JIS (1974) Ltd. v MCP Investment Nominees I Ltd.

In July 1989, the Defendants' predecessor in title, Sun Alliance and London Assurance Company Limited ("Sun Alliance"), agreed in principle with the Claimant for the grant of a lease of a site at One Legg Street, Chelmsford. The claimant had obtained planning permission to build an office building of some 70,000 sq. ft. Sun Alliance were to develop the building and grant a lease to the claimant. The local planning authority required the building to incorporate a small set of shop units on part of the ground floor amounting only to 2,990 sq. ft. Sun Alliance hoped to obtain planning permission to turn the shop units into offices.

The parties entered into an agreement for the lease on 1 December 1989. It provided for Sun Alliance to carry out the Landlord's works as defined, and by clause 7 provided for the parties respectively to grant and accept a lease of the premises in the form of the draft annexed to the agreement. Simultaneously with entering into the agreement for the lease, the parties entered into a supplemental agreement for an underlease of the shop units. Clause 1 of that supplemental agreement required Sun Alliance to take all reasonable steps to procure planning permission for the shop units to be used as offices. Clause 3 provided that, if planning permission had not been obtained by the practical completion date, then immediately after the grant of the lease of the shops, the claimant would grant to Sun Alliance an underlease of the shop units in the form of the annexed draft (which provided for a term of 25 years, less the last day). (By clause 2, if permission for office use of the units were obtained, the agreement would cease to have effect). To cater for the two alternatives, the parts of the draft lease which required to be adapted for the possibility of shop use (for example, the user clause) included the relevant parts in square brackets.

The building was duly completed, and the lease granted, on 8 January 1993. Because planning permission for office use of the shop units had not been received before practical completion, the underlease of the shop units was also granted by the claimant to Sun Alliance on the same day. The term of the lease as granted was 25 years commencing on 24 June 1991. Clause 1 defined the demise in the following terms:

Clause 5 of the lease contained an option for the tenant to determine the lease. This is at the heart of the present dispute:

The underlease of the shop units was for the same period as the lease, less the last day. The rent was nominal (whimsically described as "the yearly rent of one white rose"). This was a departure from the draft underlease, which had contemplated a rack rental. Another difference from the draft underlease, was that the latter had provided that the underlease and the reversion to the lease could not be assigned separately by the Landlord. This provision was not reproduced in the underlease as granted. Thus the underlease became a valuable asset in its own right.

In June 1999 Sun Alliance transferred their reversion, together with their interest in the underlease, to the Defendants. In subsequent discussions between the parties to the present proceedings, the Defendants took the position that, in order to exercise the option under Clause 5, the Claimants would need to give up vacant possession of the whole of the building, including the shop units, even though the latter are subject to the Underlease to the Defendants. This was said to be the consequence of the inclusion of the units in the definition of the "demised premises".

These proceedings were begun by the Claimants in May 2001 for a declaration that, either by construction or as an implied term, the requirement in Clause 5 for vacant possession should not extend to the shop units ("the construction issue"); alternatively, for rectification of the lease to achieve that effect ("the rectification issue").

Formally there are two appeals before us, although relating to the same subject matter. The first (with permission of the judge) relates to the order of Mr Justice Hart on 20 June 2002, dismissing the part of the claim relating to the construction issue. The second relates to the rectification issue. That claim was summarily dismissed by Deputy Master Cousins on 28 May 2002, but Mr Justice Hart, at a hearing immediately following the judgment on the construction issue, granted permission to appeal and allowed the appeal. On 16 August 2002 Lord Justice Robert Walker granted the Defendants permission to cross-appeal on the rectification issue, and directed that the Court of Appeal should have the opportunity to consider the two issues "together and in the round".

The judge summarised the issue between the parties:

The judge agreed with the Defendants on this point, and so do I. The starting point must be the wording of the contract. The judge referred to some extracts from recent authorities about the admissibility and relevance of evidence as to the background of the contract. (We have also been shown an illuminating paper by Mr Lewison himself, his 2002 Blundell lecture "Interpreting Property Documents - How Far Has The Law Come?"). I do not see any need to review those cases, because, whatever the limits of admissible background information, it is only of assistance insofar as it may throw light on the meaning of the language as used by the parties. In Melanesian Mission Trust Board v Australian Mutual Provident Society [1997] 2 EGLR 128 in the Privy Council Lord Hope said:

Here the language of the contract is all too clear. "Demised premises", for the purposes of the break clause, are defined as including the shop units. To put it beyond doubt, the schedule says that they are excludedonly for the purpose of the rent review. That is what the language says, and no amount of background evidence will change that stark fact. For the same reason, there is no room for implying terms, since it is a basic rule that an implied term must not contradict any express term of the contract.

The only tenable argument for the claimants is based on the court's power to correct an obvious error. Mr Brock says that it is obvious that the parties made a mistake in relation to the break clause. It can be corrected simply in the definition of "demised premises", to which I have referred. There is already a parenthesis excluding the shop units in relation to the rent review provisions; this exclusion, he says, should also apply to the break clause.

No doubt the court has power in certain circumstances to correct obvious errors as part of the exercise of construction rather than rectification. That was recently affirmed by the House of Lords in Homburg Houtimport BV and Others v Agrosin Private Ltd and Another [2003] 2 WLR 711, [2003] UKHL 13, where Lord Bingham said at paragraph 23:

The high point of Mr Brock's argument on this point is by analogy with the decision of this court in Holding & Barnes Plc v Hill House Hammond Ltd (No 1) [2002] L & TR 7, 103. It is necessary to see what was said in that case in the context of the facts. It related to the sale of an insurance business under which there were to be granted seven leases, two of which related to complete buildings and five to parts of buildings. All seven leases contained landlord's repairing covenants. One of the leases of a complete building ("The Ilford lease") contained a covenant in the following form:

Mr Brock relies on the statements in the leading judgment of Lord Justice Clarke with which Lord Justice Peter Gibson also agreed. Lord Justice Clarke referred to the recent cases on interpretation of contracts, including BCCI v Ali (above) and the statement of principles by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912-913. Those cases emphasise the importance of looking at contracts against the background as known to the parties. Lord Justice Clarke then referred to the cases on rectification, in particular, the judgment of Lord Justice Brightman in East v Pantiles Plant Hire Ltd [1982] 2 EGLR 111 at 112 where he said:

Following that guidance, the judge in the present case said:

As I said, it is important to see the judgments in Holding & Barnes in the factual context. The clause as it stood was an obvious nonsense on its face. Whether one describes that as a clerical error, whatever precisely that means, or, perhaps its more modern equivalent, a word processing error, it was clearly a nonsense and it was also clear what the alternative should be. Although Lord Justice Clarke referred to the need to take into account the background knowledge of the parties, the background knowledge to which he was referring was in fact very limited. It simply involved a comparison with the other leases, and the knowledge that they were all entered into at the same time as part of the same transaction. By comparison with the other lease, it was quite clear what was intended.

In my view that does not help Mr Brock in this case. The break clause is not obvious nonsense on its face. The complaint is that, when one analyses the lease and the underlease in more detail, one can see that the clause is practically inoperable. The tenant can only give vacant possession of the shop units to the landlord if either it can first buy the underlease back from the landlord/underlessee, or if it comes to an end for some other reason. Neither, it is said, would have been a possibility which was in the contemplation of the parties. The former would imply that the landlord could, in effect, prevent the exercise of the option by refusing to sell. The latter was very unlikely because of the intrinsic value of the underlease, and contrary to the intention of the parties who contemplated the underlease extending effectively for the same period as the lease.

This argument is powerful and certainly relevant to rectification. However, in my view the problem is quite different from the obvious nonsense which was corrected in Holding & Barnes. The task of interpretation does not allow the court to rewrite the contract.

That view is enough to dispose of the construction issue. I should mention a further difficulty raised by mr Lewison. He says that correcting the mistake is not as simple as Mr Brock suggests. It may not be enough simply to exclude the shop units from the demised premises for the purposes of the break clause. Any re-draft would have to take account of the possibility, not only of the grant of occupational sub-tenancy to the units, but also of the sale of the underlease itself as a separate asset (which the 1993 transaction, unlike the earlier draft, permits to be done). The operation of the break clause in the lease would (in the absence of provision to the contrary) have the effect of terminating not just the lease but also the underlease, and any inferior sub-tenancies. That is the effect of Pennell v Payne [1995] QB 192, approved by the House of Lords in Barrett v Morgan [2000] 2 AC 264. Thus those interests would lose any capital value they retain and might have claims for damages against their respective landlords for breach of the covenant for quiet enjoyment. There would therefore need to be some provision to preserve these interests.

Mr Brock's answer to that is that in 1993, before Pennell v Payne, the parties would have had a different view of the law, and should be taken as having contracted with that in mind. He gains some comfort from BCCI v Ali, where a reference in a 1990 contract to "claims which exist or may exist", was interpreted by reference to claims which might reasonably have been in contemplation at the time, not claims which were only made possible by a House of Lords' decision seven years later which "developed or, more bluntly, changed the law" (see Lord Nicholls, paragraph 33).

I do not find that answer convincing. The question in Ali was what the parties had in mind in the words they actually used in the contract, rather than, as here, what they might have had in mind in relation to words they did not use. Further, although the law as settled by Pennell was a departure from previous authority, it cannot be said that the previous law was so clear the other way that it can be assumed that this point would have been ignored. In Lord Justice Simon Brown's judgment in Pennell at page 201 he summarised the effect of the various text books prior to the date of that decision. As he said, some - including Foa's General Landlord and Tenant Law 1957 Edn, and Woodfall in the current edition - took the view which the Court of Appeal subsequently adopted in Pennell. I also note that in her evidence in the present proceedings, Mary Ball, the Sun Alliance's in-house legal adviser at the time of the leases, when asked about what the parties would have done on this point, said:

However, I prefer not to decide the construction issue on this point. The problems which Mr Lewison raises are entirely hypothetical, and I am far from convinced that they would be problems in practice. I prefer therefore to rest my decision on the short point that the error is not an obvious nonsense, as in the cases to which I have referred.

Having found against the claimants on the construction issue, the judge heard argument and gave a separate judgment on the rectification issue. Here we are not reviewing a final judgment after trial. The question is simply whether the judge was right to say that this was not so clear a case that summary judgment was appropriate.

The principles for rectification are not in dispute. They are conveniently summarised by Lord Justice Peter Gibson in Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71, [2002] EWCA.Civ 560 at paragraphs 33 to 34. He said:

The suggested rectification was pleaded in the claim. There were three alternatives, all of which have the same effect. I shall take the proposed amendment to the definition of the demised premises in Clause 1 (italicised in para 3 above) -

Mr Brock explains that the reference to the area over which practical control was exercised, read as at the time of the letter, was looking forward to practical control at the time of the lease which, depending on whether permission was granted for office use, might or might not include the units. That, I think, accords with the way he put the point to the judge; the judge (at page 6) refers to his summary of his case:

The evidence before the judge included statements not only by those who had represented the claimants in the lease negotiations which were before the deputy master, but also two witnesses for the defendants' predecessor, the Sun Alliance: Mr Mark Pendower, their chartered surveyor, and Mary Ball, their in-house lawyer to whom I have already referred.

Mr Pendower (at paragraph 8) commented on the suggestion made by the defendants that, because vacant possession cannot be given of the whole of the property, the break option cannot validly be exercised. He said this:

Mary Ball, commenting on the same argument at paragraph 12, said:

The main point made by Mr Lewison is that that evidence does not go far enough. It shows what the parties would have done if they had thought about it. It does not show any shared intention to do anything about it at the time, still less any agreement or accord to that effect. He relied on the familiar passage in Frederick Rose Ltd v William Pim & Co Ltd [1953] 2 QB 450 where, at the top of page 462, Lord Justice Denning said:

Mr Lewison also relies on the decision of this court in Kemp v Neptune Concrete Ltd [1988] 2 EGLR 87 at 90G where Lord Justice Purchas explained the first criterion for rectification:

The judge considered the very similar arguments as put to him. He noted that, as Mr Brock conceded, shared intention was not enough, at least as the authorities stand, unless there was some "outward expression" of that intention. He continues as follows:

Thus he had two grounds of decision: the first that an outward expression of the common intention may not be necessary, if it is so obvious that it need not be stated; and the second that, on the facts of this case and on the state of the evidence, it would be wrong to shut it out without going to trial. It has to be borne in mind, as Mr Brock urges upon us, that we are at a very early stage where there has not been disclosure of the documents which may be in the defendants' possession. Of the two points, I can see room for argument about the first ground. For my part, I would not exclude the possibility of their being some development of the strict Rose v Pim principles to cover the case where there is an obvious common assumption, as the judge suggested. However, it is unnecessary to decide whether the case for rectification would succeed. It is enough to find, as I do, that the judge's second ground of decision represents an entirely proper exercise of his discretion.

As he said, it was a striking feature of this case that there was wholly credible evidence from both parties to the contract, speaking with one voice as to their shared intentions. It was quite clear that a mistake was made, and that if it had been drawn to the parties' attention they would have made sure it was corrected. It was intended that the break clause should work, and not be subject to a stranglehold by the landlord.

The only question is how precisely they would have corrected it, in particular having regard to the effect on inferior interests. However, as Miss Ball says, it would not have been regarded as a significant problem, particularly bearing in mind that it concerned only 3,000 sq ft, of no commercial interest to either party, in a building of more than 70,000 sq ft. As Swainland makes clear, on rectification, the court's powers are much more flexible than when simply correcting an "obvious error": see Lord Justice Peter Gibson at paragraph 44.

This view of the present case is not inconsistent with the passage I read from Kemp v Neptune. In that case the parties had agreed in negotiations that the six years should be extended to 12 years, but had failed altogher to address the issue of a second rent review. The court would not manufacture an agreement on that point. In this case detailed consideration had been given to the break clause; the only oversight was in relation to a detail which was of no practical significance in the negotiations to either party.

On this issue also I would uphold the judge's decision.

LORD JUSTICE BUXTON: I agree.

LORD JUSTICE KENNEDY: I agree.