Rowallan Group Ltd v Edgehill Portfolio No 1 Ltd

The core issue in this case is whether the Claimant, the vendor under a contract for sale of a lease to the Defendant (“the Agreement”), is liable under the Agreement to pay an instalment of £65,000 of the premium charged on the grant by the landlord of the lease due in April 2006 (“the Instalment”). The provisions of the Agreement clearly so provide, but the Claimant in its Particulars of Claim contends that it is entitled to rectification of the Agreement transferring the liability to the Defendant. There is before the Court an application pursuant to CPR 24 by the Defendant claiming (together with other relief) summary judgment on the ground that the Claimant has no real prospect of success in the action. The live question between the parties on this application is the availability of the remedy of rectification on grounds of unilateral mistake on the case made by the Claimant. There are other issues between the parties in this action, but it is common ground that they turn on the outcome of the Claimant’s claim to rectification and accordingly do not require any separate consideration. If the Defendant fails on the application for summary judgment the Defendant seeks an order for security for costs. The Claimant sensibly and properly concedes that it must provide such security.

By a lease dated the 24^th April 1998 (“the Lease”) Southend-on-Sea Borough Council (“Southend”) granted to the Claimant a lease at the rent of £100 per annum for the term of 199 years of premises known as the The Kursaal, Southchurch Avenue, Southend-on-Sea (“the Property”) in consideration of payment of £650,000 (“the Premium”) payable in 10 annual instalments of £65,000. The first instalment of £65,000 was payable on the 24^th April 2000 and the further instalments were payable on the 24^th April in each subsequent year. In fact the Claimant, instead of paying the instalments of £65,000 as agreed in advance on the 24^th April in each year, has paid the £65,000 by monthly payments in arrears and Southend has agreed to or acquiesced in this arrangement (“the Arrangement”).

The Property when purchased by the Claimant was derelict. A very large sum was expended renovating and rebuilding it and constructing a huge extension. The Property became (as it is now) a successful retail and leisure unit.

In 2005 the Claimant instructed CBRE, a sales agency company, to sell the Lease subject to various subleases. CBRE prepared a brochure (“the Brochure”) in January 2006 and this was provided to prospective purchasers. The Brochure sought offers in excess of £16 million. It stated that at the end of March 2006 £275,000 of the Premium would remain payable to Southend over the next four years. Neither the Brochure nor CBRE nor the Claimant disclosed the Arrangement to prospective purchasers.

On the 24^th February 2006 the Defendant wrote to CBRE offering subject to contract to purchase the Property for £16,100,000 on terms that the Claimant would pay the outstanding instalments of the Premium. The letter stated that the Defendant was prepared to exchange contracts within 10-15 working days from receipt of the full legal package with completion 28 days thereafter. The Claimant refused that offer. The Defendant thereupon made a revised offer of £16,300,000 and to pay the outstanding instalments of the Premium.

On the 13^th March 2006 the terms of the final draft of Heads of Terms (“the Heads of Terms”) were agreed. These included the terms of the revised offer and in particular provided in clause 20.2 that the Defendant should pay the outstanding instalments of the Premium. A draft agreement in these terms (“the Draft Agreement”) was prepared by the Claimant and submitted to the Defendant on the 20^th March 2006.

There followed some delay in concluding the deal arising from problems of title and issues with sub lessees and the Instalment became payable under the terms of the Lease on the 24^th April 2006 before the contract was signed. Unknown to the Defendant the Claimant did not pay the Instalment, but continued making the monthly payments in accordance with the Arrangement.

On the 24^th April 2006 a draft licence to assign was prepared for execution by Southend. Southend approved the draft assignment of the Lease. On the 15^th May 2006 the Claimant’s solicitor Mr Montlake wrote to Mr Maskey the Defendant’s solicitor: “Council’s approval as below attached. We will be getting confirmation that all payments have been made”.

On the same day the Defendant (by its solicitor Mr Maskey) wrote to Mr Montlake inquiring whether the Claimant had paid the Instalment and stated that, if not, it would be necessary to provide for this in the proposed contract. Mr Montlake did not reply. On the 17^th May 2006 Mr Maskey again wrote to Mr Montlake: “Has the April instalment of premium been paid? If so could I have evidence of this. If not paid, we will need a provision in the contract for it to be paid before completion.” Mr Montlake again did not reply and Mr Maskey repeated this message on the 19^th May 2006.

Later on the 19^th May 2006 Mr Maskey and Mr Montlake had a telephone conversation in the course of which they agreed an amendment to the Draft Agreement to the effect that on completion of the sale the Claimant would deliver to the Defendant a rent and capital payment receipt from Southend in respect of the rent and capital payment due on the 24^th April 2006, and the Agreement was thereupon executed including a provision in those terms.

Thereafter the dispute arose and was ventilated in correspondence between the solicitors as to who was liable to pay the Instalment. The position taken by Mr Maskey was that the Claimant in failing to produce the receipt was in breach of contract. The position taken by Mr Montlake (in particular in his e-mail dated the 15^th June 2006) was that the Claimant would not produce the receipt requested by the Defendant and that this was not a breach of contract because the provisions of the Agreement did not represent the agreement reached between the parties. The Defendant agreed to complete notwithstanding the non-production of the receipt but on the basis that it would withhold £65,000 from the purchase price until the dispute was resolved. On the 16^th June 2006 Southend and the Defendant signed the Licence to Assign and on the same day the parties completed the Agreement. The Claimant executed the transfer of the Lease and the Defendant paid the balance of the purchase price less the sum of £65,000 which it withheld. On completion the Defendant took possession of the Property.

The Claimant’s claim in their Particulars of Claim is for rectification of clause 20.2 of the Agreement substituting for the provision requiring the Claimant on completion to deliver a receipt for payment of the capital payment due on the 24^th April 2006 a clause requiring delivery of a receipt for the Premium due until the 23^rd April 2006 i.e. excluding the Instalment. The Claimant contends that this relief should be granted “it being the intention of the Claimant that the Defendant would be liable for the Premium in accordance with the Brochure, the Defendant’s revised offer and the Heads of Terms”.

The Claimant cannot allege that there was any mutual mistake. The Defendant’s intention was clearly that the Agreement should provide (as it did) that the Claimant should be liable to pay the Instalment, and indeed the Claimant pleads this as a fact in its Particulars of Claim. To obtain relief in the absence of any mutual mistake, it is necessary to plead and establish the requirements for the grant of relief on the ground of unilateral mistake. It is accordingly necessary to examine how far this ground has any real prospect of being established.

There have been a series of cases on the legal requirements for rectification on the ground of unilateral mistake culminating in the decision of the Court of Appeal in George Wimpey v. V I Construction Ltd [2005] EWCA 77. These cases underline that the remedy of rectification for unilateral mistake is a drastic remedy, for it has the result of imposing on the defendant to the claim a contract which he did not, and did not intend to, make. Accordingly the conditions for the grant of such relief must be strictly satisfied.

To establish its claim to rectification of the Agreement the Claimant is required to plead and establish that the Defendant had actual knowledge of the mistake on the part of the Claimant that under the terms of the Agreement the Defendant would be liable to pay the Instalment. There are two qualifications to this requirement. The first is that actual knowledge includes wilfully shutting one’s eyes to the obvious and wilfully and recklessly failing to make such inquiries as an honest or reasonable man would make. The second is that if the Defendant intended that the Claimant should be mistaken in this regard and deliberately set about diverting the Claimant’s attention from discovering the mistake, it is unnecessary that the Claimant actually knew that the Claimant was mistaken: it is sufficient that the Defendant merely suspected that it was so.

For the purpose of this application the Claimant’s pleaded case and evidence must be accepted that Mr Montlake and the Claimant mistakenly believed that the agreed amendment to clause 20.2 did not operate to detract from the term previously agreed in the Heads of Terms that the Defendant would be liable to pay the Instalment. He did not think that the amendment would make any difference to what had been agreed as set out in the Brochure and Heads of Terms. The critical issue is whether the Claimant can show a real prospect of establishing at trial the necessary knowledge of this mistake on the part of the Defendant.

The Claimant’s pleaded case is that after agreement of the Heads of Terms the Defendant for various reasons wished to try and obtain a reduction in price from that agreed and set out in the Heads of Terms, but instead of seeking to negotiate a reduction in price:

“11(d) … took advantage of (i) The passage of the 24^th April 2006, when the Claimant would become contractually liable to [Southend] for a year’s instalment of premium in the sum of £65,000.

(ii)

Then the Claimant’s mistake as to the meaning of the amendment to clause 20.2 of the [Agreement] introduced by the Defendant immediately before the exchange of contracts making [the Agreement]

so as to render the Claimant liable to pay [the Instalment] and produce the receipt for the same as a term thereof, thereby reducing the price of the Property by £65,000.”

The plea in respect of knowledge is as follows:

“12.

Prior to and upon the proposing the said amendment the Defendant, by its solicitor, had no grounds to assume that the premium due on 24^th April 2006 would be paid by the Claimant as a matter of course despite the intended sale of the Property to the Defendant. The same would be contrary to the Heads of Terms which the parties were seeking to give effect to by the contract and the clear position taken by the Claimant on the sale price from the start of negotiation. In fact, while unknown to the Defendant, the Claimant had been paying the said instalments monthly in arrears but on 19^th May 2006 both the Claimant and its solicitor understood there to be 12 months of such instalments due to 23^rd April 2006 in further arrears. To the Claimant and its Solicitor, in error, the amendment to clause 20.2 dealt with that position. Accordingly, by reason of the matters stated in the first two sentences of this paragraph the Defendant, by its solicitor knew or suspected that the Claimant by its solicitor was mistaken in agreeing to a form of words in the amendment to clause 20.2 which provided that the Claimant would pay the Premium due upon 24^th April 2006.

13.

The Defendant, having made no attempt to negotiate the price of the Property … or to draw those matters [giving rise to its wish to negotiate a reduction] to the Claimant in any other way, therefore intended the Claimant to be mistaken as to the meaning of the amendment to clause 20.2 and acted so as to divert the Claimant’s attention from discovering the mistake. The Claimant is therefore entitled to rectification of the contract to correct its unilateral mistake.”

Mr Maskey in his witness statement on the application states that, when the 24^th April 2006 passed the Defendant assumed that the Claimant had paid the Instalment and that the Defendant had no reason to believe that the Claimant had made any mistake in agreeing the amendment to clause 20.2 or the Agreement.

Mr Montlake made a witness statement in support of the allegations in the pleading. In it he said that: (1) he did not think that the amendment would make any difference to what had been agreed as set out in the Brochure and Heads of Terms; (2) the Defendant’s solicitors had not made any attempt to renegotiate the price; (3) the Claimant had not told him at the time of his conversation with Mr Maskey what was the amount of the outstanding Premium in May 2006; (4) he thought that the reference in Mr Maskey’s communications of the 15^th, 17^th and 19^th May 2006 to the premium due in April 2006 was the reference to the monthly payment in arrears payable under the Arrangement; (5) the Claimant had instructed him that all the Premiums due up to the 23^rd April 2006 would be paid prior to completion; and (6) when he wrote to Mr Maskey on the 15^th May 2006 to the effect that he would be getting confirmation that all payments would be made, he meant payment of all the Premiums for the year ended 23^rd April 2006.

In my judgment the Claimant has no real prospect of establishing his pleaded case claiming rectification on grounds of unilateral mistake. The amendment on its face plainly and unequivocally imposed the obligation on the Claimant to pay the Instalment. The critical fact is that the matters which apparently induced Mr Montlake to believe that the amendment had no such effect were matters undisclosed and unknown to the Defendant and in particular the Arrangement, the state of account between the Claimant and Southend and the instructions given by the Claimant to Mr Montlake. Absent that knowledge, there was no reason why the Defendant should not proceed on the basis that the Claimant knew and intended exactly what the amendment provided, namely that the Claimant should provide the receipt for payment of the Instalment. Mr Maskey gave Mr Montlake every opportunity to state the Claimant’s unwillingness to pay the Instalment when replying to his three letters and responding to his proposed amendment. There was no sharp practice on the part of the Defendant in requesting the Claimant to produce a receipt for payment of the Instalment. After the 24^th April 2006 had passed the Defendant proceeded on the basis that the Claimant had paid the Instalment in accordance with the Lease and (in default) should pay the Instalment. There was no sharp practice on the Defendant’s part in not stating explicitly that the Defendant wanted a reduction in the previously agreed price and that the payment of the Instalment by the Claimant achieved this objective. This was the plain and obvious effect of the amendment requiring the Claimant to produce a receipt for that payment. Likewise there was no reason why the Defendant could or should have known or even suspected the pleaded mistake on the part of the Claimant. The insuperable hurdles facing the Claimant’s claim are highlighted by the form of rectification sought. In place of the clause requiring the Claimant to deliver a receipt for payment of the capital payment due on the 24^th April 2006, the Claimant seeks substitution of a clause requiring delivery of a receipt for the Premium due on the 23^rd April 2006. I can see no basis for the suggestion that the Defendant knew or suspected that the Claimant believed that the 24^th April 2006 was a mistake for the 23^rd April 2006. The 24^th April 2006 was clearly on its face the date on which the Instalment fell due and the Defendant had no reason to believe that this was not appreciated by Mr Montlake.

There is no reason why this hopeless case should proceed to trial.

For these reasons I hold that the Defendant is entitled to summary judgment on the Claimant’s claim to rectification.