Tenant making excessive rent payments resulting from failure to check terms of lease – Tenant discovering mistake – Tenant wrongly advised that future overpayments would be recoverable – Tenant continuing to overpay pending outcome of proceedings for declaration – Whether erroneous advice gave rise to operative mistake of law – Whether landlord, in any event, had agreed to repay if tenant’s proceedings successful – Implications of Kleinwort Benson Ltd v Lincoln City Council [1998] 3 WLR 1095 HL
In 1990 the defendant landlord granted to L Ltd a 25-year lease of commercial premises in Humberside, which provided for the annual rent to be paid by equal instalments on the first day of February, May, August and November in each year. On 1 June 1995 L Ltd assigned the lease to the defendant (the tenant). Shortly after payment of the instalment due on 1 February 1997 the tenant formed the view that, whereas the five instalments invoiced and paid as from 1 February 1996 had been based on an annual rent of £267,021 (£66,755 per quarter), the correct figure, according to the lease, was £207,683 (£51,921 per quarter). The landlord disagreed. On 1 May 1997 the tenant paid £66, 755 as before, and did so on solicitors’ advice that a full refund would be obtained if the lease were judicially construed in its favour.
On 12 June 1997 the tenant issued proceedings for a declaration that rent had been overpaid during the period in dispute and that it was entitled to deduct the overpayment from future rent payments. On 25 July 1997 the tenant’s solicitors wrote to the landlord’s solicitors stating that, without prejudice to its claim, the tenant would continue to pay at the higher level, the letter concluding: “Obviously the overpayment will be refundable if [the tenant] is successful at the trial”. The landlord’s solicitors replied saying “we note your comments with regard to payment of rent”. At the first of two hearings it was held, on a preliminary issue as to the construction of the lease, that the tenant had made 10 overpayments over the period 1 February 1996 to 1 May 1998. At the second hearing the landlord contended that the overpayments were not returnable. After the close of submissions, but before judgment was given, the House of Lords handed down its decision in Kleinwort Benson Ltd v Lincoln City Council [1998] 3 WLR 1095, which abolished the long-standing rule that money paid under a mistake of law was irrecoverable.
Held All 10 overpayments were recoverable.
1. The first five instalments were paid by the tenant in the belief that it was still liable under the lease to make certain additional payments. That belief was mistaken because the relevant clause, as earlier construed, limited that obligation to years four and five of the lease. Whether that mistake was one of fact, as it appeared to the court, or one of law had ceased to be material as a result of the ruling in Kleinwort (supra). Moreover, the landlord could not claim to have altered his position as a result of the overpayments as there was no evidence that payment at the correct level would have prompted the landlord to initiate a rent review.
2. The sixth instalment (1 May 1997) was also recoverable as one paid under a mistake of law, notwithstanding that the tenant was no longer mistaken as to the limit of his liability. The operative mistake stemmed from the solicitors’ advice that the overpayment would eventually be recovered. That advice was wrong, because, absent a mistake or appropriate agreement, a person who had made a conscious decision to pay had no action to recover the money on the ground that he was responding to a threat of legal proceedings or that he was intending to dispute liability: see Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70 per Lord Goff at p165. Given that the tenant would not have paid but for that advice, the court rejected the landlord’s contention that the ruling in Kleinwort should not be extended to mistakes as to remedies, as distinct from liability to pay. Such a distinction was not only artificial but also inconsistent with the speech of Lord Hoffman in Kleinwort (supra) at p1138, and with the reasoning in Barclays Bank Ltd v WJ Simms Son & Cooke (Southern) Ltd [1980] QB 677.
3. The last four overpayments were recoverable, not only on the ground of mistake, but also on the ground that they were made pursuant to an agreement whereby the recipient would make repayment if the money was proven not to be due: see Woolwich (supra) per Lord Goff at p165. Such an agreement had been concluded when the landlord accepted and retained future rent after receiving the quite unambiguous proposals contained in the tenant’s solicitor’s letter of 25 July 1997: Felthouse v Bindley (1862) 11 CBNS 869 (silence cannot amount to acceptance) distinguished.
Jonathan Brock QC and Alexander Hill-Smith (instructed by Brookstreet des Roches, of Witney) appeared for the plaintiff tenant; Edward Nugee QC and Patrick Walker (instructed by John Barkers, of Grimsby) appeared for the defendant landlord.
Alan Cooklin, barrister
