Commercial lease — Tenant’s break clause — Construction — Whether grounds for rectification — Claim allowed in part — Counterclaim allowed
The claimant occupied an office as the defendant’s sub-undertenant, pursuant to a reversionary sub-underlease for a term of 31 years from 1998. The parties’ predecessors in title had originally agreed a 52-year term, which had been divided into an initial sub-underlease followed by the reversionary term that the claimant now held. The defendant, 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 six months’ 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. In proceedings brought by the claimant, the defendant argued that the clause should be rectified to include words that had been accidentally omitted but that were included in a sub-underlease annexed to the original agreement for lease. The clause, as amended, would read: “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 but in the event only that such reviewed rent exceeds the yearly rent payable during the first year of the said term and thereafter during the year immediately preceding the eleventh and twenty-first years respectively of the said term”. It would therefore provide three opportunities to break, dependent upon the rent being reviewed, and an increase imposed, in the relevant years.
The claimant submitted that the clause should be construed as it stood. It argued that the clause provided five opportunities to break, namely: (i) three that were exercisable only if a rent review had taken place to determine the rent from the end of the stated years, but with no requirement that the rent should have been increased; and (ii) two further “freestanding” opportunities, not dependent upon the landlord’s actions, and exercisable by six months’ notice served during the 10th or 20th years of the term.
Held: The claim was allowed in part and the counterclaim was allowed.
(1) Although the agreement for lease was part of the admissible background to construction, it was not possible, without more, to read the reversionary sub-underlease as though the relevant words had been inserted. In order to do that, the court would need to be satisfied not only that words had been erroneously omitted but also what those words were, at least as to their gist: Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) [2003] UKHL 12; [2004] 1 AC 715 applied. That was not apparent merely by looking at the wording of the original sub-underlease. In having regard to the agreement for lease, it was necessary also to consider the fact that the parties had subsequently negotiated amendments, including changes to the break clause itself. Moreover, the parties’ intention had been that the initial and reversionary sub-underleases should set out the terms of the leasehold relationship between them, to the exclusion of the annexed sub-underlease. Accordingly, even though it appeared that the wording was defective, the parties’ contract had to be found exclusively in the terms of those leases, and the agreement for lease could not be used to contradict those terms: HIH Casualty & General Insurance Ltd v New Hampshire Insurance Co [2001] EWCA Civ 735; [2001] 2 Lloyd’s Rep 161 applied. Applying that approach, the break clause was to be construed as contended for by the claimant. It was not inherently unlikely that the tenant should have a right to break independently of a rent review because whether a review took place was entirely at the landlord’s discretion.
(2) The original parties to the sub-underlease had made a mutual mistake. The intention had been to give the same three opportunities to break as were conferred in the annexed sub-underlease. On that ground, the court would grant the rectification sought by the defendant.
Hazel Williamson QC and Richard Fowler (instructed by Linklaters) appeared for the claimant; Michael Driscoll QC and Thomas Leech (instructed by Thomas Eggar) appeared for the defendant.
Sally Dobson, barrister
