Hc12f01351 v Blueco Limited

This is an appeal from an order dated 3 May 2013 of His Honour Judge Kaye QC, sitting as a High Court judge, relating to an agreement for the acquisition by the first appellant, The Prudential Assurance Company Limited (“Prudential”), of a share of income from the Bluewater Shopping Centre, near Dartford, Kent (“Bluewater”). Prudential claims that, on the proper interpretation of the Management Lease of Bluewater, it is entitled to acquire a further 15 per cent of the net income from the occupational tenants of Bluewater in addition to the 35 per cent of net income it is currently receiving. The Judge rejected the appellants’ argument on interpretation. He also rejected the appellants’ alternative argument that the Management Lease should be rectified, and he ordered that the appellants pay the respondents’ costs on an indemnity basis.

Considerable amounts turn on the litigation. It is estimated that the financial advantage to Prudential of succeeding in the litigation, that is to say the difference between the market value of the additional 15 per cent and the amount it would pay if successful on its interpretation of the Management Lease, could be as much as £120 million. As to the order for indemnity costs, the respondents’ costs of the litigation up to the conclusion of the trial were in the region of £2.5 million.

The legal and financial framework for the construction of Bluewater was put in place in 1996. The project was the initiative of Lend Lease Corporation Limited (“Lend Lease”), the fourth respondent. The finance was to be provided by Prudential and by a syndicate of three banks, namely Lloyds Bank, Barclays Bank and the Royal Bank of Scotland, by their wholly owned finance leasing subsidiaries (“the Banks”). The relevant subsidiary of Barclays was BMBF (Bluewater Investments) Limited, formerly called Barclays Mercantile Business Finance Limited (“BMBF”). The Banks were to invest some £375 million, and Prudential was to invest £100 million (plus VAT) and £3 million (plus VAT) in respect of fees.

The repayment to the Banks and the return on their finance was initially to be reflected in their rights under a chain of leases, with the freeholder at one end of the chain and the occupational tenants at the other end of the chain. Prudential’s rights in Bluewater have been held on trust for it by the second and third appellants since March 2005. There is no need to distinguish between them for the purpose of this appeal, and I will therefore refer to them compendiously as “Prudential”. There are four respondents to the appeal, all of which are members of the Lend Lease group of companies. Again, there is generally no need to distinguish between them or between them and any other members of the Lend Lease group of companies for the purpose of this appeal, and I will therefore refer to all of them compendiously as “Blueco”.

The intended initial structure, pursuant to various documents executed in 1996, was to comprise (1) a ground lease by Blueco, as freeholder, to the Banks (“the Ground Lease”); (2) a headlease by the Banks to Blueco (“the Headlease”); (3) a lease by Blueco to Prudential (“the PAC Lease”); (4) a lease by Prudential to Blueco (“the Management Lease”); and (5) occupational leases to tenants of the retail units. Under this structure Blueco was to receive rents from the occupational tenants. After deductions for the costs of managing and maintaining Bluewater, the net rents were divided between Blueco, Prudential and the Banks as they were either retained or passed up the chain of leases.

The Ground Lease and the Headlease were executed on 4 November 1996. Blueco’s rent payable to the Banks under the Headlease comprised the following (assuming no options were exercised and there was no default):

Assuming no options were exercised, Basic Participation Rent would be 5 per cent of the net rents shared between the Banks from 2014, and would increase to 15 per cent shared between the Banks in 2034. Under the initial structure, Basic Participation Rent would then be payable for the remainder of the 999 year term, even after the Banks’ initial lending had been repaid.

In addition, under the Headlease the Banks had an option exercisable in 2014, 2019 or 2024 to convert the Variable Rent (i.e. the loan repayment) and the Basic Participation Rent (i.e. the 5 per cent or 15 per cent of net rents) to a Fixed Participation Rent. This was to be calculated by reference to the total Development Expenditure payable by the Banks, divided by 1,000,000, multiplied by 15 per cent. So, if the Development Expenditure was £380 million, the Fixed Participation Rent (shared between the Banks) would be 57 per cent (viz. 15% x 380) of net rents.

Under the Headlease Blueco had the option to commute the majority of the rent payable to the Banks under the Headlease into a lump sum, either leaving the Headlease in place with only the nominal Basic Rent payable or requiring the Banks to grant an overriding “Option Lease” (again at a nominal Basic Rent) to Blueco for a term longer than the term of the Headlease. In such circumstances the Variable Rent and the Participation Rent would cease to be payable. That option was exercisable on 20 March 2005, 20 March 2009 or 20 March 2011 (“the Blueco Options”), that is before the Banks would become entitled to a Basic Participation Rent and before the Banks had the right to convert the Variable Rent to a Fixed Participation Rent.

The Headlease contained provisions restricting the right of the tenant to underlet in a way inconsistent with the agreed lease structure, that is to say, subject to the exceptions which I next mention, it prohibited the disposal of any share of the net rents other than those granted to the Banks and Prudential under the lease structure. Its provisions also recognised, however, that new underlettings could be made if net rents were released by exercise of the Blueco Options or a put option (“the BMBF Option”) granted to BMBF pursuant to an agreement between Blueco and BMBF also executed on 4 November 1996 (“the BMBF Option Agreement”).

Clause 10 of the Headlease also provided for certain consequences if the BMBF Option was exercised, but it is not necessary to describe them for the purpose of this judgment.

In very general terms, the effect of service of a BMBF Option Notice pursuant to the BMBF Option Agreement was to entitle BMBF to require Blueco to commute its rent obligations to BMBF by payment of a lump sum. The BMBF Option Agreement specified a number of circumstances in which a BMBF Option Notice could be served, including various defaults by Blueco and also, without any default, if BMBF wished to do so not more than six nor less than two months prior to “the Rent Payment Date” falling in September 2011. The BMBF Option Agreement also stipulated, however, that no BMBF Option Notice could be served after, among other things, the service of a notice exercising one of the Blueco Options or 20 July 2011.

The PAC Lease and the Management Lease were granted pursuant to an agreement called the Forward Sale Agreement between Lend Lease and Prudential also made on 4 November 1996 (“the FSA”). In very broad terms the FSA provided that on practical completion of the development (and subject to the fulfilment of some other conditions which it is not necessary to describe) the second respondent was to grant or to procure the assignment by a nominee of the second respondent to Prudential of the PAC Lease, which was to be subject to and have the benefit of the Management Lease. The Management Lease was to be granted before the PAC Lease and was to be between the Lend Lease group company which was the tenant under the Headlease and Blueco. The grant of the Management Lease was to be a pre-condition of the grant of the PAC Lease. The agreed form of the PAC Lease and of the Management Lease were attached to the FSA.

The agreed form of the Management Lease attached to the FSA provided for 15 per cent of the net rents to be paid (together with other sums) by way of rent to Prudential. Under the Tenth Schedule to the agreed Management Lease (“the Tenth Schedule”) Prudential had the right to increase its investment in certain circumstances by paying a lump sum (calculated in accordance with a pre-determined formula) to receive a further 15 per cent of the new rents from Blueco (“the pre-emption”). That right was conditional on the service of a notice by Blueco in the circumstances set out in paragraph 2 of the Tenth Schedule as follows:

“The Tenant:

2.1

within the period of three months before or one month after any of the Blueco Option Dates shall serve a notice (a Blueco Call Notice) on the Landlord if it is considering exercising or has exercised one of the Blueco Options or

2.2

if by the 30 September 2011 Blueco has not exercised any of the Blueco Options but BMBF has exercised its rights under the BMBF Option shall serve a notice (a BMBF Notice) on the Landlord

requiring that the Landlord notifies the Tenant within twenty Working Days of receipt of the Blueco Call Notice or BMBF Notice (as the case may be) whether the Landlord conditionally wishes to increase the Percentage from 15 per cent to 30 per cent.”

Clause 21 of the FSA prohibited any variation to a number of documents, including the Headlease, which “would result in a material adverse effect on [Prudential’s] interest in [Bluewater]” (other than in respect of the Variable Rent consistent with the provisions of the Headlease).

After the execution of those documents in November 1996 the Finance Act 1997 changed the tax treatment of finance lease structures in a way unfavourable to Blueco. As a consequence the decision was made to reduce the leasehold structure for Bluewater so as to cover the cost of fixtures and fittings only (amounting to £82.6 million). The remaining £300 million odd, formerly intended to be repayable as rent under the leases, would be covered by a far simpler separate loan facility. The effect was that, although the Banks remained as investors in Bluewater and entitled to net rents under the leasehold chain structure, that was to a much smaller degree and there was released 55 per cent of the net rents from Bluewater which had formerly been payable to the Banks or otherwise not available for disposal by Blueco under that structure.

That restructuring was carried into effect by various documents executed on 3 July 1998. The documents executed on that day included an agreement by which Prudential consented to various matters (“the Consent Agreement”), the Management Lease, a deed of variation of the Headlease (“the Headlease Deed of Variation”) and a “subject to contract” agreement between Blueco and Prudential for the acquisition by Prudential of a further 20 per cent share of net income from Bluewater (“the Further Acquisition Agreement”).

The Consent Agreement provided that Prudential gave its consent “subject to and to the extent only that its rights under the [FSA] remain unaltered in any way” save that such rights could be satisfied by different parties to those specified in the FSA. The Consent Agreement also provided that:

“In consideration of the Prudential’s consent given above [BLUECO] HEREBY CONFIRM[S] the following:

1.

the [FSA] remains unaltered other than as contemplated by the consent given by Prudential …”

The Management Lease was between various Blueco companies. So far as relevant to this appeal, its provisions were in identical terms to those in the agreed Management Lease attached to the FSA. In particular, the rent payable included 15 per cent of the net rents and the provisions for the acquisition of a further 15 per cent in the Tenth Schedule were the same as before.

Under the Headlease Deed of Variation the provisions for Basic Participation Rent and Fixed Participation Rent were deleted. The only rent to which the Banks would be entitled was the (nominal) Basic Rent and the Variable Rent. The Variable Rent, under the revised Schedule 4, would only be payable until 20 September 2013. Accordingly, after repayment in 2013 Blueco would have no significant rent obligations to the Banks. As a form of security for the obligation to pay Variable Rent, the Banks would have the right to Default Participation Rent if there should be an Investor Enforcement Event. Furthermore the BMBF Option was cancelled. Clause 10 was deleted from the Headlease and there were similar deletions from and cancellation of related documents. There were substantial amendments to the tenant’s covenant against underletting, including the insertion of a proviso which in effect limited to 70 per cent Blueco’s right to grant new leases disposing of net rents. Taking into account Prudential’s original 15 per cent share, that enabled Blueco to dispose of the 55 per cent of net rents freed up by the 1998 restructure.

The Further Acquisition Agreement provided for Prudential to acquire a further 20 per cent share of the net rents, taking its share of net rents to 35 per cent. The additional 20 per cent was acquired by Prudential in two tranches of 10 per cent in July 1999 and July 2000 respectively.

In 1999 Blueco disposed of the remainder of the 55 per cent of net rents released by the restructuring by granting some to a fund in which Blueco held interestsandthe balance to BriTel.

The PAC Lease was granted by Blueco to Prudential on 16 March 1999.

Blueco has not exercised any of the Blueco Options. In those circumstances, and in light of the cancellation of the BMBF Option, Blueco claims that the pre-conditions in paragraph 2 of the Tenth Schedule are no longer capable of being satisfied. For its part, Prudential claims that, in the light of the admissible factual background, paragraph 2.2 of the Tenth Schedule is to be interpreted as if the BMBF Option had been exercised or, alternatively, as though the words “but BMBF has exercised its right under the BMBF Option” were deleted. The effect of that interpretation is that Prudential has been absolutely entitled since 30 September 2011 to acquire a further 15 per cent of the net rents.

This appeal relates to two actions. The first in time was a Part 8 claim by Blueco against Prudential. The other is a Part 7 claim by Prudential against Blueco. The relief sought in the Part 8 claim is various declarations as to the meaning and operation of paragraph 2 of the Tenth Schedule. The essence of the declarations is that, the BMBF Option having been cancelled on 3 July 1998 and Blueco not having exercised the Blueco Options by 30 September 2011, the obligation on the tenant to serve a BMBF Notice has not arisen and cannot now arise, with the result that the right of the landlord under the Management Lease to increase by 15 per cent its share of the net rents due under the Management Lease is no longer capable of being exercised.

In its particulars of claim in the Part 7 proceedings Prudential asserts that paragraph 2.2 of the Tenth Schedule is to be interpreted as if BMBF had exercised the BMBF Option and Blueco is now obliged to serve a BMBF Notice on Prudential, or alternatively as if the reference to the BMBF Option was not there. The relief sought in the Part 7 claim is (1) a declaration that Blueco is obliged by paragraph 2.2 of the Tenth Schedule to serve a BMBF Notice on Prudential; (2) alternatively, an order that paragraph 2.2 of the Tenth Schedule to the Management Lease be rectified so as to remove the words “but BMBF has exercised its rights under the BMBF Option”; (3) in either case, an order for the service of a BMBF Notice.

Blueco has counterclaimed in the Part 7 proceedings for (1) declarations mirroring the essence of the declaratory relief in its Part 8 claim; (2) if necessary, rectification of the Tenth Schedule by deletion of the whole of paragraph 2.2 and of the words “or BMBF Notice (as the case may be)” from the second part of paragraph 2 of the Tenth Schedule; (3) alternatively, a declaration that Prudential is estopped from contending that paragraph 2.2 of the Tenth Schedule has any effect.

The Judge delivered a clear and detailed written judgment. He concluded that Blueco’s interpretation of paragraph 2 of the Tenth Schedule is correct. He also dismissed Prudential’s claim for rectification on both bases for which it was argued, mutual mistake or alternatively unilateral mistake. The following were key to his decision on rectification. He said (at [102]) that Prudential’s argument conflated expectations with intentions, and that those assumptions or expectations had, with hindsight, been wrongly regarded as common intention. He said (at ([104]) that, having regard to the totality of the evidence, the parties’ relevant common intentions as regards the rights of Prudential to the extra 15 per cent were wholly dependent on the provisions as drafted and executed in the Tenth Schedule; it was no part of their common intention that Prudential would or must obtain the extra 15 per cent since Prudential’s rights were wholly conditional, not unconditional, and did not change before or after 1998. He referred to the evidence of the two witnesses for Prudential, Mr Christopher Taylor, who dealt with the negotiations, and Mr Clive Lander, and summarised their evidence and stated his conclusion on it as follows:

107.

It was quite plain from the evidence of Mr Taylor on the Prudential side alone, that Prudential from the outset had not initially wanted to be committed to acquiring an extra 15%. As repeatedly stated, Mr Taylor described it as a “journey” towards acquiring 50%. It was also quite clear from his evidence that there was no guarantee at all that Prudential would acquire the extra 15% under the provisions of Sch 10. It was only by exercising the Options that the 15% became available. Mr Taylor conceded, gallantly, that there was no guarantee. It was more in the nature of an expectation under an inheritance and as he recognised “There’s no guarantee on anything in life”. His expectation from the outset had been very strong that Blueco would exercise one of its Options, but he also accepted Prudential had no legal right to require this.

108.

The position had not changed in 1998. At the end of his evidence the following exchange occurred between him and Mr Nugee (a passage I have referred to above):

“Q. …. I think the answer to my question that in 1998 the question of what would happen if Blueco didn't exercise their options simply wasn't on the table?

A. It wasn't discussed.

Q. So it was not your understanding in 1998 that if Blueco, for some reason, didn't exercise its options, that Prudential would get an extra right to claim the 15 per cent on 30 September 2011. It simply wasn't part of the discussion?

A.

That is correct. I have to accept that.”

109.

Mr Lander’s evidence in the witness box showed that his understanding was the same as Mr Taylor’s. Prudential’s right to the 15% was dependent on Blueco exercising one of its Options and Prudential had no legal right to require Blueco to do so (indeed this was expressly stated as part of the Heads of Terms in both 1996 and 1998 also as noted above). Mr Lander said of his understanding in 2003: “It was still our understanding at the time that we could only exercise that 15 per cent when Blueco itself had exercised it.”

110.

Having regard to the evidence overall, documentary, witness statements, and oral, nothing has therefore persuaded me that the common intention of the parties was other than as in fact expressed in para 2 of the Tenth Schedule to the Management Lease.

111.

It also therefore follows that I reject, on the basis of Prudential’s own evidence, as set out above, that there was any unilateral mistake by Prudential which might have entitled them to seek rectification under this head too.

The Judge said (at [112]) that he rejected completely the allegation that Lend Lease, its companies and officers had been involved in dishonesty or trickiness or sharp practice in deceiving Prudential over the commercial and economic effects of the 1998 restructuring.

The Judge then briefly considered whether, if (contrary to his conclusion) Prudential’s interpretation argument had been correct, Blueco’s argument on rectification and estoppel by convention would have been successful. He concluded that they would have been.

Following the delivery of his written judgment on the merits, the Judge gave a short judgment on costs. He refused an application by Prudential to adjourn Blueco’s application for its costs to be assessed on the indemnity basis. He ordered Prudential to pay Blueco’s costs of both actions on the indemnity basis. The two principal matters identified by the Judge as material to the issue of indemnity costs were that (1) the evidence of the principal witnesses for Prudential, Mr Taylor and Mr Lander, did not support Prudential’s case, and (2) unfounded allegations of impropriety and dishonesty were made against Blueco’s officers. The Judge said that the former might not of itself take the case out of the norm, but the latter was more serious. He summarised his overall view as follows:

“A substantial amount of the case, particularly as regards rectification, must have been devoted to being dependent, so far as the unilateral mistake is concerned, on making an allegation of dishonesty against the officers of Lend Lease, which, on the footing of the findings that I made as to the common intention of the parties, was never going to get off the ground.”

He rejected a suggestion by Blueco’s own counsel that he could consider awarding indemnity costs after the close of Prudential’s case or should limit it to costs of the Part 7 proceedings rather than the Part 8 proceedings. He said that the latter course would in particular lead to immense complications. He said that the cases could have effectively been run as one, almost from the outset, with a considerable overlap and that the two matters he had highlighted, largely based on Prudential’s own evidence, applied throughout the entirety of the case.

The Judge described the matter as finely balanced, but he concluded that it was a case for an award of costs on the indemnity basis in respect of both actions.

By its Notice of Appeal Prudential appeals against the Judge’s decision on construction, his rejection of Prudential’s claim to rectification and his order as to costs. The Notice of Appeal states that, if the appeal fails on construction and rectification, Prudential appeals against the Judge’s order dismissing Prudential’s application to adjourn the hearing of Blueco’s application for indemnity costs and the Judge’s order that Blueco’s costs be assessed on the indemnity basis.

There is a Respondents’ Notice upholding on further grounds the Judge’s dismissal of Prudential’s claim for rectification.

Very shortly before the hearing of the appeal Prudential abandoned its appeal against the Judge’s dismissal of Prudential’s claim for rectification.

The contractual and property documentation which provides the context for the issue of interpretation is lengthy and complex. The issue of interpretation itself, however, is a narrow one.

At the core of the argument of Mr Alain Choo-Choy QC, for Prudential, was his submission that the pre-emption can be and must be interpreted and applied so as to give effect to its commercial purpose objectively ascertained. He identified its overriding commercial purpose as the mechanism by which Prudential was entitled to obtain a further 15 per cent share of net rents if and when an event occurred which released to Blueco that or a greater proportion of the net rents.

Mr Choo-Choy addressed this issue by looking, first, at the position in November 1996 when Blueco and Prudential made the FSA, to which the agreed Management Lease was attached, and, secondly, in July 1998 when the Management Lease was executed.

Mr Choo-Choy highlighted the following matters in November 1996. Under the November 1996 arrangements the net rents from Bluewater were to be divided as to 85 per cent to the Banks and as to the remaining 15 per cent to Prudential. Pursuant to the documents executed in November 1996, there were two sets of circumstances, and only two, under which those shares of net rents would be released to Blueco. The first was if one of the Blueco Options was to be exercised. The second was if BMBF served a BMBF Option Notice pursuant to the BMBF Option Agreement. In either eventuality the November 1996 documents provided for the relaxation of the restriction in the Headlease of the tenant’s right to underlet so as to enable Blueco to dispose of the released share of net rents. The provisions of paragraph 2 of the Tenth Schedule to the agreed Management Lease attached to the FSA mirror those two sets of circumstances, paragraph 2.1 expressly referring to the Blueco Option dates and paragraph 2.2 expressly referring to the BMBF Option and specifying 30 September 2011 as the cut-off date. That date fell a few days after the last date on which it would be possible for BMBF to exercise its option rights under the BMBF Option Agreement.

Mr Choo-Choy added, as part of that context for interpreting the pre-emption, that it was envisaged in November 1996 that it was highly likely that the Blueco Options would be exercised. That was for three reasons. Firstly, he submitted that the commercial purpose of the Blueco Options was to create a mechanism whereby Blueco could realise value from the development by enabling it to regain control and ownership of the Banks’ share of the net rents. Secondly, if the Blueco Options were not exercised, the rents payable to the Banks under the Headlease could substantially increase and be payable for the entirety of the remainder of the 999 year term. Thirdly, in November 1996 everyone was hoping and, to that extent, expecting that the venture would be a success.

Accordingly, Mr Choo-Choy contended, the bargain embodied in paragraph 2 of the Tenth Schedule of the agreed Management Lease was that if, by 30 September 2011, Blueco had become entitled to dispose of at least an additional 15 per cent of the net rents, it would then be obliged to offer that share to Prudential. In giving effect to that commercial bargain, the literal wording of paragraph 2 of the Tenth Schedule to the agreed Management Lease attached to the FSA was correct in the circumstances that then existed.

Mr Choo-Choy’s analysis then highlighted what had happened as a result of the restructuring in 1998 following the changes made by the Finance Act 1997. The vast bulk of the Banks’ investment was no longer to be financed by the net rents. It was converted into standard debt facilities. This released an additional 55 per cent of the net rents for disposal by Blueco. Furthermore, BMBF considered that it was no longer necessary to retain its right of exit from the lease structure by means of its option rights under the BMBF Option Agreement since the lease structure was now to apply only to some 20 per cent of its financing of the development. The consequence of all this, Mr Choo-Choy submitted, was that BMBF practically secured the exit from the lease structure that it would otherwise only have been able to achieve through the exercise of the BMBF Option and Blueco achieved the release of the proportion of the net rents that it could otherwise only have achieved if BMBF had served a BMBF Option Notice (in fact, 55 per cent, which was considerably more).

Mr Choo-Choy said that a literal interpretation of paragraph 2 of the Tenth Schedule, for which Blueco contends and which the Judge accepted, would not reflect that practical reality. Furthermore, he submitted, it would have the effect of elevating the exercise of the Blueco Options to that of a strict and absolute condition precedent to Prudential’s right of pre-emption. He said that would be quite wrong bearing in mind that the Blueco Options had never had that status when the Management Lease was agreed in 1996 and bearing in mind also that, by virtue of the restructuring, it was highly unlikely that the Blueco Options would be exercised after 1998. He submitted that an interpretation of paragraph 2.2 of the Tenth Schedule which made the exercise of the Blueco Options an absolute condition precedent to Prudential’s right of pre-emption was inconsistent with the intention of the parties that Prudential would have a right to a further 15 per cent of the net rents if such rents became available by 30 September 2011 even if the Blueco Options had not been exercised by then. Critically, he contended, such a literal interpretation and its consequence would be inconsistent both with the commercial purpose of paragraph 2 of the Tenth Schedule as a mechanism for providing an additional share of the net rents if they became available for distribution and with the purpose of the description of the trigger events specified there as merely the parties’ attempt to identify the circumstances that existed in November 1996 as to when such further net rents might become available for distribution.

Mr Choo-Choy elaborated on those submissions by making the following further points. He submitted that, bearing in mind that the BMBF Option was to be cancelled on the same day as the Management Lease, the parties to the Management Lease cannot have intended paragraph 2.2 to have literal effect. He submitted that, objectively speaking, something has gone wrong with the language and that mistake can be corrected by a purposive interpretation. He said that something fundamental has gone wrong with the language of paragraph 2.2 because the only event which would allow Blueco to have additional shares of net rents available if the Blueco Options had not been exercised could not happen and did not happen. He submitted that rectification is not necessary. He emphasised that a purposive interpretation of the pre-emption was possible because what had occurred by way of restructuring was analogous to - in the sense of being a “de facto” - exercise of the BMBF Option. That was, he submitted, part of the factual background against which the Management Lease granted in July 1998 has to be interpreted.

Mr Choo-Choy also sought to gain support for his purposive interpretation of the pre-emption from clause 21 of the FSA. His argument was that the 1998 restructure radically diminished the likelihood that the Blueco Options would be exercised because the original provisions in the Headlease for a substantial increase in rent after 2014 were deleted and replaced with provisions under which, after repayment in 2013, Blueco would have no significant rent obligations to the Banks. Accordingly, he submitted, if paragraph 2.2 of the Tenth Schedule were to be interpreted in the literal fashion for which Blueco contends, so that exercise of the Blueco Options is an essential pre-condition to exercising the pre-emption, the restructuring would have caused a breach of clause 21 of the FSA. It would have done so, he argued, because the restructuring diminished the likelihood of the Blueco Options ever being exercised and that effectively diminished considerably the economic value of Prudential’s right of pre-emption. He submitted that it is a factor which weighs in favour of Prudential’s purposive interpretation that it would avoid a consequential breach of clause 21 of the FSA.

Mr Choo-Choy’s argument was that, in view of all those matters, and interpreting paragraph 2 of the Tenth Schedule in the light of the admissible background facts which existed in July 1998, the literal meaning of the words in paragraph 2 that had been appropriate in November 1996 was no longer appropriate. On the other hand, the underlying commercial purpose of paragraph 2, which was identifiable from the facts and circumstances in November 1996, continued to apply to the new factual situation in July 1998. The literal wording agreed in November 1996, which had mistakenly been retained in July 1998, could be given a reasonable commercial meaning by a legitimate purposive interpretation.

Mr Choo-Choy submitted that it follows from those matters that, giving the Management Lease as executed in 1998 a purposive construction, paragraph 2.2 should be interpreted as if the BMBF Option had been exercised or, alternatively, as if the reference to the BMBF Option had not been there.

In support of his interpretation Mr Choo-Choy referred to Investors Compensation Scheme Ltd v West Bromwich Building Society (No.1) [1998] 1 WLR 896, Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900, Al Sanea v Saad Investments Co Ltd [2012] EWCA Civ 313, and Kudos Catering (UK) Ltd v Manchester Central Convention Complex Ltd [2013] EWCA Civ 38.

Mr Choo-Choy’s general summary of the principles of interpretation applicable to this case is that if, reading the words against the background reasonably available to the parties at the time of the contract, there is more than one possible interpretation, the court should prefer that one which is most consistent with business common sense.

At the conclusion of the oral submissions on construction, we informed the parties that we would be dismissing the appeal on that issue. That left only the appeal against the Judge’s order for assessment of Blueco’s costs of both sets of proceedings on the indemnity basis. In the Notice of Appeal Prudential appealed the Judge’s dismissal of an application by Prudential to adjourn the hearing of Blueco’s application for indemnity costs on the ground that Prudential had not had time properly to consider and respond to a witness statement from Blueco’s solicitor on the issue of indemnity costs which had been served that morning. That ground of appeal was not pursued by Mr Choo-Choy.

Mr Choo-Choy’s submissions on the appeal on indemnity costs may be briefly summarised as follows. He submitted that, on any footing, it was wrong for the Judge to have ordered indemnity costs on the construction issue. He said that any practical implications of dividing the costs between the construction issue and the claim for rectification was a matter for the costs judge. He pointed out that Blueco had itself initiated litigation by bringing its Part 8 claim on construction.

As to rectification, Mr Choo-Choy observed that Blueco had itself counterclaimed rectification and estoppel by convention in the Part 7 proceedings and so those matters and the evidence relevant to them had to be investigated in any event. He also submitted that the mere fact that the evidence of witnesses may not survive cross-examination does not take a case out of the ordinary so as to justify indemnity costs. He said that Prudential was justified in suspecting that Blueco may have been aware that Prudential had a different interpretation from Blueco of paragraph 2.2 of the Tenth Schedule at the time the Management Lease was granted. He relied on an internal Blueco email exchange on 6 July 2001, in which Mr Keith Perry sent a message to Mr Dick Morath, copied to Mr David Hutton, in which the following statement was made:

“The position as to whether Pru’s pre-emption would in effect lapse if we leave the finance lease in place is as you would imagine very sensitive in that we are sure this is not Pru’s interpretation and thus might be subject to legal challenge.”

Mr Choo-Choy observed that, although there was a response by Mr Hutton to the email, there was no answer by Mr Hutton to that point. Mr Choo-Choy relied on the fact that Blueco did not call any of the parties to the email chain and so none of them could be cross-examined by Prudential’s counsel at the trial.

The context for this appeal on interpretation is an unusual one in view of the abandonment of the appeal from the Judge’s dismissal of Prudential’s rectification claim. Prudential claimed, in the event that it was wrong on its interpretation of the pre-emption, that paragraph 2.2 of the Tenth Schedule should be rectified so as to provide that Prudential was to have an additional 15 per cent of net rents if none of the Blueco Options was exercised. In its Particulars of Claim in the Part 7 proceedings Prudential claimed rectification on the ground of mutual mistake or alternatively unilateral mistake. The Judge dismissed the rectification claim on both bases on the ground that, in the light of all the evidence, he concluded at ([104], [110] and [111]) that it was the intention of both Blueco and Prudential before and after 1998 that Prudential’s right to obtain the additional 15 per cent of net rents was conditional and not unconditional. In abandoning its appeal on rectification, Prudential accepts the Judge’s factual and legal conclusion on that issue. Accordingly, Prudential seeks to argue on this appeal in favour of an interpretation of the pre-emption which is inconsistent with the actual intention of both parties, that is to say including its own intention. This is, therefore, the reverse of the normal situation in which rectification is claimed in order to bring the mistaken provisions of a contract, objectively interpreted, into line with the parties’ intentions. Mr Choo-Choy sought to diminish the significance of this unusual state of affairs by saying that the Judge had failed to apply the objective analysis for common mistake rectification which was set out in Lord Hoffmann’s speech in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 and endorsed by the other members of the Appellate Committee and, in any event, even if the Judge had applied an objective test for mutual mistake, the Judge had taken into account facts which are not admissible on the interpretation of a contract. Whether or not Mr Choo-Choy is correct on those aspects, an argument that the court should interpret a contractual provision in a way not actually intended by either party to it is not the most promising starting point.

There is no dispute as to the principles of interpretation. Mr Choo-Choy referred to the relevant authorities and there is no challenge to his summary of the correct approach.

The first issue is whether there is any ambiguity in the language of paragraph 2.2 of the Tenth Schedule. Viewed in isolation, there is plainly no ambiguity. The provisions of paragraph 2.2 are perfectly clear and comprehensible.

The next and critical issue is whether, in the light of the admissible background facts at the time the Management Lease was executed, there is an ambiguity in paragraph 2.2. Allied to that question on the facts of the present case, although conceptually distinct, is the issue whether, as urged by Mr Choo-Choy, something has plainly gone wrong with the language of paragraph 2.2. Despite everything that Mr Choo-Choy has so skilfully submitted, it seems to me quite plain that there was no such ambiguity and no such mistake.

The effect of Prudential’s argument is that what had previously been a conditional right under paragraph 2 to a further 15 per cent of net rents dependent upon the decisions of either Blueco (in relation to the Blueco Options) or BMBF (in relation to the BMBF Option) became an absolute right. Prudential would become unconditionally entitled to a further 15 per cent of net rents on 30 September 2011 whether or not one of the Blueco Options was exercised before then. Prudential’s difficulty is that, although the evidence shows that it was regarded in 1996 as very likely that one of the Blueco Options would be exercised, the evidence does not show, and Mr Choo-Choy did not contend, that there was certainty in November 1996 that the Blueco Options, let alone the BMBF Option, would be exercised. Lord Hoffmann has said that, provided it is clear that something has gone wrong with the language and that it is clear what a reasonable person would have understood the parties to have meant, “there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed”: Chartbrook at [23]. On the face of it, however, the change from a conditional right, where the condition may or may not occur, to an unconditional entitlement amounts to a re-writing of the contract rather than its interpretation.

An important part of the background to the Management Lease was that it was granted pursuant to the FSA which was made in 1996. Subject to minor amendments the Management Lease granted in 1998 was in the same form as the agreed Management Lease attached to the FSA. In particular, paragraph 2 of the Tenth Schedule was in identical language. Mr Choo-Choy accepts that the language of paragraph 2, read literally, was entirely apt in 1996. The effect of Prudential’s argument is that, despite the retention of the original language, paragraph 2.2 dramatically changed its meaning between 1996 and 1998. Mr Choo-Choy seeks to meet the obvious difficulties of such a proposition by his concentration on what he submitted was the original and consistent underlying commercial purpose of the pre-emption, on the effect of the re-structuring as an analogy to the satisfaction of the condition specified in paragraph 2.2 and on what he maintained was an obvious mistake in the retention of the original language. Despite the elegance of his submissions on those matters, I have no hesitation in rejecting them.

I do not accept Mr Choo-Choy’s submission that, objectively ascertained, the commercial purpose of paragraph 2 of the Tenth Schedule was that if, by 30 September 2011, Blueco had become entitled to dispose of at least an additional 15 per cent of the net rents, it would then be obliged to offer that share to Prudential. The fact that the Blueco Options and the BMBF Option were the only routes contemplated at the date of the FSA for obtaining further shares of net rents for distribution cannot of itself justify the conclusion that the pre-emption was to apply to a further 15 per cent of net rents irrespective of the way in which they had become available for distribution. Mr Choo-Choy himself accepted as much. The refinement of his argument was that it was sufficient if a further 15 per cent became available by some means analogous to the exercise of the conditions specified in paragraph 2 of the Tenth Schedule. I cannot see any objective justification for that conclusion which seems to me to be just another way of re-writing rather than interpreting the Management Lease.

In any event, I do not accept that the restructuring, including the cancellation of the BMBF Option, was in any meaningful or relevant way analogous to the exercise of the BMBF Option. The BMBF Option, a put option exercisable by BMBF, was granted to BMBF in order to provide a way in which it could exit a long term financial commitment under the original lease structure. The 1998 restructuring, which avoided the need for such an early exit mechanism, was at the initiative of Blueco and was driven by Blueco’s tax planning. Furthermore, exercise of the BMBF Option would have brought to an end BMBF’s involvement in the original lease structure. The 1998 restructuring, including cancellation of the BMBF Option, did not remove BMBF’s participation in the lease structure. BMBF’s financial commitment under the lease structure was significantly diminished but it was not eliminated and it remained a party to the Headlease.

Nor is there scope for a serious argument that, objectively ascertained, there was clearly a mistake in the language used in paragraph 2.2 of the Tenth Schedule of the Management Lease as executed. In the first place, although the 1998 restructuring made it less likely than in November 1996 that one of the Blueco Options would be exercised, the evidence does not go so far as to show, and Mr Choo-Choy did not claim, that it was inconceivable in July 1998 that the Blueco Options might be exercised in the future. In the second place, all parties, including Prudential, knew by July 1998 that the BMBF Option would be cancelled. Prudential’s solicitors were in fact sent a copy of the draft Headlease with the proposed amendments marked in manuscript. It is common ground that on 3 July 1998, in strict order of time, the Management Lease was executed before the other documents and, in particular, before the documentation cancelling the BMBF Option. Strictly speaking, therefore, at the moment of the execution of the Management Lease, the condition in paragraph 2.2. remained exercisable.

Furthermore, it is common ground that Prudential was not only aware of, but also to a limited extent involved in, the various changes involved in the 1998 restructuring. It was a party to the Consent Agreement made on 3 July 1998. In that Agreement Prudential gave its consent to the matters specified there “to the extent only that its rights under the [FSA] remain[ed] unaltered” and Blueco confirmed that the FSA remained unaltered. It is clear from that and from the contemporaneous correspondence that a deliberate decision was made not to alter the terms of paragraph 2.2 of the Tenth Schedule despite the intended cancellation of the BMBF Option.

So far as concerns a possible breach of clause 21 of the FSA if Blueco’s interpretation of the pre-emption is correct, it was clear from Mr Choo-Choy’s submissions in reply that (in his own words) it was “not really germane to [his] argument on construction”. In any event, I do not accept that the economic consequences of the 1998 restructuring, including variations of the Headlease, which meant that BMBF no longer had an interest in retaining the benefit of the BMBF Option and so agreed to its cancellation, fell within the ambit of clause 21 of the FSA. Even assuming in favour of Prudential that clause 21 is capable of bearing an interpretation that embraces mere adverse economic consequences for Prudential (which is far from clear), the adverse economic consequence alleged in the present case is far too remote and contingent upon independent commercial decisions taken by BMBF to fall within the scope of the clause. Nor is it clear, and the Judge did not make any finding, that the restructuring did have a material adverse economic effect on Prudential. For that purpose, it is necessary to take account of the agreement or understanding between the parties at the time that, out of the 55 per cent of the net rents released by the restructuring, a further 20 per cent was to be acquired by Prudential, 10 per cent was to be offered to Hermes as trustee for BriTel to enable Prudential to acquire a stake in a development in the Milton Keynes shopping centre and the final 25 per cent was to be sold to a proposed retail fund to be set up by Blueco. The last proposal was supported by Prudential because it would introduce liquidity to Bluewater. Additional comments on the economic benefits to Prudential of those further disposals are contained in the respondents’ skeleton argument and were made by Mr Robin Dicker QC, for Blueco, in his oral submissions but it is not necessary to mention them here. It is sufficient to say that Prudential did not satisfy the Judge and has not satisfied me on this appeal that the restructuring had a material adverse economic effect on Prudential.

Mr Dicker advanced a number of further arguments in opposition to Mr Choo-Choy’s submissions, but I do not consider they carried the same weight as the ones I have mentioned and I do not need to refer to them.

I can deal with the appeal on costs quite briefly. The Judge cannot be faulted for his decision that the allegation of impropriety by Blueco, in the light of the evidence, took the proceedings out of the ordinary and justified an order for indemnity costs at least as regards the claim for rectification. The email of 6 July 2001 of itself was a wholly inadequate basis for making and then continuing the allegation of sharp practice by Blueco. It is but one document out of tens of thousands disclosed by Blueco. It came several years after the Management Lease was granted. Neither Mr Perry nor Mr Morath have been identified by Prudential as involved in the making of the FSA in 1996 or the execution of the Management Lease in 1998. Mr Choo-Choy did not identify anything in the witness statements of either side to support an allegation of sharp practice by Blueco in 1996 or 1998. The allegation of sharp practice or dishonesty by Blueco was strictly only relevant to Prudential’s claim for rectification for unilateral mistake but it was within the proper exercise of the Judge’s discretion to treat the rectification claim as one claim for the purposes of indemnity costs.

On the other hand, I do not consider that the Judge was justified in principle in refusing to make a distinction between the issue of construction and the claim for rectification. As Mr Choo-Choy observed, Blueco itself commenced the litigation with its Part 8 claim on construction. I do not consider that Prudential’s arguments on construction were so frivolous as to warrant indemnity costs. Nor did the Judge. It is clear that the Judge himself took the view that it was the allegation of impropriety against Blueco that took the matter out of the ordinary. It is commonplace for proceedings on construction to be accompanied with an alternative claim for rectification.

The Judge does not identify anything that took these two sets of proceedings out of the ordinary in that respect. Subject always to any special features of a particular case, I do not consider that it is correct in principle in such a situation for the order for costs on rectification to be extended to the construction issue merely because there may be difficulty in separating out costs attributable only to the construction issue. It will plainly assist in the usual case, if the costs of construction are assessed on one basis and the costs of rectification on another basis, if the judge feels able to make an order for costs which apportions the costs between the two issues on a percentage basis. In the present case, we are not in a position on this appeal to make that division. The proper order for costs in those circumstances is for Prudential to pay all the costs of the two sets of proceedings on an indemnity basis other than those costs which would necessarily have been incurred on the construction issue if that had been the sole issue, such costs to be assessed on the standard basis. It is necessarily implicit in that formulation that, in the event of a dispute on the division, the burden will be on Prudential to establish which of Blueco’s costs fall to be assessed only on the standard basis.

For all those reasons, I would dismiss the appeal save that I would set aside the Judge’s order for costs and would substitute an order that Prudential shall pay all the costs of the two sets of proceedings on an indemnity basis other than those costs which would necessarily have been incurred on the construction issue if that had been the sole issue, such costs to be assessed on the standard basis.

Subject only to one point, I agree with the reasoning of the Chancellor as to why the appeal on construction should be dismissed. I also agree that the Judge’s costs order should be varied, for the reasons which my Lord gives.

My only reservation is that, in the particular circumstances of this case, I do not consider that the matrix of fact pertaining as at the date of the execution of the Management Lease is necessarily the appropriate matrix for the purposes of ascertaining by interpretation the extent of the option rights eventually to be conferred upon Prudential by its Tenth Schedule. In my view, the matrix of fact as at the time of the making of the FSA in 1996 is, at least arguably, a better guide to interpretation.

The usual expression of the principles about the admissibility of the matrix of fact as an aid to interpretation is by reference to the time of the making of the agreement or other document sought to be interpreted. In most cases that gives rise to no difficulty, where the relevant agreement or document is preceded only by negotiation. But where the relevant document is made solely pursuant to a prior contractual obligation to make it, such as a conveyance or transfer pursuant to a contract for the sale of land or, as here, a lease pursuant to a binding agreement for lease, the question arises as to which is the relevant time at which the contextual facts need to be examined.

In most cases there is again no difficulty, either because the time-lag between the two is very short or, even if it is long, no relevant change in underlying factual background has occurred. But in the present case the time-lag is indeed long, and important changes in the factual background occurred between the making of the FSA and the execution of the Management Lease. A two year time-lag is not exceptional in the context of property development, but the tax changes and subsequent re-structuring of the multi-layered lease transaction which occurred in the meantime is very unusual.

There are I think two reasons why it is at least strongly arguable that 1996 rather than 1998 is the relevant time for looking at the matrix of fact. The first derives from asking why the factual matrix assists in interpretation. In my view, it is because the objective analysis of the meaning of an agreement is to be conducted by reference to the background in which the parties were at the time when they made their bargain. It is part of what Lord Hoffmann described as the assimilation of the way in which documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life: see ICS Ltd v West Bromwich B S [1998] 1WLR 896 at 912G. In this case the bargain pursuant to which the Management Lease was executed was made in, and at the time of, the FSA. The grant of that lease, to which Prudential was not even a party, was the mere performance of the FSA by one of its parties. It involved no fresh bargain at all.

The second reason is that, if there might have been a question whether the formulation of the option rights in the Tenth Schedule to the Management Lease were the result of further bargaining in 1998, against a fresh factual background, the negative answer to that question is made manifest by the terms of the July 1998 Consent Agreement, in which Prudential expressly confirmed that, save where varied with its consent, its rights under the FSA (reflected in the draft Management Lease annexed to it) were to remain unaltered. That meant unaltered in substance as well as in form.

I am content to say for present purposes that this earlier date for the appraisal of the matrix of fact is strongly arguable rather than correct because it merely confirms that the interpretation reached by my Lord, by reference to a later date, is right. Furthermore this question has not been pursued in submissions, counsel on both sides being content to include the facts in 1998 for the purposes of interpretation. Of course the option rights in the Tenth Schedule have to be applied to the circumstances which changed in and after 1998, but that does not of itself make those circumstances of assistance in interpretation. Interpretation and application are two different processes.

I also agree.