Commercial lease — Tenant’s break clause — Construction — Whether grounds for rectification — Appeal allowed
The appellant occupied an office as the respondent’s sub–undertenant, pursuant to a reversionary subunderlease from July 1985. The parties’ predecessors in title had originally agreed a 52–year term in 1974. This had been divided into an initial subunderlease followed by the reversionary term held by the appellant. The respondent, as landlord, had the option of instituting upward–only rent reviews at five–year intervals. A tenant’s break clause was exercisable after the end of the third, 13th and 23rd years of the term on providing written notice “to be given within a period of six months following the determination of the reviewed rent to be payable from the expiration of the first eleventh and twenty–first years respectively of the said term and thereafter during the year immediately preceding the eleventh and twenty–first years respectively of the said term”.
A dispute arose as to the meaning of the break clause. The appellant submitted that the clause should be construed as it stood. It argued that the clause provided five break opportunities: three of them dependent upon a rent review; the other two “free-standing” and dependent only upon service of the required notice during the 10th or 20th year of the term.
The respondent contended that there were only three opportunities to break the clause, all of which were dependent upon a rent review. To achieve that result, the clause should be rectified, on the basis of mutual mistake, to include words that had been accidentally omitted but that were included in a subunderlease annexed to the original agreement for lease. Alternatively, even if the lessee had two additional break rights, they should be construed as also being dependent upon a prior rent review.
The judge upheld the respondent’s case for rectification based upon mutual mistake but rejected its alternative case predicated on unilateral mistake. However, the judge indicated that if rectification had not been possible he would have upheld the appellant’s interpretation: [2006] PLSCS 27; [2006] 06 EG 171 (CS). The appellant appealed.
Held: The appeal was allowed.
It was necessary for the party seeking rectification, and upon whom the burden of proof lay, to demonstrate, on a balance of probabilities and with convincing proof, that the parties had: (i) a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (ii) there was an outward expression of accord; (iii) the intention continued when the instrument sought to be rectified was executed; and (iv) the instrument mistakenly did not reflect that common intention: Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560; [2002] 2 EGLR 71; [2002] 23 EG 123 applied.
In the present case, although the court was reluctant to disagree with the judge on an issue of fact, from the primary material upon which he had relied, and which was clearly and fully set out in his judgment, the respondent had failed to establish the facts necessary to support the rectification claim.
Further, the court would not rectify the lease to give effect to the common intention that there should be only three rights to break, all of which were dependent upon a rent review. The common intention extended only part of the way and it was not permissible to order rectification to reflect those parts of the parties’ intentions that were the same but ignore those parts that were not: Swainland Builders Ltd distinguished.
With regard to the correct construction of the lease, considering the structure and grammar as a whole, the break clause was clearly designed to give three rights to break rather than five. If the draftsman had intended, in 1985, to introduce a significant change in the number of break opportunities, it would have been signalled in the substantive part of the clause, not the parenthesis: Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2003] UKHL 12; [2004] 1 AC 715 and HIH Casualty & General Insurance Ltd v New Hampshire Insurance Co [2001] EWCA Civ 735; [2001] 2 Lloyd’s Rep 161 considered.
Christopher Nugee QC and Timothy Dutton (instructed by Linklaters) appeared for the appellant; Michael Driscoll QC, Thomas Leech and Adam Smith (instructed by Thomas Eggar) appeared for the respondents.
Eileen O’Grady, barrister
