Cherry Tree Investments Ltd v Landmain Ltd

The appellant (“Landmain”) is the registered proprietor of 2, Battersea Rise, London SW11 1ED (“the Property”). It is in dispute with the respondent (“Cherry Tree”) over the validity of the transfer to it of the Property by Dancastle Associates Ltd (“Dancastle”). Dancastle sold the Property to Cherry Tree in exercise of the power of sale granted by a registered charge dated 30 July 2010 (“the charge”) read with a facility agreement of the same date (“the facility agreement”). The charge, but not the facility agreement, was registered at HM Land Registry. Landmain executed both documents. Landmain contends that no sum secured by the charge had become due under the terms agreed for repayment before the sale to Cherry Tree. That is not, however, the dispute which the court had to determine on the application which is now the subject of this appeal. That application sought to by-pass that dispute.

It is critical to the validity of the sale to Cherry Tree that the provisions of the facility agreement varied or extended the statutory power of sale. If they did so, it was unnecessary to show that any sums had become due at all. Landmain, however, contends that the statutory power of sale applied without any variation because it had not been varied or extended by the charge itself. Before I formulate in more detail the issues to be determined on this appeal, I need to explain the nature of the statutory power of sale and how it can be varied or extended.

The statutory power of sale is one of the statutory powers conferred on mortgagees by section 101 of the Law of Property Act 1925 (“the 1925 Act”). It applies to a mortgage created by a deed, and a mortgage is defined by the 1925 Act to include a legal charge. Section 101 of the 1925 Act provides that in the case of such a mortgage or charge the mortgagee has certain powers by implication of law. They need not be set out in the mortgage itself. These powers include a power of sale. This power of sale is exercisable only once the mortgage monies have become due in accordance with the terms agreed for repayment.

Section 101(3) of the 1925 Act provides that the mortgage deed may vary or extend the statutory power of sale. It may also exclude the whole or part of section 101 (section 101(4)). It is section 101(3) which is relevant for our purposes:

“(3)

The provisions of this Act relating to the foregoing powers, comprised either in this section, or in any other section regulating the exercise of those powers, may be varied or extended by the mortgage deed, and, as so varied or extended, shall, as far as may be, operate in the like manner and with all the like incidents, effects, and consequences, as if such variations or extensions were contained in this Act.”

Accordingly, any variation or extension of the statutory power of sale must be effected by the mortgage deed or charge itself and not by some separate agreement between the parties. In the present case, clause 12.3 of the facility agreement provided as follows:

“The security constituted by the Legal Charge of the Property shall be immediately enforceable and the power of sale and other powers given by section 101 of the Law of Property Act 1925 (as varied or extended by the Legal Charge) shall, as between the [Dancastle] and [Landmain] arise on the execution of the Legal Charge and be exercisable at any time after that execution, but [Dancastle] shall not exercise the power of sale until the security constituted by the Legal Charge has become enforceable as above.”

So, if Cherry Tree can show that the statutory power of sale was effectively varied by clause 12.3, notwithstanding that it does not physically appear in the charge as executed, the statutory power of sale became exercisable immediately on execution of the charge. It was not necessary to wait until there had been a default by Landmain. Such a clause would be unusual in a term loan. However, when it is used, it is effective in law. Furthermore, by virtue of section 104(2) of the 1925 Act, Cherry Tree, as a purchaser from a chargee selling under the statutory power of sale, would also be free from any obligation to see whether the statutory power of sale had been properly exercised.

The issues to be decided on this appeal can now be formulated in more detail. There are three questions.

The first is the novel question whether the charge and the facility agreement can be interpreted together for any purpose having regard to the fact that the charge alone is registered at the Land Registry pursuant to the Land Registration Act 2002 (“the 2002 Act”). The register is open to inspection by members of the public, and the public may inspect documents filed at the land registry. The courts have not previously considered that question. So far as the charge is concerned, the facility agreement is “extrinsic” evidence because it is not incorporated into the charge by some suitable wording.

The second question is whether, if the answer to the first question is yes, the court can correct by interpretation the mistake made by the parties in not varying the statutory power of sale in the charge itself.

The third question is whether, if the answer to the first and/or second question is no, the charge and facility agreement constitute in law a single document so as to meet the requirement for any variation of the statutory power of sale to be contained in the charge.

Before I develop the parties’ cases on these questions, I need to explain the form of the security arrangements in this case in a little more detail.

The facility agreement was entered into on 30 July 2010 to secure a bridging facility of £635,000, to be drawn down in full on 30 July 2010 and repayable on 30 January 2011. Clause 12.3 of the facility agreement, set out in paragraph 5 above, provided that the monies secured by the charge should become immediately due on execution of the facility agreement. Clause 12.3 therefore differed from the statutory power of sale, which was exercisable only if the monies secured by the charge had become due. Landmain indeed accepts that point.

The charge was in Land Registry form CH1. This form contains a box for completion with details of the amounts secured by the charge and dates when they became repayable. Unfortunately, the parties failed to complete this box so on the face of the charge nothing is secured by it. Nonetheless the charge was registered at the Land Registry. The register is divided into three parts: the property register, which provides a description of the land in the title, the proprietorship register, which states the name and address of the legal owner and the nature of his title, and the charges register, which contains details of charges and other rights and interests which affect the property, such as leases. In the present case it is not clear whether the original charge or a copy of it was filed with the application for registration. The charge appears in the charges register for the Property with the following entry:

“2.

(17.09.2010) Registered Charge dated 20 July 2010.

3.

(17.09.2010) Proprietor: Dancastle Associates Limited (Co Regn. No. 01487107) of 1, Dancastle Court, Arcadia Avenue, London N3 2 JU.”

Dancastle applied for a restriction to be inserted in the proprietorship register for the Property, which was duly made. This provides that the prior written consent of the proprietor of the charge is required for any disposition of the registered estate in the Property. So anyone inspecting the charges register would learn that there was a charge in favour of Dancastle. He could inspect the filed document, which may have been an original or a copy. The effect of the registration of the restriction was that Dancastle was protected against the risk of subsequent disposition by Landmain of legal interests in the Property without its consent. The problem, however, that has arisen is on a disposition by Dancastle itself.

In December 2010 Dancastle served notice on Landmain that the monies secured by the facility agreement had become immediately due and payable. Landmain disputed this notice on the grounds that under the facility agreement Dancastle was not in a position to serve such a notice unless an event of default had occurred, which it contended had not happened. Nonetheless, Dancastle went ahead and sold the Property at auction to Cherry Tree with full title guarantee. That meant that Dancastle warranted that it had the right to dispose of the Property (Law of Property (Miscellaneous Provisions) Act 1994, section 2(1)(a)). Cherry Tree did not know of the dispute between Dancastle and Landmain at the time the Property was sold to it.

Cherry Tree took a transfer of the Property on 6 January 2011, but when it applied to the Land Registry to register this transfer, it was unable to obtain registration due to the objections of Landmain. Accordingly Cherry Tree brought these proceedings seeking an order of the court for registration of its name as owner in the proprietorship register.

Cherry Tree then applied for summary judgment in these proceedings on the basis that there was no answer to its claim if, as it contended, the statutory power of sale had been varied by clause 12.3 of the facility agreement and the monies secured by the charge had become due on execution of the charge. On that basis, the court was not concerned to decide whether the monies secured by the charge had in fact become due. Landmain accepted that, if Cherry Tree established that the power of sale was exercisable immediately on the execution of the charge, the transfer was effective to pass title to the Property. Cherry Tree for its part accepted that, if it could not establish this, its application for summary judgment would fail.

HHJ Pelling QC heard Cherry Tree’s summary judgment application and he found in favour of Cherry Tree. He was not invited to consider the first question set out in paragraph 8 above. He determined the second question in favour of Cherry Tree and the third in favour of Landmain.

The judge was persuaded that the facility agreement and charge had been executed as part of a single transaction and that they could be treated as one. In addition, he held that the parties obviously intended the power of sale in the facility agreement to be effective. He further held that they were mistaken in their belief that it had been effectively varied by the facility agreement. He held that, because of this mistake, the charge should be read as if the variation to the statutory power of sale in clause 12.3 of the facility agreement had been incorporated into the charge. In those circumstances, the charge effectively extended the statutory power of sale, and so the sale to Cherry Tree was valid and effective. The judge, however, rejected the argument that the facility agreement and the charge constituted a single document for the purposes of section 101(3) of the 1925 Act, but this did not affect the result. Cherry Tree obtained summary judgment on its claim. Landmain appeals from the judge’s order.

Before I turn to the issues raised by this appeal, I should say a little about the general principles of interpretation. These are to be found in the well-known passage from the speech of Lord Hoffmann in Investors’ Compensation Scheme Ltd v West Bromwich BS [1998] 1 WLR 896 (“ICS”). Lord Hoffmann there set out five principles (“the ICS principles”). The significant point to note for the purposes of the first issue on this appeal is that Lord Hoffmann explained that interpretation is not just about finding the ordinary or natural meaning of words in a document. The court has to find the meaning that the document would convey to a reasonable person having the background known or available to the parties. That meant that the approach was contextual and not purely objective. It achieves greater approximation to the meaning the parties would have intended than merely taking dictionary meanings of words. Accordingly the court will in general have to have regard to the background. In the present case, the facility agreement forms part of the background against which in principle the charge would be construed by the court.

These points appear from the first four of the ICS principles, which were as follows:

“(1)

Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)

The background was famously referred to by Lord Wilberforce as the 'matrix of fact', but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

(3)

The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.

(4)

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax (see Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749.”

The second principle raises an important point for the purposes of this appeal. The background made admissible by this principle is not limited to the information which would be available to third parties at the time it comes to be interpreted by the court. This court so held in KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363. The admissible background is that which is reasonably available to the parties at the date of execution. In this respect there is a difference between English law and the law of New South Wales, as explained by Campbell JA in Phoenix Commercial Enterprises v City of Canada Bay Council [2010] NSWCA 64, paragraph 151. In addition, in this jurisdiction, though not in Australia, it is not necessary to show that there is an ambiguity before the court looks at the surrounding circumstances.

Some extrinsic material will be known or capable of being known to third parties, for example publicly known facts about the existence of some statutory right or the physical features of the land. What is in issue in this case is whether the court should exclude “party specific” extrinsic material. This would include a supplemental agreement made between the parties that does not appear on the register, such as the loan agreement in this case.

Lord Hoffmann went on to state a fifth principle to deal with the situation where parties make a mistake in what they had recorded in their written agreement. That principle is relevant to the second issue. I will, therefore, set out the fifth principle when I come to that issue.

This issue emerged for the first time in this court, and it is logically the first issue. It raises the question of the impact on the ICS principles of the fact that the charge alone was registered at the Land Registry. Accordingly I must first introduce the relevant features of the land registration system.

As Rimer LJ put it in Franks v Bedward [2011] 3 EGLR 39 at paragraph 25:

“Subject to exceptions, the register is intended to provide a comprehensive and accurate reflection of the state of the title of registered land at any given time, so that it is possible to investigate title to land online with the minimum of additional enquiries and inspections.”

This is primarily achieved by the provision in the 2002 Act that registration is conclusive as to title, and this is so even if a disposition would not otherwise have been effective, for example, because it was void. Thus section 58 provides:

“58 Conclusiveness

(1)

If, on the entry of a person in the register as the proprietor of a legal estate, the legal estate would not otherwise be vested in him, it shall be deemed to be vested in him as a result of the registration.

(2)

Subsection (1) does not apply where the entry is made in pursuance of a registrable disposition in relation to which some other registration requirement remains to be met.”

The entries in the register and the documents referred to in the register are open to public inspection under section 66(1) of the 2002 Act. Registration is the only way in which a legal interest can be acquired if a disposition is required to be registered: section 27(1) of the 2002 Act. In the case of the charge registration had the consequence, under section 51 of the 2002 Act, that the charge took effect as a legal charge. Without registration, the charge would have had the lesser status of an equitable charge, conferring no power of sale without an order of the court. In addition, by virtue of section 30(1) of the 2002 Act, registration meant that the charge had priority over prior dispositions that were not registered at the Land Registry but which had been executed before the date on which the charge was registered. Dancastle was therefore protected by registration against the risk that Landmain might execute further charges having priority over its charge.

However, the register is not conclusive as to the state of the title in all cases. For instance, not all interests are registrable. An example of a non-registrable interest would be a lease for less than seven years. In addition, a squatter may acquire the right to land by adverse possession. Furthermore, in general “the general boundaries rule” applies and this means that the register is not conclusive as to the boundaries of a property. Moreover, the court and the registrar have powers, albeit limited by the 2002 Act, to rectify the register. In addition, the parties may have entered into an agreement varying the terms of a filed document. There is in general no obligation to file a deed of variation though it may be filed and must be filed if it involves a further registrable disposition (see Ruoff & Roper, Registered Conveyancing, paragraph 18.005.01).

Various decisions of the court also demonstrate that the conclusiveness of the register is in this jurisdiction qualified. Thus, for instance in Scottish & Newcastle plc v Lancashire Mortgage CorporationLtd [2007] EWCA Civ 684, this court held that a mortgagee was estopped, as a result of communications which did not appear on the register, from asserting that its charge had priority even though its charge had been registered on the register first. Thus the charge had a different priority from that appearing from the register.

Another exception would be that of rectification of a document already on the register. As to the rectification of documents, the 2002 Act provides in substance that a mere right to have a document rectified is a proprietary interest which is liable to be postponed unless it is registered (see section 116). This caveat protects the interests of the third parties who need to be protected, namely those who already hold registered interests in the property in question. Where parties are agreed that they should amend a document, and wish to register a deed to do so, Rule 113 of the Land Registration Rules 2003 sets out the procedure. Rule 113 requires consents to be obtained from certain persons, including the proprietors of “every other registered charge of equal or inferior priority that is prejudicially affected by the variation”. Rule 113, therefore, defines those who under the land registration system have interests which have to be protected.

I have already explained in paragraph 13 above that the register is divided into three parts, the property register, the proprietorship register and the charges register. I have also explained in paragraph 28 above that the register and documents referred to on the register are open for public inspection. The documents may be originals or copies (such as photocopies, extracts from documents and abstracts of title). Where the documents are copies, section 120 of the 2002 Act provides for the conclusiveness of the filed documents. This is to protect third parties and to reduce the enquiries that a person needs to make before taking an interest in the property in question. Since section 120 deals only with copies, it does not apply where the original has been filed. In my judgment, it is therefore concerned only with discrepancies between original and copy documents and does not of itself alter the substantive law as to the effect of a document. I will need to deal with an argument based on section 120 in paragraph 52 below but it is convenient to set it out at this stage. It provides:

“120 Conclusiveness of filed copies etc

(1)

This section applies where—

(a)

a disposition relates to land to which a registered estate relates, and

(b)

an entry in the register relating to the registered estate refers to a document kept by the registrar which is not an original.

It is clear that in practice it is not uncommon for parties to execute supplemental agreements which are not registrable (for an example, see paragraph 38 below). It is also not uncommon for purchasers of property to require the vendor to prove his title to land. With this short explanation of the relevant features of the land registration system I turn to counsel’s submissions.

Mr Edward Francis, who appears for Landmain, submits that in general, under the ICS principles, a document is to be interpreted against the admissible background facts that were known or ought reasonably to have been known by the parties. Those would include the execution of the contemporaneous facility agreement. However, on his submission, this is not the usual case since the register is open to inspection by members of the public. In those circumstances extrinsic evidence as to the background is inadmissible as an aid to the interpretation of the charge. For this reason also, the judge should not have interpreted the charge as incorporating clause 12.3 of the facility agreement.

Mr James Pickering, on the other hand, who appears for Cherry Tree, submits that it is irrelevant that the register is open to inspection by the public as the charge is only capable of being enforced as between the parties to it. Both Landmain and Dancastle knew that the power of sale had been varied by the facility agreement and there is thus no prejudice to any relevant third party in admitting the terms of facility agreement as an aid to interpretation of the charge.

For the reasons given in paragraphs 37 to 60 below, I conclude that registration at the land registry does not prevent the court from using extrinsic material as an aid to interpretation of the charge provided that the court can be satisfied that the interpretation involved would not prejudicially affect the rights of any third party. The charge is not to be treated as addressed to third parties simply because a third party might have inspected the register. Only third parties to a subsequent disposition are likely to be prejudicially affected. In this case, Landmain has not created any further interest in the Property which might be prejudicially affected by interpreting the charge in the manner sought on Cherry Tree’s application. The charge will be discharged if the charge is interpreted in the manner sought by Cherry Tree. Therefore there is no objection to the admission of extrinsic evidence in this case. I have six reasons for my conclusions.

My first reason is this. The principle that the courts should, when interpreting a contract, have regard to the background against which it was made is an integral part of the approach to contractual interpretation in the ICS case. Interpretation on the ICS principles is always to be preferred since it is more likely to achieve the meaning which the parties would themselves have intended than simply finding the dictionary meaning of words. It increases party autonomy, that is the control which the parties have over their own agreements. It is consistent with the general approach of English law which is to enable parties to make such contracts as they choose. The exclusion of background material from the process of contractual interpretation should be the exception rather than the rule.

It follows that it would constitute a significant invasion of party autonomy if the court held that extrinsic evidence could never be admitted to a document whenever it had been registered at the Land Registry. In Scottish Widows Fund and Life Assurance Society v BGC International [2012] EWCA Civ 607, there was a dispute, as between the original parties to a sub-sub-underlease (“the relevant lease”), with regard to the meaning of terms in the rent clause. The claimant claimed corrective interpretation by reference to a supplemental agreement which was not incorporated into or referred to in the relevant lease. The relevant lease was required to be registered at the Land Registry just like a charge. The claimant failed in this court on that point not because the supplemental agreement had to be left out of account but because when the two documents were read together they did not lead to the result which the claimant sought (see paras 24, 28, 29). The claimant also claimed rectification and the judgments show the different nature even today of claims for corrective interpretation and claims for rectification. The effect of the argument in the present case is that the court could not grant relief by way of corrective interpretation in relation to any contract registered at the Land Registry as between the parties to it. In my judgment, the court should not reach that result unless it is compelled to do so.

My second reason is that, while there is no authority on the use of extrinsic material to interpret a registered charge, there is authority that supports the proposition that the mere fact that a document is registered on a public register does not mean that extrinsic evidence should not be used as an aid to interpretation. In particular, Lord Hoffmann at paragraph 40 of his judgment in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 WLR 1101 addressed the argument that it was in some cases unfair to third parties to refer to the background material as an aid to interpretation. He rejected the fact that a person might take an assignment of a contract as a good reason for excluding background material. However, he recognised that, where a document was addressed to third parties it could be unfair if extrinsic evidence was taken into account in the interpretation of a document. He gave the examples of a company’s articles of association and a bill of lading. Chartbrook represents the latest authority on the subject of the admission of extrinsic evidence as an aid to interpretation. It must therefore be taken to have superseded earlier inconsistent statements on this topic, and to represent the state of the law in this jurisdiction.

Lord Hoffmann held:

“The law sometimes deals with the problem by restricting the admissible background to that which would be available not merely to the contracting parties but also to others to whom the document is treated as having been addressed. Thus in Bratton Seymour Service Co Ltd v Oxborough [1992] BCLC 693 the Court of Appeal decided that in construing the articles of association of the management company of a building divided into flats, background facts which would have been known to all the signatories were inadmissible because the articles should be regarded as addressed to anyone who read the register of companies, including persons who would have known nothing of the facts in question. In Homburg Houtimport BV v Agrosin Private Ltd, The Starsin [2004] 1 AC 715 the House of Lords construed words which identified the carrier on the front of a bill of lading without reference to what it said on the back, on the ground that the bankers to whom the bill would be tendered could not be expected to read the small print. Ordinarily, however, a contract is treated as addressed to the parties alone and an assignee must either inquire as to any relevant background or take his chance on how that might affect the meaning a court will give to the document. The law has sometimes to compromise between protecting the interests of the contracting parties and those of third parties. But an extension of the admissible background will, at any rate in theory, increase the risk that a third party will find that the contract does not mean what he thought. How often this is likely to be a practical problem is hard to say. In the present case, the construction of the agreement does not involve reliance upon any background which would not have been equally available to any prospective assignee or lender.”

The test for the exclusion of extrinsic material is thus whether the document is to be treated as addressed to third parties. Lord Hoffmann did not, for instance, suggest that the fact that the document had to be registered at a public registry was sufficient to exclude extrinsic evidence about the background. The test was satisfied in the case of a company’s articles of association, a point also made by Lord Hoffmann in his speech in Attorney General of Belize v Belize Telecom Ltd [2009] 2 All ER 1127. In determining persons to whom a document is to be treated as addressed the court has to consider whether account has to be taken of their interests. Lord Hoffmann does not exclude the possibility of dealing with the problem of fairness to third parties in ways other than excluding extrinsic evidence altogether.

Lord Hoffmann’s test does not follow the precise reasoning of this court in the case that he cites, namely Bratton Seymour Service Co Ltd v Oxborough. That decision was primarily influenced by the special nature of the contract contained in a company’s articles of association, in particular the fact that on registration at Companies House a company’s articles are deemed by statute to constitute a contract between the company and its members, whenever they became members.

The difference in reasoning, however, between Lord Hoffmann and this court was not one of principle. Lord Hoffmann’s reason is simply formulated at a higher level of abstraction, namely that the articles have to be regarded as addressed to persons who had not been involved in agreeing them in the first place. (This principle could be applied to other documents, such as the bill of lading in The Starsin.)

Articles of association have special characteristics that justify the conclusion that they are to be regarded as addressed to third parties as well as to the shareholders at the time of their adoption. There is often a substantial number of other persons who have to rely on them and they may be in force for many years. Registration gives constructive notice of their contents to the entire world: Ernest v Nicholls (1957) 6 HL Cas 401. Third parties frequently have to rely on a company’s articles of association to determine the powers of its directors. In addition, it is well established that articles of association cannot be rectified by the court (see the BrattonSeymour case). As I shall show, this is not the case with documents creating interests in land.

In the case of articles of association, therefore, the balance to be struck between the shareholders at the date of their adoption and third parties comes down in favour of protecting the third parties. Protection is achieved by the total exclusion of extrinsic evidence. The position was the same in The Starsin, although the document in that case was a bill of lading. It is necessary to consider how far these points apply to a registered charge, which brings me to my third reason.

My third reason is that there is no provision in the 2002 Act which expressly prevents the interpretation of a document filed with the registrar in accordance with any of the ICS principles. This does not of course prevent the conclusion that the 2002 Act does so by implication, but given that by the time of the passing of the 2002 Act the ICS principles had been laid down and been the subject of discussion it is perhaps remarkable that some provision was not made if the power of the courts to admit extrinsic evidence as an aid to interpretation of a registered document was to be excluded.

My fourth reason is that the 2002 Act recognises that registered documents may be rectified (see paragraph 31 above). Rectification of a registered charge would in the normal course involve the use of extrinsic material. There is no reason in principle why the 2002 Act should allow rectification of a document by order of the court, but not corrective interpretation by a court, if there is no third party who is liable to be prejudicially affected.

My fifth reason is that the land registration system in general adopts the policy of not interfering with the rights of the parties to a disposition as between themselves unless it is necessary to do so to achieve the purpose of land registration (as to which see paragraph 26 above). So a party can enforce a right to have an instrument rectified against the other party. The right is not lost even if it is not registered unless a third party takes a prior interest which prevents it. Likewise if a defective copy of an original document required to be filed with the registrar is so filed, third parties are not affected by parts of the original not included in the filed copy but the position as between the parties to the original disposition is unaffected by the discrepancy: see section 120 of the 2002 Act (set out in paragraph 32 above). In addition, the Land Registration Rules provide for deeds of variation to be filed where errors in expressing the terms of an instrument are discovered. Variation is not prevented by registration but permitted provided third parties are protected. Land Registration Rule 113 sets out the way in which they are to be protected. However the point remains that the mere fact of registration does not prevent the parties from agreeing to amend a filed document if they choose to do so. My preferred conclusion is therefore consistent with other instances in the land registration scheme of not interfering with contractual rights of parties to a disposition of land as between themselves.

My sixth reason is that none of the remaining objections raised in this case to my conclusion are sustainable. There are three such objections, which I shall call “remaining objections”. Firstly, it is said that the land registration system prevents the admission of an unregistered document such as the facility agreement for the purpose of construing a registered charge in the circumstances which I have described. In his invaluable work on The Interpretation of Contracts, 9th ed at paragraph 3.17 (page 160) and paragraph 11.03, Lewison LJ drew attention to the fact that the Australian courts were “much more cautious” about admitting background material as an aid to interpreting conveyancing documents relating to registered land in Australia. It is well-known that in Australia there is a system of land registration which is a form of that known as the Torrens system of registration. Lewison LJ writes:

“… the courts of Australia are much more cautious in admitting extrinsic evidence in interpreting conveyancing documents (e.g. grants of easements) because the Torrens system of land registration is dependent on a publicly accessible register. It is not clear whether this approach will be applied in New Zealand. Whether the move in England and Wales to a system of title by registration (rather than registration of title) as a result of the Land Registration Act 2002 will cause a shift in prevailing judicial attitudes to the admission of extrinsic evidence to interpret conveyancing documents remains to be seen. However, the indications of the last few years are that the courts in England and Wales have become more rather than less willing to have recourse to extrinsic evidence in interpreting conveyancing documents”

The footnotes refer to Westfield Management Ltd v Perpetual TrusteeCompany Ltd [2007] HCA 45, a decision of the High Court of Australia. The court held that extrinsic evidence could not be used to interpret the scope of an easement. The High Court held:

“The third party who inspects the register cannot be expected, consistently with the scheme of the Torrens system, to look further for extrinsic material which might establish facts or circumstances existing at the time of the creation of the registered dealing and placing the third party (or any court seized of a dispute) in the situation of the grantee.” (paragraph 39)

The extension of an easement would if done by deed involve a disposition of land for the purposes of section 27 of the 2002 Act, and would thus be a situation in which, in my judgment, the rights of third parties would have to be protected. However, I do not consider that this court should take the same course as the High Court of Australia and exclude extrinsic material as an aid to interpretation altogether simply because the document requiring interpretation has been registered at the Land Registry. Indeed I consider that this case should not be treated as persuasive authority in this case for three reasons. First, it appears that the Australian courts have not adopted the ICS principles with regard to the admission of background material for all purposes as the general rule in contractual interpretation. Secondly, it appears even following the 2002 Act there are still some significant differences between the system of registration under that Act and that of the Torrens system adopted in Australia and New Zealand (see generally Megarry & Wade 8th ed paragraph 6-040). Thirdly, no consideration is given to the possibility of using extrinsic evidence as an aid to interpretation in a case where third parties are not affected.

The second remaining objection is based on section 120 of the 2002 Act, which is set out in paragraph 32 above. It is said that section 120(2)(b) prevents the admission of extrinsic evidence as an aid to interpretation of the charge. This assumes that the filed document is a copy. In fact, as explained above, it may be an original in which case section 120 has no application. Even if it is a copy, I do not consider that section 120 has the effect that extrinsic evidence cannot be admitted for the purposes of interpretation in this case for the following reasons:

The third remaining objection is based on the Privy Council case of Opua Ferries Ltd v Fullers Bay of Islands [2003] UKPC 19. This case concerned the interpretation of details of a ferry service required to be placed on a public register for the information of the public, which therefore constituted a public document. The function of the register was to enable members of the public to inspect it, not to facilitate dealings on the faith of the register. Extrinsic evidence was rejected as an aid to interpretation. In the present case, however, the register serves a different purpose, namely that of facilitating dealings in land by simplifying the investigations necessary to prove title to land (see paragraph 26 above). In deciding whether extrinsic evidence should be admitted as an aid to interpretation of a document referred to on a public register, the court must take account of the function of the particular registration system. In the case of details of a ferry service, or indeed a company’s articles of association, third parties may have relied on the publicly-registered document in the way intended by the statutory requirements for registration as soon as the document is registered. In the case of land, however, a person is not prejudicially affected by a registered document unless and until he takes an interest in the land.

For all these reasons I consider that the issue for the court, when it is asked to admit extrinsic evidence as an aid to interpretation of a document available for inspection at the Land Registry is whether there are third parties who would be prejudicially affected by its admission. If there are or may be such third parties, extrinsic evidence should not be admitted as an aid to interpretation.

This conclusion does not go so far as the decision of this court in Franks v Bedward in relation to the day list, that is, the record maintained by the registrar of the date and time of pending applications for registration or applications for priority searches. This list is critical to the registration process since this list determines the order in which entries will subsequently be made to the register. This court held that it has jurisdiction to order the restoration to the day list of an application to be entered on the register which had been wrongly struck off the day list with retrospective effect if it was necessary to do so in order to give effect to its order on appeal. This court further held that the fact that third parties had taken an interest in the property was not in that case a bar to the court doing so. The existence of those interests would, however, mean that the court would be wary of exercising its jurisdiction to make such an order. The approach of the majority in that case, nonetheless, provides some support for my conclusion in this case.

Prejudice to third parties is simply not an issue in this case. There are no third party interests which can damage the integrity of the registration system if relief is granted. Landmain is not prejudiced because it was a party to both the charge and the loan agreement. It would constitute a breach of its obligation not to derogate from its grant in the charge to object to corrective interpretation on the grounds that the loan agreement was not registered at the Land Registry. Cherry Tree seeks the order and accordingly must be taken to have waived any protection to which it might otherwise be entitled against the consequences of its interpretation. There is no subsequent encumbrance, and no extension of Dancastle’s interest in the Property. The charge will be discharged if the transfer is registered. So there is no question of any future disposition being affected by the charge.

In a future case, the court might have to consider how far it could go to provide protection for any third party who might be prejudiced. For example, the court might be persuaded to make its order conditional on the consent of a specified person, such as the holder of a subsequent charge. Alternatively it might be persuaded that it could make its order conditional on the execution and registration of a deed varying the terms of the charge to reflect the court’s interpretation. In addition, it might be persuaded that it could in exercise of its inherent jurisdiction give directions for the execution and registration of a deed varying expressly the terms of the earlier agreement.

My conclusion does not involve any suggestion that a disposition would have one meaning for one purpose and one meaning for another purpose. The only question is whether party-specific extrinsic evidence can in any particular case be admitted as an aid to interpretation. It does not seem to me to be necessary to say that it must be excluded in all cases where the original or a copy of a document has been registered at the Land Registry.

There is a question of the weight to be given to extrinsic evidence. This must depend on all the circumstances of the case. There is nothing in the ICS principles to suggest that the weight should automatically be diminished because the parties agreed that the information should not be placed on a public register if that option was open to them. In any event, since on any analysis the court will have concluded third party interests are not engaged before it admits extrinsic evidence in this kind of case, there would be no justification for treating the weight as automatically diminished because it was not available for inspection by third parties.

If the court cannot provide satisfactory protection for third parties who are or might be prejudiced, there would in general, consistently with The Starsin, have to be limits on the type of extrinsic evidence which can be admitted as an aid to the interpretation of a registered document. For the reasons already given that is not, however, this case. In my judgment, it is better to recognise that exceptions to, or limits on, the admission of background material might have to be worked out than to create now a blanket rule that all such evidence should be excluded. That blanket rule is likely to lead to anomalies and injustices.

Accordingly I would dismiss the appeal on this issue. I turn now to consider the second issue on this appeal.

As I indicated in paragraph 24 above, the issue here is whether this case falls within the fifth of Lord Hoffmann’s principles. This concerns corrective interpretation, that is, interpretation to correct a mistake. This principle addresses a category of cases where “something must have gone wrong with the language”. In general, and this is the primary rule of interpretation, the meaning of a document is what the parties using the words which they used against the relevant background could reasonably be expected to mean. However there is a limited exception to this, as Lord Hoffmann stated in the fifth of his principles of interpretation. That reads:

“The 'rule' that words should be given their 'natural and ordinary meaning' reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1985] AC 191 at 201:

‘… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.’”

Accordingly, there are circumstances in which the court may, if it finds from the face of the document interpreted with the admissible background, that the parties have mistakenly included, or omitted, words in a document, interpret the document so that it has the meaning which, according to the document read with the admissible background, the parties clearly intended. By intention of the parties I do not mean subjective intention, but the intention of the parties as ascertained from the terms of the document in the context of the admissible background facts and objectively assessed (see per Lord Bingham in BCCI v Ali [2001] 1 AC 251 at 259). However, as the subsequent case of Chartbrook makes clear, there are limitations. In particular:

These points were summed up by Lord Hoffmann in paragraph 25 of his judgment in Chartbrook when, after examining the earlier authorities, he held:

“What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant.”

It follows that it is not enough that the parties have 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. While Lord Hoffmann made it clear that there is no limit to the amount of “red ink” or verbal correction that the court can achieve by interpretation, he also made it clear that in his judgment the three conditions that I have set out in paragraph 49 must be met.

With Lord Hoffmann’s fifth principle in mind I turn to the parties’ submissions on this issue.

Mr Francis submits that there was no mistake in the way that the transaction was expressed in the charge that qualifies for the purposes of applying the fifth principles in ICS. The parties did not make any mistake in the way that they expressed themselves but rather in their understanding of what the law required to be in the charge. Therefore the judge should not have interpreted the charge as if it referred to the facility agreement. In answer, Mr Pickering submits that the judge was right in his conclusion for the reasons he gave.

In my judgment, the judge was right to come to the conclusion that he did. The parties mistakenly thought that clause 12.3 of the facility agreement was effective, but that was not the limit of their mistake. They were also mistaken as to whether appropriate provision had been made in the charge. I reach this conclusion by the following steps.

First, the parties’ mistake was not one of misunderstanding the requirements of section 101(3) but in believing that those requirements had been satisfied. This can be seen from the words in round brackets in clause 12.3. These read “as varied or extended by the Legal Charge”. Those words make it clear that the parties realised that there had to be appropriate wording in the charge itself, and not just the facility agreement.

Secondly, on their true interpretation those words do not refer to the mere possibility that there could be such a variation or extension. If that had been intended, the parties would have used words such as “subject to any variation or modification in the Legal Charge”.

Thirdly, it is a well-established principle that, where there are two possible meanings for a phrase, one of which will make the provision effective and one of which will not, the court will adopt that which makes the provision effective in preference to the other (see, for example, Hillas & Co Ltd v ArcosLtd (1932) All ER 494 at 504 per Lord Wright). It is arguable that the words “as varied or extended”, when explicated, mean either “as the statutory powers, including the statutory power of sale, may be varied or extended” or “as the statutory powers, including the statutory power of sale, are varied or extended”. Applying the principle I have described, I would interpret the words “as varied or extended” as having the latter meaning. I do not attach any significance to the fact that variation and extension are referred to in the alternative, as that formula simply follows the wording of section 101(3) of the 1925 Act. Analysis of the words in round brackets in clause 12.3 brings me to my fourth reason.

Fourthly, on the basis of the words in round brackets as I have construed them, any reasonable observer looking at the facility agreement and knowing of the charge would reach the conclusion that the parties considered that the variation or extension of the statutory power of sale had to be in the charge and that they thought that this had been done. In fact, it had not been done because the parties had not included the relevant wording in the charge. Corrective interpretation is only available where the error is one of expression and here the type of the error was one of expression of the parties’ agreement. The court would not be writing into the parties’ contract some new provision that had not been agreed. Moreover, since the charge was executed leaving the important matter of the amount secured blank, there is in fact no difficulty in reaching the conclusion in this case, in terms of Lord Hoffmann’s fifth principle, that “something must have gone wrong with the language”.

Fifthly, the court can reach the conclusion that there has been a relevant mistake from the admissible background, that is the charge and the facility agreement read together. It is not necessary to look at any pre-contractual negotiations. They are not admissible as an aid to interpretation: see the third ICS principle. They can be used in an action for rectification of a document, but there is no claim here for rectification of the charge.

Sixthly, the result the judge reached in law has the merit of upholding the parties’ agreement consistently with the requirements of section 101(3) of the 1925 Act. Corrective interpretation forms part of the common law. Like an order for rectification, it takes effect from execution of the document.Section 101(3) does not exclude the ordinary rules of contractual interpretation, or indeed the possibility of rectification by an order of the court. Express language would be needed to achieve such exclusion since statutes are in general to be read against the background of the common law. Accordingly, section 101(3) is satisfied where the court finds that a charge, on its true interpretation, varies or extends the statutory power of sale. There is no requirement that the variation or extension should be achieved by some express provision.

Seventhly, the fifth ICS principle realistically recognises that parties can make mistakes in recording their agreements. The court should not be over eager to accept that a mistake in expressing an agreement has been made. However, when it has been made, and it is clear what the parties should have said, the court should exercise its power of corrective interpretation to put the mistake right without the need for full-blown rectification proceedings.

There is, however, a point made by the judge with which I disagree. The judge held that neither party to the charge would have made the mistake if they had “applied their minds to the effect of section 101 of the 1925 Act”. That formulation does not meet the strict requirements for corrective mistake that the mistake must have been one of language or syntax (see paragraphs 49 and 50 above). Nonetheless, I am satisfied for the reasons given above that the mistake can be properly analysed as one in the expression in the charge of the parties’ agreement about the variation of the statutory power of sale.

I entertain no doubt what variation had to be made to the statutory power of sale by the charge. The variation had to make the statutory power of sale exercisable immediately on execution of the charge and without waiting for any monies secured by the charge to become due and payable.

In the circumstances, all the conditions for corrective interpretation on the grounds of mistake were in my judgment met. For these reasons, I would dismiss the appeal on this ground.

This is a short point, and although I do not need to answer it in the light of my answers to the first two issues I propose to express my opinion on it. Mr Pickering submits, as an alternative ground for upholding the judge’s order, that, even if the respondent is wrong on interpretation, the judge should have held that both the charge and the facility agreement constituted in law a single document. On this basis the requirements of section 101(3) of the 1925 Act were met.

There is no doubt a well-established principle under which, as the judge held, documents constituting a single transaction are read and construed as one document. Lewison LJ most helpfully explains this rule in his work, The Interpretation of Contracts, at paragraph 3.03. I need take only one of the authorities to which he refers, namely Smith v Chadwick (1882) 20 Ch D 20 (affirmed on another point (1884) 9 AC 187), on which Mr Pickering also relies. At page 62, Jessel MR held:

“[T]he doctrine as to contemporaneous documents rests on this, that when documents are actually contemporaneous, that is, two deeds executed at the same moment, a very common case, or within so short an interval that having regard to the nature of the transaction the Court comes to the conclusion that the series of deeds represents a single transaction between the same parties, it is then that they are all treated as one deed; and, of course, one deed between the same parties may be read to shew the meaning of a sentence, and be equally read, although not contained in one deed, but in several parchments, if all the parchments together in the view of the Court make up one document for this purpose.”

In my judgment, this principle, or doctrine as Jessel MR puts it, is not a self-standing principle separate from the ICS principles. It should be regarded in future as now subsumed within those principles. The background referred to in those principles is plainly to be interpreted as including other documents executed as part of the same transaction, whether they happen to be executed before, at the same time as, or after the document requiring to be interpreted.

However, the point that Mr Pickering makes is in effect that the principle of interpreting as one all the documents arising from a single transaction means more than simply that each of such documents is admissible as an aid to the interpretation of every other. On his submission it leads to the conclusion that the separate documents are in law a single document.

In my judgment, however, the fact that in the present case the charge may be treated as one with the facility agreement for the purposes of interpretation does not mean that the charge and the facility agreement are in law one document. That would be to take a legal fiction as fact when it is simply a construct for the purposes of a legal rule.

I would reject Mr Pickering’s argument on this point. First, we have not been shown any authority which goes as far as Mr Pickering submits. Secondly, Mr Pickering’s submission would also subvert the obvious policy in section 101(3) of the 1925 Act, which is that the person seeking to find a variation of the statutory power of sale should only need to look in the charge itself and not in any further document. It would be wrong to extend the common law if it would have the effect of subverting that policy.

I am not aware of any authority for this proposition in the context of section 101(3) of the 1925 Act, but support by analogy can be obtained from Timmins v Moreland Street Property Ltd [1958] Ch 110. That case concerned section 40 of the 1925 Act (now repealed), which required the terms of a contract for the sale of land to be in a memorandum in writing signed by the party to be charged. This court held that that requirement was not satisfied where the purchaser signed only one of two separate documents forming part of the same transaction and that document contained no internal reference to the other.

In the present case, the variation of the statutory power of sale has to be within the charge. A mere internal cross-reference in the facility agreement to the charge does not satisfy that requirement. In this situation, it would be wrong for this court artificially to treat the two agreements as one document in law so as to circumvent the statutory requirement. The same does not apply to corrective interpretation of a charge (see paragraph 69 under the second issue above).

Accordingly, in my judgment, the facility agreement and charge in this case do not constitute in law a single document. If corrective interpretation on the grounds of mistake were not available, the provisions of the facility agreement would not be automatically incorporated into the charge or vice-versa. I would therefore dismiss the respondent’s notice on this issue.

For the reasons given above, in my judgment, the judge was right to treat the facility agreement as part of the admissible background against which the charge was to be interpreted, notwithstanding that the charge was registered at the Land Registry and that the facility agreement was not so registered. He was right to interpret the charge as including the statutory power of sale as varied by the facility agreement in order to correct the parties’ mistake. He was also right to reject Cherry Tree’s alternative argument. The charge and the facility agreement do not constitute in law a single document so as to satisfy the requirements of section 101(3) of the 1925 Act for varying the statutory power of sale.

I would dismiss this appeal and the respondent’s notice in part.

Does the remedy of rectification serve any useful purpose, or has it been subsumed into the modern approach to the interpretation of contracts? Some scholars think that rectification as a separate remedy has all but disappeared. In Construction and Rectification (published in Contract Terms ed Burrows and Peel, 2007) Professor Burrows argued that:

“… the new contextual approach means that construction has swallowed up much of what only rectification could have previously achieved.”

He concluded that rectification was “on the point of being rendered largely superfluous”. Professor McMeel echoes that view, and considers that the only reason why rectification still exists is to circumvent the exclusionary rules of evidence in cases of contractual interpretation: The Construction of Contracts 2^nd ed para 17.63. In a note published in the Cambridge Law Journal [2010] CLJ 253 Sir Richard Buxton suggested that following the decision of the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 [2009] 1 AC 1101 there was (wrongly in his view) a complete overlap between interpretation and rectification. In the present case the judge decided, on an application for summary judgment, that he was entitled to interpret a charge by way of legal mortgage on the basis that it contained a clause enlarging the mortgagee’s statutory power of sale, even though the mortgage deed contained no such clause. He did this by reference to the facility agreement that the same parties had entered into on the same day as the charge: 30 July 2010.

I gratefully adopt Arden LJ’s description of the more detailed facts.

Under clause 2 of the facility agreement the lender agreed to make available to the borrower a loan up to a maximum of £635,000 for the purpose of refinancing the property. Clause 11 stated that the borrower’s obligations should be secured by a first ranking legal charge over the property “in the Lender’s preferred form”. Clause 12.3 stated that:

“The security constituted by the Legal Charge over the Property shall be immediately enforceable and the power of sale and other powers given by section 101 of the Law of Property Act 1925 (as varied or extended by the Legal Charge) shall, as between the Lender and the Borrower, arise on the execution of the Legal Charge and be exercisable at any time after such execution, but the Lender shall not exercise such power of sale until the security constituted by the Legal Charge has become enforceable as above.”

Both the borrower and the lender executed the facility agreement as a deed. On the same day the same parties executed the legal charge. The charge in the present case (as in almost all cases) was created by using the standard Land Registry form CH1. After giving details of the property, its address and the parties to the charge, panel 6 of the standard form contained the grant of the charge. It said that the borrower with full title guarantee “charges the property by way of legal mortgage as security for the payment of the sums detailed in panel 9”.

The side note to panel 9 reads:

“Insert details of the sums to be paid (amount and dates) and so on.”

However, panel 9 was left blank. There is no reference anywhere in the charge to the facility agreement. The legal charge was also executed as a deed. The charge was completed by registration on 17 September 2010. The relevant entries in the charges register read as follows:

“2.

(17.09.2010) REGISTERED CHARGE dated 30 July 2010

3.

(17.09.2010) Proprietor: DANCASTLE ASSOCIATES LIMITED (Co. Regn. No. 01487107) of 1 Dancastle Court, Arcadia Avenue, London N3 2JU.”

I entirely agree with Arden LJ that the registered charge and the facility letter are not one document. I also agree with her at [84] that the obvious policy of section 101(3) of the Law of Property Act 1925 is that a person seeking to find a variation of the statutory power of sale should only need to look in the charge itself and not in any further document. I agree also that it would be wrong to extend the common law if it would have the effect of subverting that policy. In my judgment that is one of many reasons why we should be very cautious about a “corrective construction” which would have the same effect as if the enlarged power of sale had been contained in the mortgage deed (which it had not been).

In my judgment this case demonstrates that there is still a useful role for rectification to play. I begin by delimiting the scope of the exercise that the court undertakes which it interprets an instrument. As Lord Hoffmann explained in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10 [2009] 1 WLR 1988:

“The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed.”

The question, then, is what does the registered charge mean? Whatever it means, it has always meant what it means. A contract cannot mean one thing when it is made and another thing following court proceedings. Nor, in my judgment, can it mean one thing to some people (e.g. the parties to it) and another thing to others who might be affected by it. As Arden LJ herself has said a contract has only one meaning: Egan v Static Control Components (Europe) Ltd [2004] 2 Lloyd’s Rep 429. Thus I do not consider that the question is as posed by Arden LJ at [63]. We are not, in my judgment, seeking to ascertain “what the parties intended to agree” but what the instrument means.

Arden LJ has already set out Lord Hoffmann’s well-known restatement in Investors Compensation Scheme v West Bromwich BS [1998] 1 WLR 896. The two main principles of interpretation in play are principles (2) and (5) as slightly modified in BCCI v Ali [2001] UKHL 8 [2002] 1 AC 251 at 269:

“(2)

The background was famously referred to by Lord Wilberforce as the “matrix of fact”, but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything[relevant] which would have affected the way in which the language of the document would have been understood by a reasonable man. …

(5)

The “rule” that words should be given their “natural and ordinary meaning” reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.”

In KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363 this court was concerned with the terms of a break clause in a lease granted in 1985. It followed generally the form of a draft lease attached to a 1974 agreement for lease, pursuant to which the grant took place. However, some words contained in the agreed draft had been omitted from the final version. The form in which the clause appeared in the final version made no sense if read literally. One of the questions was whether the agreement for lease was admissible for the purpose of interpreting the final granted lease. Carnwath LJ said (§ 39):

“Applying this logic, Mr Nugee submits that a lease, unlike an ordinary commercial contract, creates an interest in land, which may last many years and be owned in different forms by many different parties. It is addressed not merely to the original landlord and tenant, but also to their successors in title, their undertenants, their chargees and so on. Accordingly, what matters is the background material reasonably available to this disparate group of people. That, it is suggested, will include such matters as the physical location and layout of the property, and perhaps common form provisions found in a typical lease; but not a prior agreement for a lease “which is a private arrangement between the original parties and which successors have no right to know about, let alone see”.”

Carnwath LJ said that he did not accept this argument and added (§ 41):

“Similarly, I see nothing in Mr Nugee's argument that the original agreement may no longer be available to successors. This is an issue of proof, not principle. In disputes about older documents of title it is a commonplace that the court may not have full information about the context in which the agreement was made. This is as true of questions about the physical state of the land, which Mr Nugee accepts as relevant, as it is about background transactions. Where relevant evidence is not available, the court has to do its best on what there is. I cannot see this as a principled reason for excluding such evidence in a case where it is available.”

He therefore held that the agreement for lease was admissible in interpreting the final version. It is pertinent to observe that the grant in that case preceded the Land Registration Act 2002 which is of importance in the present case. No argument was addressed to the court on the significance of registration. It is also pertinent to observe that the question was approached as a binary question: was the agreement admissible (in which case it was determinative) or was it not (in which case the court could not have regard to it at all). That said, we are I think bound by KPMG for what it decided.

But accepting that the court need not shut its eyes to the existence and terms of the facility letter (i.e. it is admissible evidence), there is still the question: what do you do with the evidence once it has been admitted? As Lord Steyn explained in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1977] AC 749:

“Secondly, what is admissible as a matter of the rules of evidence under this heading is what is arguably relevant. But admissibility is not the decisive matter. The real question is what evidence of surrounding circumstances may ultimately be allowed to influence the question of interpretation. That depends on what meanings the language read against the objective contextual scene will let in.” (Emphasis in original)

It is necessary, therefore, to set the contextual scene. In the present case the contextual scene is the grant of a legal charge intended to be registered at HM Land Registry under the Land Registration Act 2002. That Act was passed following six years’ work by the Law Commission and the Land Registry. Its fundamental objective, stated in paragraph 1.5 of the report which presented the draft bill, was expressed as follows:

“The fundamental objective of the Bill is that, under the system of electronic dealing with land that it seeks to create, the register should be a complete and accurate reflection of the state of the title of the land at any given time, so that it is possible to investigate title to land on line, with the absolute minimum of additional enquiries and inspections.”

The report called for a fundamental change in the perception of title. As explained in paragraph 1.10: “It will be the fact of registration and registration alone that confers title.” The report went on to explain in paragraph 9.36:

“The ability to obtain information from the registers of title and cautions is an essential feature of the system of conveyancing that the Bill seeks to create. Easy and open access to information held by the Registry are the keys to speedier conveyancing.”

These objectives were reflected in section 66 of the Act which provides:

“(1)

Any person may inspect and make copies of, or of any part of—

(a)

the register of title,

(b)

any document kept by the registrar which is referred to in the register of title,

(c)

any other document kept by the registrar which relates to an application to him, or

(d)

the register of cautions against first registration.”

Thus a person who applies under this section will be supplied with documents kept by the registrar. Necessarily those documents are limited to documents with which the registrar was supplied in the first place. The facility agreement was not one of those documents. Section 120 has an important bearing on documents kept by the registrar. It says:

“(1)

This section applies where—

(a)

a disposition relates to land to which a registered estate relates, and

(b)

an entry in the register relating to the registered estate refers to a document kept by the registrar which is not an original.

(2)

As between the parties to the disposition, the document kept by the registrar is to be taken—

(a)

to be correct, and

(b)

to contain all the material parts of the original document.

(3)

No party to the disposition may require production of the original document.

(4)

No party to the disposition is to be affected by any provision of the original document which is not contained in the document kept by the registrar.”

I draw attention in particular to section 120 (2) (b). It applies not only to a subsequent incumbrancer but also “as between the parties to the disposition”; that is to say as between the chargor and the chargee. In my judgment to treat the registered charge as containing a modification of the statutory power of sale contained only in the facility letter falls foul of that sub-section. In essence a document held by the Land Registry such as a registered charge may be inspected by a person contemplating some dealing with the land, although there are rules which permit the withholding of sensitive commercial information. But it is unlikely that the Registrar would agree to withholding information about a power of sale on the ground that it is commercially sensitive, because to do so would prejudice the keeping of the register: Ruoff & Roper Registered Conveyancing (§ 31.007). Moreover a person contemplating some dealing with the land must take copy documents held by the registrar as correct and containing all material provisions. In addition he is not entitled to call for the original so as to check the correctness of the copy. The clear intention of the joint report was that the copy document and the register would be conclusive (§ 9.52); and that the register would be “a barrier to further enquiry in relation to the documents referred to in it” (§ 9.53). Not only is this part of the general framework within which transactions are now conducted, it is a fact which is or should be known to the parties themselves. The charge in the present case was created by using the standard Land Registry form CH1. The standard form ends with a warning which includes:

“Under section 66 of the Land Registration Act 2002 most documents (including this form) kept by the registrar relating to an application to the registrar or referred to in the register are open to public inspection and copying. If you believe a document contains prejudicial information you may apply for that part of the information to be made exempt using form EX1 under rule 136 of the Land Registration Rules 2003.”

The use of CH1 is not compulsory. Parties are free to use their own forms of charge. So the use of form CH1 is a question of choice. Here the parties chose to use it. Moreover, parties may choose to hive off their bargain into two separate documents (as was done in this case). Knowing that form CH1 is a public document the parties may choose which parts of their bargain they choose to put into the public domain and which parts they wish to keep private. Party autonomy is thus fully respected. They may, of course, choose to incorporate by reference the terms of another document (e.g. the Barsetshire Building Society’s mortgage conditions 2012 edition); but that is a matter for them. If they do incorporate the terms of another document by reference, that will be apparent on the face of the document that the Registrar has retained, and which anyone may inspect. Moreover, in such a case the Registrar may refuse to proceed with the registration unless the incorporated document is produced for retention by him: Land Registration Rules 2003 r. 17; Ruoff & Roper Registered Conveyancing (§ 31.007).

The priority of interests under the Act is governed principally by section 29. That says:

“(1)

If a registrable disposition of a registered estate is made for valuable consideration, completion of the disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition whose priority is not protected at the time of registration.

(2)

For the purposes of subsection (1), the priority of an interest is protected—

(a)

in any case, if the interest—

(i)

is a registered charge or the subject of a notice in the register,

(ii)

falls within any of the paragraphs of Schedule 3, or

(iii)

appears from the register to be excepted from the effect of registration, and

(b)

in the case of a disposition of a leasehold estate, if the burden of the interest is incident to the estate.”

Schedule 3 contains the list of overriding interests which are not postponed to a registered disposition. They include (among others) certain rights of persons in actual occupation of the land. It is also necessary to refer to section 116 of the Act which provides:

“It is hereby declared for the avoidance of doubt that, in relation to registered land, each of the following—

(a)

an equity by estoppel, and

(b)

a mere equity,

has effect from the time the equity arises as an interest capable of binding successors in title (subject to the rules about the effect of dispositions on priority).”

A right to rectify is traditionally classified as a “mere equity”. It therefore falls within section 116. Although it is capable of binding successors in title, whether it does so in fact will depend (as the section makes clear) on the same rules of priority as any other property right.

Charges are dealt with in Part 5 of the 2002 Act. Sections 48 to 50 deal with priorities. Section 49 says:

“(3)

The proprietor of a registered charge may … make a further advance on the security of the charge ranking in priority to a subsequent charge if—

(a)

the advance is made in pursuance of an obligation, and

(b)

at the time of the creation of the subsequent charge the obligation was entered in the register in accordance with rules.

(4)

The proprietor of a registered charge may also make a further advance on the security of the charge ranking in priority to a subsequent charge if—

(a)

the parties to the prior charge have agreed a maximum amount for which the charge is security, and

(b)

at the time of the creation of the subsequent charge the agreement was entered in the register in accordance with rules.”

It is to be noted in particular that these matters must be entered on the register if they are to affect third parties. Section 51 makes it clear that a charge by way of legal mortgage comes into effect on registration. Section 52 (1) provides that:

“Subject to any entry in the register to the contrary, the proprietor of a registered charge is to be taken to have, in relation to the property subject to the charge, the powers of disposition conferred by law on the owner of a legal mortgage.”

It will be seen therefore that all these sections refer to registration or to entries on the register. The form of the register is prescribed by the Land Registration Rules 2003. Charges are entered in the charges register, whose form is prescribed by rule 9 of the Rules. This requires the charges register to contain (among other things) details of the charge, sufficient to enable it to be identified, and restrictions entered under section 40 of the Act. Section 49 (3) is picked up by rule 108 which enables (but does not require) a proprietor of a registered charge to apply to the registrar for an obligation to make further advances to be entered in the register. If such an application is made the registrar “must make an entry in the register in such terms as he considers appropriate to give effect to [the] application”. Likewise section 49 (4) is picked up by rule 109, which is in similar terms.

Finally it is necessary to refer to the power to alter and rectify the register. This is introduced by section 65 which brings Schedule 4 to the Act into operation. Paragraph 2 of that Schedule provides:

“(1)

The court may make an order for alteration of the register for the purpose of—

(a)

correcting a mistake,

(b)

bringing the register up to date, or

(c)

giving effect to any estate, right or interest excepted from the effect of registration.

(2)

An order under this paragraph has effect when served on the registrar to impose a duty on him to give effect to it.”

Paragraph 8 of the same Schedule provides:

“The powers under this Schedule to alter the register, so far as relating to rectification, extend to changing for the future the priority of any interest affecting the registered estate or charge concerned.”

Paragraph 2 makes it clear that the statutory power is a power to order rectification of the register. It is not a statutory power to rectify underlying documents. In my judgment whether the charge is to be interpreted as containing (or as not containing) the extension of the power of sale, there is nothing on the register that needs to be rectified. The entries which identify the registered charge and the proprietor of the registered charge will remain the same. So in my judgment the statutory power of rectification does not bear on this case. Paragraph 8 makes it clear that even if the register is rectified, it operates prospectively only. Thus it respects the rules of priority.

I do not consider that Chartbrook abolished the remedy of rectification. On the contrary Lord Hoffmann described rectification as one of two “legitimate safety devices” but one which must be pleaded and proved (§ 47). He approved the following summary of the conditions required to support a claim for rectification (see Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71, 74):

“The party seeking rectification must show that:

(1)

the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;

(2)

there was an outward expression of accord;

(3)

the intention continued at the time of the execution of the instrument sought to be rectified;

(4)

by mistake, the instrument did not reflect that common intention.”

Absent the priority provisions of the Act, if a document is rectified in accordance with the usual equitable principles, the effect of the court’s order is retrospective, and the document will be read as if it had always been in its rectified form: Craddock Brothers Ltd v Hunt [1923] 2 Ch 136, 151. However, since the right to rectify is treated for the purposes of the Act as a property right under section 116, it will take effect in accordance with the priority provisions of the Act, rather than being fully retrospective.

We are now in a position to understand the difference between the effect of interpretation and rectification. If the missing clause is inserted by means of interpretation, then the “interpreted” charge will rank in priority from the date of its original registration. There is nothing on the register to rectify, and consequently the protective provisions of paragraph 8 of Schedule 4 will not apply. If someone has inspected the register between the time of the original registration and the date when the court “interprets” the charge, he will not have discovered the existence of the missing clause, because the facility letter, as opposed to the charge itself, will not have been open to inspection. If he has, for example, taken a second charge on the strength of the register his charge will be postponed to the registered charge as “interpreted”. If, on the other hand, the missing clause is inserted into the charge by rectification, a person who has dealt with the land in the meantime will not be affected by the right to rectify (unless that right belongs to a person in actual occupation of the land). Thus the insertion of the missing clause by way of interpretation rather than by way of rectification would bypass the carefully calibrated rules of priority which are an essential feature of our modern system of land registration. I appreciate that on the facts of that case this question does not arise; but in my judgment the question is one of principle, and hard cases make bad law. Nor do I consider that the court can declare the meaning of the charge in some conditional way; or that it can compel the parties to enter into a deed of variation of the charge when, ex hypothesi, there is no need to vary it.

We can now return to the question: given that the terms of the facility are admissible in evidence, what influence do they have on the interpretation of the charge?

Our courts have already drawn distinctions between the use of background material in the interpretation of what I might call “ordinary” commercial contracts on the one hand, and the interpretation of negotiable and registrable contracts or public documents on the other. It is true, as Arden LJ points out at [41], that in his speech in Chartbrook Lord Hoffmann did not expressly refer to documents in a public register. But he did refer to articles of association and to bills of lading; and made the point that the background relied on in Chartbrook would have been available to any prospective assignee or lender. The point about public documents did not arise for decision. If Lord Hoffmann had meant to exclude public documents from the kind of instrument where the role of background is limited, he would have had to have considered authority to contrary effect. In Opua Ferries Ltd v Fullers Bay of Islands Ltd [2003] UKPC 19 [2003] 3 NZLR 740 the Privy Council considered the scope of a licence to operate a ferry service. Opua argued for the admission of extrinsic evidence to explain the terms of the registered certificate. The Privy Council rejected that argument. Lord Hope said:

“19.

There would much to be said in favour of this argument if the relevant documents were contained in a contract between the parties which the court was being asked to construe. If that were so the court would wish to put itself into the same position as the contracting parties were when they entered into their contract. As Lord Hoffmann said in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912H, when one is interpreting a document of that kind one is seeking to ascertain the meaning which it would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. The parties' knowledge of how the ferry service was in fact being operated from day to day at the time when such a contract was entered into would be part of the background.

20.

But it does not follow that the same approach is to be taken when one is construing a public document. The documents included in the register maintained by a regional council under section 52(1) of the Act have that character. This is, and is intended to be, a public register of passenger transport services. Members of the public who consult the register may come from far and near. They may have some background knowledge, but they may have none at all. In Slough Estates Ltd v Slough Borough Council [1971] AC 958, 962 Lord Reid said that extrinsic evidence may be used to identify a thing or place referred to in a public document. But he went on to say that this was a very different thing from using evidence of facts known to the maker of the document but which are not common knowledge to alter or qualify the apparent meaning of words or phrases used in it. As he put it, members of the public, entitled to rely on a public document, ought not to be subject to the risk of its apparent meaning being altered by the introduction of extrinsic evidence. Moreover, the only information which a regional council is obliged by section 53 to ensure is reasonably readily available to the public is that which gives details of the service which the council has registered. The statute makes the position clear. The register is expected to speak for itself.”

This is not an isolated occurrence. The same principle has been applied to the meaning of planning permissions both by the House of Lords (Slough Estates Ltd v Slough Borough Council [1971] AC 958) and by this court (Secretary of State for Communities and Local Government v Bleaklow Industries Ltd [2009] EWCA Civ 206 [2009] 2 P & CR 21). It has been applied to a company’s memorandum and articles of association (Egyptian Salt and Soda Co Ltd v Port Said Salt Association [1931] AC 677); and also to the interpretation of an injunction or receivership order (Masri v Consolidated Contractors (Oil and Gas) Company SAL [2009] EWCA Civ 36 [2009] 1 CLC 82). In all these cases the justification for the restrictive approach is that third parties might (not will) need to rely on the terms of the instrument under consideration without access to extraneous material.

The High Court of Australia has applied the same approach to the interpretation of conveyancing documents intended to be registered under the Australian Torrens system: Westfield Management Ltd v Perpetual Trustee Co Ltd [2007] HCA 45 (2007) 233 CLR 528. As the joint judgment in that case put it (§ 39):

“The third party who inspects the Register cannot be expected, consistently with the scheme of the Torrens system, to look further for extrinsic material which might establish facts or circumstances existing at the time of the creation of the registered dealing and placing the third party (or any court later seized of a dispute) in the situation of the grantee.”

It is true that even after the passing of the Land Registration Act 2002 ours is not a fully fledged Torrens system, where the registered title is indefeasible with very limited exceptions. We have more overriding interests, and greater opportunities to alter or rectify the register than would be acceptable under a true Torrens system. Despite these differences in my judgment the general approach of the High Court ought to apply to our system of land registration. It is also true that the High Court expressed itself in terms of admissibility. But as I have said admissibility is not the sole criterion. Even if the evidence is admitted, the question remains: what influence should it have?

There is, in fact, no conflict between this approach and the principles established in Investors Compensation Scheme. For the question is: what weight would the reasonable person with all the background knowledge of the parties attribute to background material which did not appear on the face of the charge itself? All this was elegantly explained by Campbell JA in Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64 (§ 151):

“However, the way those principles come to be applied to a particular contract can be affected by aspects of the contract such as whether it is assignable, whether it will endure for a longer time rather than a shorter time, and whether the provision that is in question is one to which indefeasibility attaches by virtue of the contract being embodied in an instrument that is registered on a Torrens title register. All these are matters that would be taken into account by the reasonable person seeking to understand what the words of the document conveyed. That is because the reasonable person seeking to understand what the words convey would understand that the meaning of the words of the document does not change with time or with the identity of the person who happens to be seeking to understand the document. That reasonable person would therefore understand that the sort of background knowledge that is able to be used as an aid to construction, has to be background knowledge that is accessible to all the people who it is reasonably foreseeable might, in the future, need to construe the document.”

In Attorney General of Belize v Belize Telecom Ltd Lord Hoffmann himself said of an earlier decision of the Court of Appeal discussing a company’s articles of association:

“Because the articles are required to be registered, addressed to anyone who wishes to inspect them, the admissible background for the purposes of construction must be limited to what any reader would reasonably be supposed to know. It cannot include extrinsic facts which were known only to some of the people involved in the formation of the company.”

In my judgment this is the key to the present case. The reasonable reader’s background knowledge would, of course, include the knowledge that the charge would be registered in a publicly accessible register upon which third parties might be expected to rely. In other words a publicly registered document is addressed to anyone who wishes to inspect it. His knowledge would include the knowledge that in so far as documents or copy documents were retained by the registrar they were to be taken as containing all material terms, and that a person inspecting the register could not call for originals. The reasonable reader would also understand that the parties had a choice about what they put into the public domain and what they kept private. He would conclude that matters which the parties chose to keep private should not influence the parts of the bargain that they chose to make public. There is, in my judgment, a real difference between allowing the physical features of the land in question to influence the interpretation of a transfer or conveyance (which we do) and allowing the terms of collateral documents to do the same (which we should not). Land is (almost) invariably registered with general boundaries only, so the register is not conclusive about the precise boundaries of what is transferred. Moreover, physical features are, after all, capable of being seen by anyone contemplating dealing with the land and who takes the trouble to inspect. But a third party contemplating dealing with the land has no access to collateral documents.

The arguments before the judge (and indeed the written arguments submitted for the purposes of this appeal) did not refer to these essential features of land registration or attach significance to the fact that the charge in this case was to be a registered charge. So the judge cannot be criticised for having approached his task as if this were an ordinary commercial contract with no potential repercussions for third parties. Moreover, nothing has gone wrong with the language of the charge so far as concerns the power of sale. It makes perfect sense as it stands. Because a registered charge has been created, the statutory power of sale applies. What arguably went wrong in that respect was that the parties failed to include in the charge a provision extending the statutory power that they agreed it should have contained. So this case is quite unlike other cases (e.g. Investors Compensation Scheme itself, or The Starsin [2004] 1 AC 715 or Chartbrook in each of which the language under consideration was difficult to interpret or did not make sense). By contrast in Scottish Widows Fund and Life Assurance Society v BGC International [2012] EWCA Civ 607 where the language of the instrument did make sense, “corrective construction” was refused.

Even the staunchest advocates of the court’s ability to consider extrinsic evidence stop short at saying that by the process of interpretation the court can insert whole clauses that the parties have mistakenly failed to include. In his well-known article My kingdom for a horse: the meaning of words (2005) LQR 577 Lord Nicholls of Birkenhead wrote:

“The flexible approach, I add, would not render the remedy of rectification redundant. If by oversight parties omit an agreed clause from their contract, interpretation would not provide a remedy. The words included in the contract could not be interpreted to include the meaning intended to be conveyed by the clause which, accidentally, had been omitted.”

Likewise Professor Burrows wrote in Construction and Rectification:

“Say, for example, the parties orally agreed that there should be a time-bar clause in the contract but that this clause was mistakenly omitted from the written contract. The omission of that clause would not be obvious from the document itself. It is hard to see that construction, as opposed to rectification, could cure the problem.”

On Cherry Tree’s case the facts fall squarely within the description of rectification in Swainland Builders. Mr Pickering, appearing for Cherry Tree, struggled to give examples of cases in which a mistake could not be corrected by interpretation yet could be corrected by rectification. In the end, he managed two. One was where the final instrument was in the form that the parties had in fact agreed but where the parties had misunderstood the legal effect of what they had agreed. The other was where recourse to the background was precluded. So far as the first example is concerned, I doubt (though I do not decide) whether put in those general terms it falls within the scope of rectification at all. Rectification does not mend bargains; it mends the expression of bargains. That is why the rectification claim failed in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 QB 450. So far as the other is concerned, that is the very point at issue in this case. For the reasons I have given the role of background in a case such as this is extremely limited.

Cherry Tree point out that there was in fact an obvious defect in the charge as registered, because panel 7 referred to the sum secured by the charge in panel 9; and panel 9 was blank. Cherry Tree accept that if the charge as registered appeared to be complete, then the facility agreement would not have influenced the interpretation of the charge. In other words, if the registered charge had specified the amount secured by the charge, but had failed to include the enlargement of the statutory power of sale, then the only means of remedying the defect would have been by rectification. But that is not the case here: the reader of the charge has no way of knowing how much is secured by it. Thus it is argued that the reasonable person with the background knowledge of the parties would have realised that there was something missing; and would have made further inquiries. Those inquiries would have led him to the facility agreement, and to the agreement that the mortgagee’s power of sale should extend beyond the statutory power. I do not accept this argument. It is one thing to say that the reasonable reader would perceive an obvious mistake in the document (call it “A”) and that recourse to the background enables mistake A to be corrected. It is quite another to say that having perceived mistake A, recourse to the background enables the reasonable reader to identify another and unconnected mistake (call it “B”) and then use the background to correct both mistake A and mistake B. I do not believe that there is any case that goes that far; and in my judgment it would be an unwarranted extension of the principles approved in Chartbrook. As Lord Hope explained in Melanesian Mission Trust Board v Australian Mutual Provident Society [1996] UKPC 53 (1997) 74 P & CR 297:

“The intention of the parties is to be discovered from the words used in the document. Where ordinary words have been used they must be taken to have been used according to the ordinary meaning of these words. If their meaning is clear and unambiguous, effect must be given to them because that is what the parties are taken to have agreed to by their contract. Various rules may be invoked to assist interpretation in the event that there is an ambiguity. But it is not the function of the court, when construing a document, to search for an ambiguity. Nor should the rules which exist to resolve ambiguities be invoked in order to create an ambiguity which, according to the ordinary meaning of the words, is not there. So the starting point is to examine the words used in order to see whether they are clear and unambiguous. It is of course legitimate to look at the document as a whole and to examine the context in which these words have been used, as the context may affect the meaning of the words. But unless the context shows that the ordinary meaning cannot be given to them or that there is an ambiguity, the ordinary meaning of the words which have been used in the document must prevail.”

In my judgment in the particular contextual scene of a charge intended to be completed by registration at HM Land Registry, the insertion of the missing clause ought to have been effected (if at all) by way of a properly pleaded and proved claim for rectification. There was no such claim pleaded in the present case, and no attempt to prove one. In my judgment therefore the case should not have been decided summarily as a pure question of interpretation of the charge.

In my judgment, and in respectful disagreement with Arden LJ, to treat the registered charge as including the extended power of sale that was included in the facility letter alone is a step too far.

I would allow the appeal.

The short facts are that Landmain, the registered proprietor of 2 Battersea Rise SW11, charged the property to a finance company called Dancastle in return for a loan of £635,000. Disputes about repayment arose, Dancastle alleging and Landmain denying that there was a default. As between Dancastle and Landmain, that dispute did not matter since the facility agreement provided that Dancastle’s power of sale arose on execution of the charge and was exercisable at any time after such execution. Pursuant to that power Dancastle sold the property to Cherry Tree who now wish to be registered as the freehold proprietor. Landmain contends that it is still the proprietor since the registered charge makes no reference to the facility agreement or its provisions about the power of sale. The power of sale implied into any charge pursuant to section 101(1)(i) of the Law of Property Act 1925 is only a power to sell when the mortgage money has become due. On the face of the charge as registered, therefore, there has been a potentially wrongful sale and Landmain say that they must remain the registered proprietors. The judge held that there was a mistake in the charge which, as a matter of construction, should be read as if it contained a power of sale arising immediately on execution because that is what the parties to it must have intended. No doubt the charge might be capable of rectification on a proper application but no such application has been made. The question therefore is whether the charge can be construed to express something which by mistake it does not say.

The question arises in this way because, as I understand the matter, registration of a freehold estate can only occur if the Land Registrar is of the opinion that a person’s title is such as a willing buyer could properly be advised by a competent professional adviser to accept and all that the Registrar has to go on for the purpose of registering a new title after a sale by a mortgagee is the terms of the charge.

It can be said that something has gone wrong in the drawing up of the charge in the form CH1 in the present case because panel 7 contemplates that the sums, security for the payment of which the property at Battersea Rise is to be charged by way of legal mortgage, will be detailed in panel 9. They were not so detailed in panel 9 which has a side rubric:-

“Insert details of sums to be paid (amount and dates) and so on”

and a title:-

“Additional provisions”

The omission of the details of the sums to be paid may in one sense be a “mistake” but it is not a very important mistake. It was not suggested that the charge was legally ineffective because the sums, for which the property was to be charged, were omitted. The charge is effective to secure sums due from Landmain to Dancastle Ltd. That was initially the sum of £635,000 but that sum would, no doubt, increase over time by reason of the accrual of interest and, perhaps, also decrease by reason of repayment of capital and payment of interest to the extent that the parties agreed that repayment and payment could occur. If the sum of £635,000 had been inserted in panel 9 (as it could and should have been) no one would think of saying that anything had gone wrong with the language of the charge.

Panel 9’s reference to “Additional provisions” indicates that it is in this panel of the standard form of charge that the parties can, if they wish, specify terms of the charge in addition to the terms of the form. If the parties wanted, moreover, to state in the charge as registered that the lender/mortgagee was entitled to exercise a power of sale at a time other than a time “when the mortgage money has become due” (as per section 101(1)(i) of the Law of Property Act 1925) e.g. at a time after execution of the legal charge (as per clause 12.3 of the Facility Agreement made between them), it would be in this panel 9 that the parties could make that clear.

In the present case the parties did not do that. If that was a mistake, it was not the same sort of mistake as failing to fill in the panel with information about the sums due under the mortgage required pursuant to panel 7. It is a mistake in failing to carry the terms of their agreement about the power of sale into the document which charges the property with the obligation to repay whatever sums are due when the power of sale is exercised. This is classic rectification territory.

Since Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 A.C. 1101 it has become fashionable to say that, if it can be seen, from the background of the contract embodied in a document, that the parties have made a mistake in the language in which they have expressed their agreement, that mistake can be corrected as a matter of construction of the document rather than by rectification of the document. This has stemmed from the fifth principle of construction set out by Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, 912 which is in the following terms:-

“(5)

The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had.”

Thus, in his article, “Construction” and Rectification after Chartbrook, [2010] CLJ 253 Sir Richard Buxton quotes the classic definition of the essence of rectification by what (in his extra-judicial capacity) he is able to call an uncommonly distinguished constitution of the Court of Appeal in The Nai Genova [1984] 1 Lloyds Rep 353, 359:-

“the remedy of rectification is one permitted by the Court, not for the purpose of altering the terms of an agreement entered into between two or more parties, but for that of correcting a written instrument which, by a mistake in verbal expression, does not accurately reflect their true agreement.”

Sir Richard then comments:-

“A closer expression of the process necessarily envisaged by principle 5 of ICS could scarcely be found”

Mr Pickering for Cherry Tree who is the purchaser from Landmain in the present case seeks to follow this fashion by saying that the background to the charge shows that the parties agreed the power of sale could be exercised at any time after execution of the charge. It must follow that the parties intended to express that agreement in the charge because they must have intended that agreement to be effective; it must further follow that their failure to express that agreement in the charge was a mistake and that the charge must therefore, as a matter of construction, mean that the power of sale could be exercised at any time after execution of the charge and that the power of sale conferred on the mortgage by section 101(1)(i) of the Law of Property Act 1925 has been “varied or extended by the mortgage deed” pursuant to section 101(3) of that Act; it would then follow yet further that a good title has been passed to the purported purchaser who is therefore entitled to be registered as the proprietor of the property.

This line of argument, it seems to me, goes too far in its reliance on the background relied on, even though that background was undoubtedly known to both of the parties to the charge. The legal charge in the present case is not just an agreement made by two parties to the transaction who are themselves alone affected. It is a public document on a public register open to inspection and potentially to be relied on by third parties. I do not think that mistakes in such documents can be construed away by a process of construction of the kind envisaged in Lord Hoffmann’s principle (5).

For my part I would respectfully approve the statement of principle at para 3.18 of Lewison on The Interpretation of Contracts (5^th ed. (2011)):

“In the case of a standard form contract, a negotiable contract or a public document evidence of background to an individual contract has a more limited part to play.”

My Lord is able to cite numerous authorities in support of this proposition culminating in the post-Chartbrook case of Re Sigma Finance Corporation [2010] 1 All ER 571. He then says that Lord Hoffmann “appears” to have taken a different view in para 40 of Chartbrook (where Lord Hoffmann says that ordinarily an assignee must take his chance). But it is perhaps noteworthy that that paragraph is part of a longer passage in which Lord Hoffmann is concerned to stress the attractions of (before going on to rebut) the heresy that pre-contract negotiations should be admissible as an aid to construction. It is part of the paragraph in which he recognised the force of Briggs J’s objection to the admissibility of pre-contract negotiations that

“it would be unfair to a third party who took an assignment of the contract or advanced money on its security”

Lord Hoffmann says this proves too much because it is an argument against the admissibility of any such background. Before he says that an assignee must ordinarily take his chance, he instances two cases where first a company’s articles of association and secondly a negotiable bill of lading had to be construed. He is therefore really accepting that public and negotiable documents are different from ordinary contracts which can, of course, be assigned but are not generally negotiable like a bill of lading is. So Lord Hoffmann’s “different view” is perhaps more “apparent” than real.

It seems to me therefore, for these reasons and the reasons more fully given by my Lord, that the public nature of the charge which falls to be construed in this case must militate against the construction for which Cherry Tree contends.

This is unfortunate for Cherry Tree who have bought the property from Landmain’s mortgagee pursuant to a power which Landmain agreed that their mortgagee should have. If there was no other way of ensuring that they could become the registered proprietor, one would have to assess whether that might be a compelling reason for extending the ICS principle to the present case. But it is difficult to see why the charge cannot be rectified, albeit only from the date of any order or agreement to that effect. Moreover, Mr Francis for Landmain accepted that, even if Landmain were entitled to remain on the register, the charge would still be effective and to the extent that Dancastle had been paid, Cherry Tree would be subrogated to Dancastle’s rights thereunder. Cherry Tree’s position is therefore not as dire as Mr Pickering sought to persuade us that it was.

I would therefore agree with Lewison LJ that this appeal should be allowed, the judge’s order be set aside and, in the light of the agreement recorded in paragraph 1 of the judge’s judgment, the claim be dismissed unless perhaps Cherry Tree seek to amend their particulars of claim by adding a claim for rectification.