Freehold reversion – Pre-emption – Lease of business premises containing right of pre-emption – Lease providing for valuation “with vacant possession” – Judge rectifying lease to reflect parties’ intention that valuation subject to lease – Whether required element for rectification missing – Appeal dismissed
In 2002, the appellant’s predecessor (Z) granted a lease of business premises to the respondent tenant for a term of 30 years at an initial annual rent of £20,000 subject, after three years, to rent reviews linked to increases in the retail price index. After the lease was granted, the respondent, which owned adjoining property, redeveloped the premises at a cost of around £1m and sublet various parts.
The lease conferred on the respondent a right of pre-emption of the freehold reversion. In March 2004, Z gave the respondent notice of his intention to sell the freehold reversion subject to the lease. The respondent served a counternotice, exercising the right of pre-emption and offered to buy the freehold for £275,000.
In December 2004, the appellant purchased the reversion and agreed to be bound by Z’s offer notice under the pre-emption provisions. The appellant and the respondent then conducted negotiations but the appellant rejected the respondent’s offer of £260,000 for the freehold. Since the parties were unable to agree a price, an independent valuer was appointed. The appellant contended that the freehold should be valued “with vacant possession” as stated in the lease (value £2.9m). The respondent contended that the freehold should be valued subject to the lease (value £250,000). After taking legal advice, the valuer concluded that, on the true construction of the lease, the open market value was “with vacant possession” and he proposed to value the property accordingly.
The respondent applied to rectify the lease on the ground that the valuation provisions therein failed to record correctly the agreement reached between the original contracting parties. The judge held that the requirements for rectification were satisfied and ordered that the lease be rectified to the effect that the freehold should be valued subject to the lease.
The appellant appealed, contending that the judge had failed to make a finding, in substance and in detail, on the parties’ prior agreement or common intention regarding the pre-emption valuation formula.
Held: The appeal was dismissed.
The judge’s conclusion and his rectification order made commercial sense. Ample evidence justified the judge’s finding that the parties had agreed and intended that the open market value of the freehold was to have regard to the continued existence of the lease, expressly disregarding the money that the respondent had spent on refurbishing the premises; and that that agreement and intention had not been correctly recorded in the lease, which referred to “with vacant possession” instead of “subject to the lease”.
The oral and written evidence and the inherent probabilities in the situation were against any agreement or common intention that a valuation formula should be based upon a hypothetical assumed vacant possession valuation.
Should the relevant provision of the lease not be rectified, the parties and their successors would, as a result of their advisers’ drafting error, which was not spotted when the lease was executed, be bound by a different bargain than the one that they had made. The objection that the parties’ common intention on a valuation formula could not be proved and that a required element for rectification was missing was misplaced. Once the judge had decided that the words “with vacant possession” had been included erroneously and should be removed by rectification, the was not required to make any other finding on the parties’ intention with regard to the valuation provisions: Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560; [2002] 2 EGLR 71; [2002] 23 EG 123 considered.
Kirk Reynolds QC and Bruce Walker (instructed by Brooke North LLP, of Leeds) appeared for the appellant; Joanne Moss and Tamsin Cox (instructed by Chadwick Lawrence LLP, of Huddersfield) appeared for the respondent.
Eileen O’Grady, barrister
