· A court will rectify a document
that, as a result of mistake by both sides, does not reflect their common
intention
· Claimants must provide convincing
evidence that the common intention continued up to the document’s execution
All professionals make mistakes from
time to time. When errors do occur, the hope is that they do not have drastic
consequences or that they can be put right. In the legal context, mistakes can
all too easily be made in the drafting of complex documents like leases, which
are often amended many times before the final version is agreed. If simple
clerical slips are picked up quickly, they can often be corrected by agreement
between the parties. However, if errors of substance have been made, especially
if their consequences do not materialise until many
years later, it will often be impossible to agree a solution, and the courts
may be called upon to decide whether the lease can be rectified.
City
of London Real Property Co Ltd v CGU International Insurance plc unreported 21 December 2000 illustrates the legal
principles involved in such a situation. In this case, the parties were arguing
the toss over a rent review clause contained in a lease executed over 20 years
previously.
In 1979 the claimant’s existing
lease of premises in Moorgate, in the City of London,
had 40 years left to run. It was keen to purchase the freehold at this time, as
it was negotiating an agreement under which it would refurbish the building and
then grant an underlease to a bank for a term of 20
years, subject to five-year upwards-only rent reviews. The landlord, however,
was unwilling to contemplate this, but was prepared to negotiate the grant of a
new, longer lease to replace the existing one.
It was agreed that this new lease
would be for a term of 120 years. The rent was to be geared to 20% of open
market rental value, reviewable upwards and downwards
every five years above the initial rent of £28,000 pa. The upwards and
downwards nature of the rent review was insisted upon by the tenant, although,
during negotiations, both parties acknowledged that the practical effect of the
tenant’s proposed underlease was that the reviews in
the headlease would be upwards-only for the duration
of that underlease.
The landlord’s first draft of the
rent review clause allowed either party to initiate the review; provided for a
rent review period rather than a predetermined review date; and required the
rent on review to be ‘whichever is the higher [of] an amount equal to 20% of
the open market rent on the relevant review date and twenty eight thousand
pounds (£28,000.00)’. The definition of open market rent was that for which the
premises might reasonably be expected to be let on the open market ‘with either
vacant possession or subject to any then subsisting tenancies (whichever shall
be the higher)’.
The tenant’s solicitor was not happy
with the concept of rent review periods, nor with the link to subsisting subtenancies. However, in its redraft, aimed at eliminating
these, it inadvertently replaced the provision under which both sides could
initiate the review with one under which the landlord only could do so. This,
of course, effectively changed the upwards and downwards review into one that
was, to all intents and purposes, upwards only. Nevertheless, both sides
continued to refer to the review in correspondence and reports to clients as
upwards and downwards, and the lease was eventually executed with the review in
the form proposed by the tenant’s solicitor.
In both 1984 and 1989 the tenant’s
rent was increased under the rent review provision. The evidence showed that by
1996 the tenant had realised that there had been a
mistake in the lease, but had decided not to press for a downwards review until
1999. However, in order to do so, it needed to have the lease rectified, since,
for obvious reasons, the landlord was not going to trigger any review that
would reduce the rent.
The relevant legal principles
governing rectification in these circumstances were not disputed. The tenant
had to provide convincing evidence that the lease did not reflect the parties’
continuing common intention that the review should be upwards and downwards.
The judge had no doubt that the initial bargain had been for an upwards and
downwards review, but two areas of difficulty remained.
First, had that intention been
reflected in the lease by the inclusion of a rent review that was, in form,
upwards and downwards, even though any downwards movement was, in practice,
unthinkable, given the landlord-only trigger provision? Second, had the redraft
of the rent review provision been the result of a fresh bargain, under which
the change to a landlord-only trigger had been a quid pro quo for deleting the reference in the landlord’s draft to
subsisting subleases?
The judge was quite satisfied
that the parties’ initial bargain had been for a lease that included a genuine
upwards and downwards review. The inclusion of a landlord-only trigger
provision, whether inadvertent(as seemed to be the case here) or under a
mistake as to its legal effect, did not reflect the parties’ common intention.
He also concluded that that intention had never altered. There was no evidence
that the changes to the rent review clause had been bartered for; this was
speculation as to what might have happened by one of the witnesses. By far the
most likely explanation was that both sides had, at the time, failed to pick up
on the practical impact of the amendment to the notice provisions within the
review clause. Accordingly, the judge was satisfied that rectification should
be ordered.
