Lease – Rectification – Common mistake – Parties making agreed amendments to standard form lease – Final lease failing to incorporate amendments – Whether final lease to be rectified on grounds of common mistake – Whether evidential requirements of rectification met – Whether appropriate to exercise discretion to refuse rectification – Appeal dismissed
In 2011, the appellant granted a seven-year lease of a property in Altrincham, Cheshire, to the respondent company. In discussions preceding the grant of the lease, the owner of the respondent had made the appellant aware of his plans to convert the property into a children’s nursery and also to live there with his family. To achieve that plan, the lease needed to permit subletting, alteration of the premises, use of the premises for any purpose and delivery up of the premises at the end of the lease term without reinstatement to their previous condition.
The first lease document produced by the parties was a standard form of business lease, which was to be amended to reflect the particular terms agreed. Although that first lease was not legally enforceable, because not all the terms were agreed and it was contemplated that the parties would sign a final lease, it reflected the parties’ agreement as to some of the terms that should be included. In April 2011, the parties signed a second, final lease document on the same standard form; however, it omitted the amendments shown in the first lease.
Thereafter, the owner of the respondent went into possession of the property with his family but was unable to obtain the necessary planning consents for the children’s nursery. He sublet the property and took in lodgers but had difficulty paying the rent. The appellant brought a claim for possession of the property, alleging subletting without consent and other breaches of the lease. He subsequently re-let the property.
In the county court, the possession claim was dismissed and the respondent’s counterclaim for rectification of the second lease was allowed. The recorder found that, just a few days before the execution of the second lease, the appellant had assured the respondent that the amendments in the first lease would apply. She found that the second lease had been executed under a common mistake of the parties that it would run in conjunction with the terms previously agreed in the first lease. She concluded that the terms of the lease were spread over the two documents and that the second lease should be rectified so as to include the amendments to its terms agreed in the first lease.
The appellant appealed. He contended that the requirements for rectification were not made out on the evidence; alternatively, rectification should be refused as a matter of discretion.
Held: The appeal was dismissed.
(1) Owing to the requirement to register the second lease, the terms that did not appear in that lease would not be enforceable without an order for rectification. The defect in the second lease could not be filled by interpretation: Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736; [2013] 1 BCLC 484; [2012] 2 EGLR 141 applied. The remedy of rectification entitled the court to give effect to the reasonable expectations of contracting parties as to the meaning of their executed agreement. The court could rectify a document, even if the terms of the agreement were those that the parties had agreed, if they were both mistaken as to the meaning of those terms. Rectification could be granted if the parties had had a clear intention and their executed intention did not achieve that intention. In a sense, rectification was an instance of the law applying a concept of good faith and fair dealing. However, since it involved interfering with the sanctity of a contract, there had to be an outward expression of accord continuing down to the making of the agreement. At least in the case of common mistake, the existence of the parties’ common intention was to be ascertained on an objective basis. The necessity for the evidence to meet the requirement for the outward expression of accord stemmed from the law’s concern that parties should not be able to disassociate themselves from their agreement simply because it had become commercially undesirable. They had to show clear evidence of a consensus on some issue that the executed and unrectified agreement did not reflect. The agreement had to be objectively ascertained by reference to what both parties did and said, not what each of them might privately have thought: Re Butlin’s Settlement Trusts [1976] Ch 251, Swainland Builders Ltd v Freehold Properties Ltd [2012] EWCA Civ 560; [2002] 2 EGLR 71; [2002] 23 EG 123 and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] AC 1101; [2009] 3 EGLR 119 applied.
(2) Although the execution of the second lease without amendment, so that it did not incorporate the terms of the first lease, was on its face evidence against the respondent, the evidence of execution had to be seen in the light of the other evidence in the case: Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153; [2012] 1 WLR 1333; [2011] PLSCS 240 applied. Factors that made it easier for the respondent to show an outward expression of accord in the included the fact that the negotiations were not prolonged, the parties were dealing with detailed standard forms rather than custom-made documents and they were negotiating as lay persons, without the intervention of lawyers at their meetings. A highly relevant factor was the appellant’s assurance to the respondent, only a few days before the execution of the second lease, that the amendments in the first lease would apply. The recorder had been entitled to conclude that the evidential requirements for rectification were met.
(3) The nature of the parties’ mistake was as to the legal effect of the words in the second lease. The parties had been mistaken about the two leases taking effect in conjunction with one another and had intended both the second lease and the amendments in the first lease to be binding. The court could rectify the second lease to achieve what it was objectively intended to achieve. A document could be rectified even though the effect of the order would be to strike out certain terms in that document. It was possible to harmonise the two leases, if necessary by the deletion or amendment of clauses on which the parties were agreed, so that they could operate in conjunction with one other once rectified. Rectification was not precluded on the ground that the parties had intended to have two separate lease documents. There had been no deliberate decision to retain certain terms in a separate document; the only reason for the parties’ decision to execute the second lease without incorporating the first lease amendments was that they had thought it unnecessary to do so to achieve their purpose.
(4) Rectification was an equitable remedy, which the court could refuse to grant if it thought fit. It might so refuse if, for example, an innocent third party had acquired rights or because the party seeking rectification had affirmed the unrectified agreement in the knowledge that it did not reflect the parties’ agreement. However, there were no factors that should have led the recorder to refuse rectification in the instant case. The ingredients for affirmation were not met. There had been no inordinate delay by the respondent such as to deprive him of his right to apply for rectification. Nor was the re-letting of the property a ground for refusing rectification since that later lease could not override the respondent’s rights under the second lease and the terms of the second lease, as rectified, did not enlarge the respondent’s interest in the property.
David Berkley QC (instructed by Saints Solicitors LLP, of Manchester) appeared for the appellant; Matthew Hall (instructed by Blackstone Solicitors, of Hale) appeared for the respondent.
Sally Dobson, barrister
Lease – Rectification – Common mistake – Parties making agreed amendments to standard form lease – Final lease failing to incorporate amendments – Whether final lease to be rectified on grounds of common mistake – Whether evidential requirements of rectification met – Whether appropriate to exercise discretion to refuse rectification – Appeal dismissedIn 2011, the appellant granted a seven-year lease of a property in Altrincham, Cheshire, to the respondent company. In discussions preceding the grant of the lease, the owner of the respondent had made the appellant aware of his plans to convert the property into a children’s nursery and also to live there with his family. To achieve that plan, the lease needed to permit subletting, alteration of the premises, use of the premises for any purpose and delivery up of the premises at the end of the lease term without reinstatement to their previous condition.The first lease document produced by the parties was a standard form of business lease, which was to be amended to reflect the particular terms agreed. Although that first lease was not legally enforceable, because not all the terms were agreed and it was contemplated that the parties would sign a final lease, it reflected the parties’ agreement as to some of the terms that should be included. In April 2011, the parties signed a second, final lease document on the same standard form; however, it omitted the amendments shown in the first lease.Thereafter, the owner of the respondent went into possession of the property with his family but was unable to obtain the necessary planning consents for the children’s nursery. He sublet the property and took in lodgers but had difficulty paying the rent. The appellant brought a claim for possession of the property, alleging subletting without consent and other breaches of the lease. He subsequently re-let the property.In the county court, the possession claim was dismissed and the respondent’s counterclaim for rectification of the second lease was allowed. The recorder found that, just a few days before the execution of the second lease, the appellant had assured the respondent that the amendments in the first lease would apply. She found that the second lease had been executed under a common mistake of the parties that it would run in conjunction with the terms previously agreed in the first lease. She concluded that the terms of the lease were spread over the two documents and that the second lease should be rectified so as to include the amendments to its terms agreed in the first lease.The appellant appealed. He contended that the requirements for rectification were not made out on the evidence; alternatively, rectification should be refused as a matter of discretion.Held: The appeal was dismissed. (1) Owing to the requirement to register the second lease, the terms that did not appear in that lease would not be enforceable without an order for rectification. The defect in the second lease could not be filled by interpretation: Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736; [2013] 1 BCLC 484; [2012] 2 EGLR 141 applied. The remedy of rectification entitled the court to give effect to the reasonable expectations of contracting parties as to the meaning of their executed agreement. The court could rectify a document, even if the terms of the agreement were those that the parties had agreed, if they were both mistaken as to the meaning of those terms. Rectification could be granted if the parties had had a clear intention and their executed intention did not achieve that intention. In a sense, rectification was an instance of the law applying a concept of good faith and fair dealing. However, since it involved interfering with the sanctity of a contract, there had to be an outward expression of accord continuing down to the making of the agreement. At least in the case of common mistake, the existence of the parties’ common intention was to be ascertained on an objective basis. The necessity for the evidence to meet the requirement for the outward expression of accord stemmed from the law’s concern that parties should not be able to disassociate themselves from their agreement simply because it had become commercially undesirable. They had to show clear evidence of a consensus on some issue that the executed and unrectified agreement did not reflect. The agreement had to be objectively ascertained by reference to what both parties did and said, not what each of them might privately have thought: Re Butlin’s Settlement Trusts [1976] Ch 251, Swainland Builders Ltd v Freehold Properties Ltd [2012] EWCA Civ 560; [2002] 2 EGLR 71; [2002] 23 EG 123 and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] AC 1101; [2009] 3 EGLR 119 applied.(2) Although the execution of the second lease without amendment, so that it did not incorporate the terms of the first lease, was on its face evidence against the respondent, the evidence of execution had to be seen in the light of the other evidence in the case: Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153; [2012] 1 WLR 1333; [2011] PLSCS 240 applied. Factors that made it easier for the respondent to show an outward expression of accord in the included the fact that the negotiations were not prolonged, the parties were dealing with detailed standard forms rather than custom-made documents and they were negotiating as lay persons, without the intervention of lawyers at their meetings. A highly relevant factor was the appellant’s assurance to the respondent, only a few days before the execution of the second lease, that the amendments in the first lease would apply. The recorder had been entitled to conclude that the evidential requirements for rectification were met.(3) The nature of the parties’ mistake was as to the legal effect of the words in the second lease. The parties had been mistaken about the two leases taking effect in conjunction with one another and had intended both the second lease and the amendments in the first lease to be binding. The court could rectify the second lease to achieve what it was objectively intended to achieve. A document could be rectified even though the effect of the order would be to strike out certain terms in that document. It was possible to harmonise the two leases, if necessary by the deletion or amendment of clauses on which the parties were agreed, so that they could operate in conjunction with one other once rectified. Rectification was not precluded on the ground that the parties had intended to have two separate lease documents. There had been no deliberate decision to retain certain terms in a separate document; the only reason for the parties’ decision to execute the second lease without incorporating the first lease amendments was that they had thought it unnecessary to do so to achieve their purpose.(4) Rectification was an equitable remedy, which the court could refuse to grant if it thought fit. It might so refuse if, for example, an innocent third party had acquired rights or because the party seeking rectification had affirmed the unrectified agreement in the knowledge that it did not reflect the parties’ agreement. However, there were no factors that should have led the recorder to refuse rectification in the instant case. The ingredients for affirmation were not met. There had been no inordinate delay by the respondent such as to deprive him of his right to apply for rectification. Nor was the re-letting of the property a ground for refusing rectification since that later lease could not override the respondent’s rights under the second lease and the terms of the second lease, as rectified, did not enlarge the respondent’s interest in the property.David Berkley QC (instructed by Saints Solicitors LLP, of Manchester) appeared for the appellant; Matthew Hall (instructed by Blackstone Solicitors, of Hale) appeared for the respondent.Sally Dobson, barrister