The difference between the value of a property that is sold with vacant possession and a property that is sold subject to one or more leases is usually substantial. Consequently, it is essential for a valuer to know whether to value property with vacant possession or not. Most legal disputes arise because the parties have failed to address this in their documents.
The dispute in Hicklane Properties Ltd v Bradbury Investments Ltd [2008] EWCA Civ 691; [2008] PLSCS 175 is unusual because it concerned a valuation provision that specifically addressed this point. The parties had entered into a lease that included a right of pre-emption over the freehold reversion. The pre-emption provisions stipulated that the price payable for the reversion was the open market value of the freehold interest “with vacant possession on completion of the sale”.
The landlord valued the freehold at £2.9m. The tenant argued that the freehold was worth £250,000, because it was encumbered by the lease. The tenant issued proceedings for rectification of the pre-emption agreement on the ground that the valuation provisions did not accurately record the agreement that the parties had reached.
The Court of Appeal reminded the tenant that it must be satisfied beyond all reasonable doubt that the instrument did not represent the parties’ common intention. However, this alone would not suffice. The court must also be satisfied as to what the parties’ common intention had been.
The landlord argued that the most that the tenant had proved was that the words “with vacant possession” had been included in the pre-emption provisions by mistake. However, each party’s evidence of intention on the valuation formula was different. The landlord argued that this was fatal to the tenant’s claim for rectification of the lease.
The Court of Appeal upheld the tenant’s claim. It ruled that if it were to refuse to rectify the agreement the parties would, as a result of a drafting error by their advisers, which no one had spotted, be bound by a different bargain than the one that they had made. The parties had intended that the tenant would buy the reversion. They had explained their perception of the price payable for the reversion in different language, but this did not prevent the court from holding that they shared the common intention that the freehold interest was to be valued on the basis that it was subject to the lease.
The case illustrates the dangers of importing valuation provisions from one document to another, without assessing the adequacy and suitability of the valuation assumptions. Unfortunately, there was no contemporaneous documentary evidence for the court to fall back on in this particular case. Parties who keep careful records of their negotiations and of the principles that have, and have not, been agreed will find it easier to prove their case. Indeed, the law reports contain numerous examples of cases that have been won and lost on the basis of handwritten notes and annotations on travelling drafts or copies of documents under negotiation.
Allyson Colby is a property law consultant
