Cadogan & & Anor v ESCADA AG & Ors

This is a dispute about the interpretation of a rent review clause. There are claims for a declaration as to the true meaning of the clause, alternatively for rectification. The Claimants are in effect the Cadogan Estate (“Cadogan”) which owns 90 acres in Knightsbridge and Chelsea. The first two Defendants (“Escada”) are part of a top range retail fashion group based in Germany. The third Defendant has no active role in the case. The dispute is about a Lease dated 29^th November 1996 (“the Lease”) of retail premises comprising the basement, ground and first floors at 194/195 Sloane Street London SW1. At the time of the Lease the premises consisted of two next door retail units with an office on the first floor of 194 with its own staircase from the street. The Lease was for a term expiring on 24^th December 2010 at an initial rent of £385,000 pa with reviews due on 25^th December 2001 and 25^th December 2006. The tenant was to carry out substantial improvement works to convert the premises into a large single shop unit.

This case is brought because disagreement has arisen during the rent review about the approach the arbitrator should take. The court has a comprehensive file of documents consisting of correspondence between and notes within the parties and their professional advisers in the period leading up to the grant of the Lease. I have also heard the evidence of five witnesses, Mr Richard Abbey a chartered surveyor employed by Cadogan, Mr Cameron Scott a director of CBRE, the Claimants’ surveyors, Mr John McGeough a partner in Pemberton Greenish the Claimants solicitors and the surveyor and solicitor representing Escada, Mr John Brown of what was then Brown Cooper Marples and Mr Ivan Kremer a partner in Beachcroft Wansbroughs. All witnesses gave clear, helpful and honest evidence.

I will first describe the background and, in view of the alternative claim for rectification, summarise briefly the events leading up to conclusion of the Lease.

In August 1996 Cadogan, through Mr Abbey and Mr Scott, prepared particulars for letting of the premises having by then recovered possession of the units at 194 and 195 and of the office on the first floor of 194. Cadogan decided to offer the premises either as two individual lets or combined to form a “prominent flagship store”. A Ms Vittoria was soon interested in taking a Lease of both units to operate, under a franchise agreement, what was to be the “flagship” Escada shop. She retained Mr Brown and Mr Kremer as her surveyor and solicitor. Mr Scott made it clear in his letter of 23^rd October 1996 outlining what was on offer that Cadogan would require any tenant to remove the office entrance to the first floor at 194 and to install new staircases to both the basement and the first floor. Those works were to be undertaken as an obligation to the landlord. On 28^th October Mr Brown wrote to Mr Scott offering on behalf of Escada to take a Lease on the terms set out in the earlier letter. Mr Brown observed that “the removal of the present central pavement entrance door and stair to first floor and basement is to be undertaken as an obligation to the landlord”. “He distinguished between works of obligation including the removal of the office entrance, the creation of a staircase and the combining of ground and first floor sales areas to a cost of some £75,000 plus VAT and the “fit out proper” to cost about £500,000. These additional works would “of course be disregarded on review”. On 31^st October Mr Cameron replied stating that Cadogan “will require your clients to undertake works involving the removal of the former office entrance to the first floor at 194 as well as installing new staircases to both the basement and first floor. These works will be undertaken as an obligation to the landlord and our clients will require full details of your proposals”.

Mr McGeough sent a draft Lease to Mr Kremer on 1^st November which included two clauses which were to give rise to difficulty. Clause 2(3)(b) obliged the tenant to prepare a scheme for fitting out and equipping the premises for approval by the Claimant (“the Works”) and then to carry out and complete these Works by a particular date. Clause 4(E) set out the rent review provisions. These included an “upwards only” requirement, an assumption that there would be “one or two staircases between the basement and ground floors and the ground and first floors”, no disregard of the Works but a disregard of a tenant’s improvements specifically excluding the Works. So the Works would have been taken into account on review. Mr Kremer’s response was to delete the upwards only provision, the obligation to carry out the Works and the exclusion of those Works from the disregard of the tenant’s improvements. On 12^th November Mr McGeough replied rejecting what he saw as a large number of amendments to what was a standard form Lease for the building. The amendments were rejected in green on the draft and this was returned to Mr Kremer. On 14^th November Mr Kremer returned the Lease amended in blue accepting the “upwards only” and the obligation to carry out the Works. However he inserted a specific disregard of the Works other than the staircases to which I refer in detail below. Although Mr McGeough made further amendments in brown on 15^th November he accepted Mr Kremer’s amendments to the rent review provisions. Escada’s understanding of the position is reflected in Mr Kremer’s report to his clients on 18^th November:-

“…. The landlord has accepted that the premises are to be valued on the basis that your fitting out works are to be disregarded and it has been agreed that the fitting out works will be treated as the whole of the works you are to be undertaking with the exception of the installation of a staircase between the basement and ground floor and between the ground and first floors”.

The dispute concerns the physical composition of the premises to be valued. Cadogan say that the review is to assume a single retail unit with the old staircases and office entrance removed and a new staircase installed. The proposed Declaration seeks that the rent should be that “payable for a single unit configured to best advantage with a new staircase but without the old staircases”. Escada argues that the arbitrator should take the premises in the form in which they stood at the date of the Lease including the staircases which then existed but adding a notional new staircase in number 194 situated not less than twenty feet from the front. The rent review clause must of course be construed as a whole against the background of the Lease but the nature of the dispute does not become clear unless one looks closely at the relevant sub-clauses which provide as follows:-

“Rent Reviews

4(E) (1) In this Clause:-

“review period” means the interval between Review Dates and the interval between the last Review Date and the expiry of the said term.

“market rent” means the best yearly rent at which The Demised Premises might reasonably be expected to be let in the open market upon the relevant Review Date by a willing Landlord to a willing Tenant on a Lease for a term of ten years without payment of a fine or premium upon the terms and conditions contained in this Lease including this present provision for rent reviews every five years and upon the assumptions that:-

(i)

The Demised Premises were vacant but fitted out at the cost of the Tenant and kept in accordance with the terms of this Lease and otherwise fit for immediate occupation and beneficial use.

(ii)

That all the Lessee’s covenants in this Lease have been complied with.

(iii)

That the Authorised Use is that of a retail shop.

(iv)

That any additions or alterations to The Demised Premises carried out either during the Term of this Lease or during any previous Lease of the Demised Premises held by the Lessee or any predecessor in title and which do not may tend to diminish such rental have been removed and reinstated.

(v)

That such willing Tenant is able to fully recover any taxes or duties upon the rents payable hereunder.

(vi)

That there will be a staircase between the basement and ground floors and the ground and first floors for normal use by customers suitable for high quality retail premises located not less than twenty feet from the front of the Demised Premises

but disregarding

(a)

the Works save insofar as these include the staircases referred to in assumption (vi) above

(b)

any alteration or improvements to the Demised Premises (other than the Works) made by the Lessee or a predecessor in title (other than pursuant to any obligation of the Lessee to carry out such work whether contained in this Lease or otherwise) prior to or since the commencement of the Term at the sole expense of the Lessee and with the previous formal written licence of the Company permitting such alteration or improvements.

(c)

any goodwill attached to the Demised Premises by reason of the carrying on a the Demised Premises of the business of the Lessee or any underlessee.

(d)

Any effect on rent of the fact that the Lessee of any underlessee has been in occupation of the Demised Premises.

(e)

Any reduction or allowance which might be made on account of any rent free period or other concession which might be granted on a new letting.

(2)

From each Review Date the yearly rent hereby first reserved shall for the ensuing review period be whichever is the greater of:

(a)

the yearly rent payable in the year of the Term immediately preceding the relevant Date or

(b)

the market rent

Cadogan accept that if 4(E)(1)(a) is read in isolation the rent review would have to value the premises as originally demised but with an added staircase in one of the shops, giving no access to the other. Cadogan submit that this produces such a non-sensical result that it must yield to a more realistic commercial interpretation. They cite the following well known passage of Lord Diplock in Antaios Companaria Naviera SA v Salen Rederierna AB [1985] AC 191, 201:-

“If detailed, semantic and syntactical analysis of a word 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”.

Cadogan rely on the context and upon particular provisions that make it clear, they say, that the parties must have pre-supposed a single unit with a new staircase but without the previous staircases for the separate units. Apart from the contents of the letter of 28^th October, they rely on the definition of the Demised premises as “the shop” delineated on the Lease plan and to the “Authorised use” being as “a retail shop”. They say that the position is also supported by the assumption in clause 4(E)(1)(i) that the premises are fitted out at cost of the tenant kept in accordance with the forms of the Lease and otherwise and fitted for immediate occupation and beneficial use. They also rely on (1)(iii) that the Authorised Use is as a retail shop and 1(vi) that there will be a staircase. Cadogan contend that against this background together with that described by the witnesses the parties could not have intended that the review was to be conducted on an entirely artificial basis assuming premises with a peculiar internal layout. Such an approach would produce an unexpected benefit for Escada which all know full well they would never have been granted against the commercial realities of this transaction where Cadogan were in the driving seat having a very desirable property to let.

Escada deny that application of 4(E)(1)(a) produces an absurd result. They say that the valuation will be of 195 as a self-contained unit with a staircase connecting all three floors and of 194 also as a self-contained unit with two entrances and two staircases to the first floor and basement respectively. They contend that this becomes clear upon examination of the relevant directions in the clause. The “Demised Premises” are defined by reference to the First Schedule to the Lease and to the plan which shows what existed at the date of the Lease, two retail units with offices on the first floor of 194. Words on the plan “thin indicates partitions to be removed” do not show removal of the central dividing wall or the staircase enclosures. Escada accept that the starting point is the physical condition of the premises in which they stand on the review date but this is subject to the other specific assumptions and disregards. The common form assumption (i) that the premises are vacant and unlet and fitted out at the cost of the tenant and kept in accordance with the terms of the Lease and otherwise fit for immediate occupation and beneficial use is directed to time only. Relevant fitting out work must be assumed to be done by the notional tenant so that he will not pay any additional rent for it. The assumption that the premises are fit for immediate occupation and beneficial use requires the valuer to assume that there is no other reason why the hypothetical tenant cannot begin paying immediately. It does not mean, for example, that the valuer assumes that the tenants have removed the staircases.

Authorised use of the premises as “a retail shop” is in contrast to that specified in the actual Lease “a retail shop for the sale of high class ladies’ fashion wear andaccessories”. The purpose of this assumption in the rent review clause is to broaden the potential field of activity when making the valuation. Escada submit that this assumption has nothing to do with the physical form of the premises being let but argue that if they are wrong about that there are similar semantic points going the other way, in particular the reference to “the shop” (potentially singular) delineated on a plan which shows more than one physical unit.

Escada submit that assumption (vi) and disregard (a) can be read and applied together. Disregard (a) requires the valuer to take the premises in the physical form in which they existed before the works were carried out but, if the works included a relevant staircase, that was assumed to be present. The staircase specified in assumption (vi) must be located at 194 rather than 195. That is because 194 was the unit without a staircase connecting all three floors and with only a limited staircase between the ground floor and basement. This exercise does not require a valuer to assume that existing staircases had been removed or that the two units have been united to form one entity. The Works, as defined, required removal of the staircases which existed at the date of the Lease but as these Works are explicitly to be disregarded the arbitrator’s assumption must be that they remain in place.

Mr Dowding QC points out that it is wrong in principle to approach the construction issue on the basis that some other arrangement might have been a better or fairer one from the point of view of one or other party. He cites the following passage from the judgment of Mummery LJ in Jones v Commerzbank AG [2003] (Footnote: ¹):-

“I agree with [counsel] that the Deputy Judge paid insufficient attention to the actual language of the documents. He placed far too much reliance on what, in the surrounding circumstances, would have been the sensible commercial agreement between the parties. In the result he constructed from the context alone a contract that the parties in their respective situations might have made. In doing so he has not construed the language of the two letters in which the terms of the contract were in fact formally expressed. Of course, the context of a contract matter as an aid to construction, but it should not be used to construct a contract which does not properly reflect the language employed in formal contractual documents”.

I have had regard to but do not address specifically the well-known guidance about construction of contracts to be found in such cases as BCCI v Ali [2002] 1 AC 259 and Investor’s Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, cited to me by Mr Munro.

A Lease must of course be interpreted in accordance with business common-sense but the passage from the speech of Lord Diplock in Antaios must be read in context. Where there are two viable constructions put forward one chooses that which is most likely to give effect to the commercial purpose of the agreement. That does not mean however that the court can rewrite the words that the parties have used in order to make the contract conform to business common-sense. Still less should one proceed on the assumption that the Lease was drafted to give effect to the terms of the letter of 28^th October 1996. As to this there was considerable discussion, negotiation and disagreement in November. The impasse was broken when Mr McGeough accepted the amendment put forward by Mr Kremer on 15^th November. I accept, as Mr Munro’s able submissions have made clear, that the wording arrived at may not be very sensible from a business point of view but that is a feature of innumerable agreements reached as a result of a compromise expressed in wording that neither side would originally have chosen. The wording of the clause may not be commercially realistic but it seems clear to me. There is no competition between rival constructions from which I am to make a commercially sensible choice. Mr Munro’s approach depends on looking beyond the wording of the clause he accepts will, if read literally, lead to the result claimed by Escada. The clause does not require or permit the valuer to assume either that the premises have become one entity or that the pre-existing staircases have been removed. The features of the Lease identified by Mr Munro do not in my view displace the express words of the disputed clause. I also agree with Escada that references to the Authorised Use do not assist. Pointers in the documents to there being one shop are at best equivocal when one has regard to the submissions of Escada to which I have referred to above and to Escada’s own semantic points. The clause is neither ambiguous nor incapable of implementation. It is an inelegant compromise which may seem unfair to the Claimants. That is no reason not to give effect to the clause as it stands. The application for a declaration will therefore be refused.

Cadogan put forward an alternative case, in the event that their application for a declaration is unsuccessful, that the Lease should be rectified in the terms of the second prayer in the Particulars of Claim. The claim is that the Lease does not contain the pre-existing agreement between the parties set out in Mr Brown’s letter of 28^th October 1996. Against the background of the correspondence which I have summarised Cadogan rely also on the evidence of their witnesses, as to the intention behind the Lease. Thus Mr Abbey says this:-

“I did not appreciate the disregarding of the tenants fit out works would mean treating the building as if it still had its original staircases as well as the new one. I was never advised that it could later be asserted that the premises would have to be valued with their original staircases in place. That only the rentalised cost of the tenants fit out would be disregarded was so far as I was aware what had been agreed between the parties agents: there was never any discussion about changing this. Accordingly I gave affirmative instructions on behalf of the Cadogan Estate to agree the disregard: in doing this I did not intend that it would be valued otherwise when as a single unit with the old staircases removed”.

Mr Scott’s view, as at the end of October, was that the combined unit would be valued as one with the staircases that were there before the works were carried out removed with a new staircase as built. Mr McGeough pointed out that at 15^th November he had not seen the plan that was to go in the Lease, was unaware of the configuration of the old staircases or that the dividing wall was then still in place. He was, as he put it, “stumbling around in the dark” but there was no question of him agreeing something with Mr Kremer which they then failed to express in the Lease. This misunderstanding appears to have been within Cadogan not between the parties. Mr Brown’s evidence did not suggest that this transaction was anything other than a conventional evolution from outline terms leading after negotiations to a concluded deal. As Mr Kremer saw it this was “a perfectly normal set of negotiations where amendments and counter-amendments are proposed between solicitors and a final form agreed upon with the matter subsequently proceeding to completion”.

As is well known the court may rectify a contract where as a result of a mistake, usually one common to both parties, the document does not give effect to what they agree. It is equally well known that the parties must have had a continuing common intention evidenced by some outward expression of agreement which the document by mistake fails to reflect. Of course there must be convincing proof before a court will in effect change the terms of a document apparently agreed between the parties.

Cadogan’s case on this point began unpromisingly but inevitably given the facts without a draft of the clause which the parties are said to have agreed but not reflected in the written document. There is then no evidence of the mistake made by both parties ( there being no suggestion of relevant unilateral mistake) in a carefully negotiated Lease involving expert professionals. As Escada point out the letter of 28^th October relied upon has to be seen in the light of earlier letters and of later ones, notably Mr Cameron’s of 31^st October. At no point is there found a common continuing understanding that the premises to be valued at rent review would be a single unit with the existing staircases removed.

Escada submit that Mr McGeough and Mr Kremer effectively started from scratch, debated the issues of controversy which arose between them and reached, with the consent of their clients a compromise solution. While “scratch” is an exaggeration the submission is otherwise fair.

The claim for rectification is therefore in my view without merit. As I see it there was no mistake. Escada certainly did not consider that there was any mistake. In cross-examination Mr McGeough, with commendable frankness, made it equally clear that there was no mistake. This transaction was, as I have said, very similar to countless others where the detail of what the parties agreed was under constant discussion, whatever the initial broad lines of accord were, until the solicitors reached the rent review compromise with the consent of their clients. The claim for rectification fails.

There will accordingly be judgment for the Defendants. I shall be grateful if the parties will let me have suggested corrections of the usual kind, a draft order and brief submissions about costs and any other points that arise.