and that its anniversary date for the review of the ‘additional rent’ was
therefore equally uncertain. However, the operative mistake, ie that which
caused the contractual documents between CIS and Centremoor not to give effect
to their ‘agreement’ as to the passing on of the 65%, was to insert the date of
March 25 into clause 3(i) of the agreement for the underlease in these
circumstances. If CIS and Centremoor had appreciated the almost inevitable
consequences flowing from the contractual documents immediately before these
were signed on July 1 1970, I think that they would have amended clause 3(i) of
the agreement for the underlease in the way in which its rectification is now
sought, because this was the simplest way of rectifying their common mistake.
Of course, there were also other possible ways of dealing with the problem if
this had then been appreciated, as Mr Littman elicited in the cross-examination
of Centremoor’s witnesses, by somehow dovetailing the material terms of the
subunderlease to the date of March 25 in clause 3(i) of the underlease. But
clause 3(i) was the provision designed to give effect to the clear ‘agreement’
between CIS and Centremoor concerning the passing on of the 65% of the
‘additional rent’. By a mistake it failed to do so. It is therefore clause 3(i)
which is the appropriate candidate for rectification, and not any provision in
the subunderlease.
I recognise,
however, that this conclusion has the consequence that the anniversary date of
the relevant rent reviews will not coincide with the anniversary dates of the
commencement of the headlease and — above all — of the underlease, which were
both March 25. I was for some time impressed by Mr Littman’s argument on this
point. However, on closer analysis I do not think that it has any foundation.
First, the ‘Heads of Agreement’ themselves envisaged that the date on which the
hotel operator — the subunderlessee — would ultimately go into occupation could
not be predicted with accuracy at that stage. In the ‘Heads of Terms’ it was
merely defined as ‘by May 1 1972 or such other date as shall be agreed between
all parties’. It was therefore not a term of the parties’ ‘agreement’ that the
commencement date of the subunderlease would necessarily fall on the same
anniversary date as that of the underlease. Secondly, it was no more a term —
express or implied — of the ‘agreement’ in the ‘Heads of Terms’ that all rent
reviews should take place on anniversary dates of the commencement of the
underlease and subunderlease than it was a term of this ‘agreement’ that the
commencement dates of these leasehold grants should themselves necessarily coincide.
On the contrary, on closer analysis one finds that it was in fact envisaged
that the various elements of the total rent payable by Centremoor to CIS would
fall to be adjusted during the currency of various ‘rent years’ so that there
would not in fact be ‘one total annual rent’ during every ‘rent year’, as Mr
Littman submitted. Thus, the so-called ‘further rent’ of 9% of the cost of the
development to CIS as at the date of the underlease was to be increased by
reference to the certification of the final development cost, and any increase
was to be payable by Centremoor to CIS as from the following quarter day.
Similarly, the so-called ‘insurance rent’ was to be computed by reference to
the cost to CIS of effecting various insurances concerning the development, and
this was thereupon to be payable by Centremoor to CIS in each case on demand
after the relevant premiums had been paid by CIS. And, finally, the ‘additional
rent’ relating to the 65%, with which this case is concerned, was itself also
not payable on any anniversary date of the commencement of the underlease, but
— by virtue of clause 3(ii) of the underlease — on the next quarter day
following its ascertainment and a notice by CIS to Centremoor requiring it to
be paid.
All this
shows, in my view, that Mr Littman’s argument based on a dovetailing of all the
relevant dates as between the underlease and the subunderlease is in part
fallacious and, as to the remainder, rests only on what the parties loosely
envisaged as the framework for carrying their agreed bargain into effect. In
this connection there was clearly some sloppiness of thought and conveyancing
which, by a common mistake, failed to give effect to the parties’ clear accord
in the ‘Heads of Terms’ that 65% of the ‘additional rent’ should be passed on
as and when received. The contractual provision designed to take care of this,
but which failed to do so as the result of the parties’ mistake, was clause
3(i) of the agreement for the underlease and ultimately clause 3(i) of the
underlease itself. Therefore both should be rectified. It is no answer, as Mr
Littman submitted, that CIS and Centremoor clearly intended that clause 3(i)
should include the reference to the date of March 25 which was inserted in it.
As Brightman J said in Re Butlin’s Settlement Trusts [1976] 1 Ch 251 at
p 260:
It
rectification
is also
available where the words of the document were purposely used but it was
mistakenly considered that they bore a different meaning from their correct
meaning as a matter of true construction.
Similarly,
rectification is, in my view, available where the parties believe that certain
wording will give effect to their bargain but mistakenly overlook some other
aspect of their arrangements, with the result that this wording will not in
fact do so. To grant rectification in such cases is not to mend the parties’
bargain but to give effect to it.
Also agreeing,
EVELEIGH LJ said: The decision in this case depends upon a correct analysis of
the facts. CIS Ltd and
straight interest-bearing loan from the CIS Ltd to Centremoor Ltd. Their plan,
to secure to each his return, was a series of leases which would provide, among
other things, for the CIS Ltd to receive from Centremoor Ltd whatever CIS Ltd
should pay as rent and also 65% of the increase in rent receivable by
Centremoor Ltd. They assumed that the building would be ready by May 1. On that
assumption they drew up an assessment of the probable income which would accrue
to each. That is what the calculations set out in the heads of agreement amount
to. Clause 3 of the underlease was intended to pick up that 65% of whatever
increase in rent should be payable under the subunderlease. It is quite clear
from the evidence that any increase of rent payable under the underlease was
intended to be dependent upon an increase being payable under the
subunderlease. Clause 3 could have said this in these general terms. However,
it is better to be precise and adopt conventional conveyancing language where
possible and clause 3 was the result of such a desire. The parties believed
that the underlease and subunderlease would be made to march in step and that
the date inserted in clause 3, namely March 25 1979, would be effective to pick
up the rent which they intended. In other words clause 3 was chosen as the
appropriate wording on the assumption that the leases would march in step.
There was no
fixed intention at July 1 1970 that the subunderlease should start from March
1972. The agreements left open the date for the commencement for the
subunderlease and it was agreed that it should commence after completion of the
building. That being so, I regard the dates which appear in the heads of
agreement to be no more than illustrations of a possible result if the
respective dates of the leases should be as envisaged in those illustrations. I
mention this as Mr Littman submitted that to allow the rectification which is
sought would contradict another agreed term, namely that the increase be payable
by Centremoor Ltd only from the beginning of the eighth year of the underlease
and not from some other date in that year.
The result,
then, is that while the parties intended clause 3 to say that Centremoor Ltd
should pay to CIS Ltd 65% of the increase of rent receivable it failed to do
so. In other words, it does not correctly express their intention. We are asked
in effect to take out a date that was wrongly inserted and substitute the date
which was intended, namely the date when an increase in rent would be due to
Centremoor Ltd.
In this
analysis of the facts the distinction between an intention and assumption or
belief clearly emerges. It is because the learned judge concluded that the
parties intended the date of the subunderlease to match the date in clause 3
that he refused rectification. On his view of the facts it would appear that
the appellants were asking the court to introduce some other machinery to
achieve the object of the parties. However, with respect I think that he failed
to distinguish between intention and assumption or belief.
I entirely
agree with the judgment of Dillon LJ, which I have read. I have added a few
words of my own out of respect for the argument of Mr Littman, which at times
caused me to waver, and because we are differing from the learned judge.
The appeal
was allowed and rectification of the underlease between Co-operative Insurance
Society Ltd and Centremoor Ltd ordered. The appellants were awarded their costs
in the Court of Appeal and half their costs below. Leave to appeal to the House
of Lords was refused.
