Commercial premises – Lease – Rent – Respondent taking subunderlease to induce occupier to move to its development – Rent under lease and subunderlease higher than market rent owing to upwards-only rent review provisions – Respondent granting sub-subunderlease to appellant on terms that rent subsidised to extent that exceeded market rent – Whether erroneous drafting of sub-subunderlease producing unintended effect – High Court correcting error by construction but refusing to rectify lease – Whether judge wrongly interpreting relevant clause – Whether judge erring in refusing to rectify lease – Appeal allowed – Cross-appeal dismissed
A company (B) agreed to take a lease of accommodation in the respondent’s commercial development provided that the respondent took over responsibility for B’s existing premises. B held these on four underleases for terms of 25 years from September 1991 with five–year, upward–only rent reviews; the respondent took subunderleases of those premises for three days less than that term, with the same provisions as to rent. The contractual rent at that time was higher than the market rent. In September 1996, the respondent granted the appellant a sub–subunderlease of B’s premises for a term expiring, three days before its own subunderlease.
Under the sub–subunderlease, the respondent would subsidise the appellant’s rent for a period to the extent that it exceeded the market rent. An initial rent of £752,765 was payable until December 2010, to which was to be added, with effect from the rent review dates on 29 September 2001 and 2006, any amount by which the open market rent on that date exceeded the “subsequent rent” of £1,285,424. The “subsequent rent” reflected the rent under the appellant’s sub-subunderlease. The lower figure of £752,765 for the initial rent reflected the approximate market rent at the date of the sub–subunderlease. This was payable until December 2010 when a reverse premium of £10m, payable by the respondent as an incentive for the appellant to take the sub–subunderlease, would run out if used to subsidise the difference between the two rents. By clause 2(c), the rent from December 2010 was to be: “Thereafter the Subsequent Rent or… the Open Market Rent on the immediately preceding Review Date and subject to further review.”
A dispute arose over the effect of clause 2(c). The High Court accepted the respondent’s contention that its literal wording did not reflect how the parties had intended the rent provisions to work where, as had happened, the market fell between September 2001 and September 2006; and that it should be construed to read: “Thereafter whichever is the greatest of the Subsequent Rent or… the Open Market Rent on the immediately preceding review date or such other sum as shall be agreed or determined to be the Open Market Rent on 29 September 2001”. However, the court refused to rectify the sub-subunderlease to that effect: [2011] EWHC 729 (CH; [2011] PLSCS 94. The appellant appealed and the respondent cross-appealed.
Held: The appeal was allowed. The cross-appeal was dismissed.
The provisions of clause 2(c) of the sub-subunderlease (the relevant lease) had to be interpreted by reference to the remainder of that document and against the admissible background, including the supplemental agreement. It did not, however, in general include the pre-contractual negotiations between the parties which were relevant only to rectification. For the purposes of interpretation, the court was confined to objective facts which both parties knew or which were reasonably discoverable to them. Pre-contractual negotiations could only be looked at for the purpose of establishing objective facts: ICS Ltd v West Bromwich Building Society [1998] 1 WLR 896 and Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 applied.
The parties knew about the terms of the B lease and that the rent payable by the respondent under that lease was above the market rent and clause 2(b) had been constructed so as to allow the appellant a reverse premium of £10m. The court accepted the appellant’s submission that the reference in clause 2(c) to the 2006 review date, being “the immediately preceding Review Date”, and that date alone, was clear. In those circumstances, the judge should have interpreted those words according to their obvious meaning. It was reasonable to suppose that the parties had agreed that the appellant should be liable only for rent reviews for the purpose of determining the rent for the period to which clause 2(c) applied. The reference in clause 2(c) to a single specific review date was consistent with clause 2(b). Therefore the judge should not have speculated that the bargain was that the appellant should receive £10m in return for taking a lease under which it would eventually pay the rent due to B.
There were circumstances in which the court might interpret a document so that it had the meaning which, read with the admissible background, the parties had clearly intended. It was not enough that the parties had mistakenly failed to provide for a particular circumstance. For the court to correct that error would be to rewrite the parties’ contract and to step beyond the permissible limits of interpretation. In all the circumstances, it was clear that the judge was wrong in his construction of clause 2(c).
The judge had fallen into error in holding that the correction of a mistake was justified where it looked as though the appellant was to receive £10m and in return take over the rent payable under the B lease. It had to be clear from the relevant lease and the admissible background both that there had been mistake and how it ought to be corrected before the court could proceed to interpret the contract as it had.
(2) As regards the respondent’s cross-appeal, the burden of proving that the requirements for rectification had been fulfilled lay on the party seeking rectification. It was more difficult to discharge the onus where the instrument was detailed and had been drafted, as in this case, with the benefit of expert legal advice.
The court had to apply an objective test to the parties’ communications and ask whether a reasonable observer would have concluded that the parties had a common continuing intention that the appellant would become liable for rent in an amount equal to the onerous rent payable under the B lease as soon as the rent reduction period came to an end.
In the present case, the shape of the transaction remained fluid until a late stage. The appellant was able to negotiate for further benefits, with success in the case of the £10m loan and there was no clear consensus that the respondent’s “line in the sand”, that it should not be exposed to the rent payable under the B lease after it had granted the reductions in rent of £10m, was agreed to be an essential element of any deal. In all the circumstances, the judge was right to dismiss the alternative claim in rectification.
Per curiam: The judge had heard two days of oral evidence but his judgment contained no reference to any of it: he obviously found it of no assistance. However, the judge ought to have explained in his judgment what oral evidence he had heard and briefly why none of it assisted him.
Jonathan Seitler QC (instructed by Norton Rose LLP) appeared for the appellant; John McGhee QC (instructed by Dundas & Wilson LLP) appeared for the respondent.
Eileen O’Grady, barrister