25 May 2012

Make no mistake: expertly drafted leases can’t be rewritten

The message: The court will not readily correct documents drafted by experienced and skilled solicitors.

The case: The Court of Appeal has overturned a judgment that allowed a sublease to be rewritten to give effect to what the judge thought the parties really intended, in Scottish Widows Fund v BGC International (9 May 2012).

In 1996, Widows sublet premises in London’s Docklands to BGC. The premises were substantially overrented and eventually a subletting until September 2016 was agreed.

At the time, the rent payable by Widows was £1.2m a year, but the market rent was only around £750,000. The parties had discussed a reverse premium of £10m to be paid to BGC to cover the rent difference. But instead, Widows agreed to subsidise the rent difference until December 2010 and then intended that BGC should be liable to pay the same rent as Widows had to pay for the remainder of the sublease.

Unfortunately, the documentation led to a shortfall in the rent payable by BGC from December 2010, because rents had continued to fall.

Whereas the rent payable by Widows rose to £1.4m a year on review in 2001, the sublease only provided for BGC to pay the higher rent of £1.2m a year or the actual market rent as at the 2006 review — only £1m.

Widows claimed it was apparent from the negotiations and documentation that something had gone wrong with the drafting of the lease, and that it should be rectified, so that the annual rent of £1.4m was payable instead. The judge at first instance agreed that the higher rent figure applied.

But the Court of Appeal adopted a far more restrictive approach than the judge, whom it thought had incorrectly rewritten the sublease to achieve a fair result. It stated that, when seeking to interpret any document, it was not allowed to have regard to the prior negotiations of the parties but just the relevant factual background at the time. It also stressed that, before the court could impose its own interpretation, it had to ascertain that the parties had made a mistake in the language used and what they had intended to agree.

As the sublease wording was unambiguous on the 2006 market rent, the Court of Appeal was not prepared to construe the sublease by reference to the 2001 rent, as Widows wished.

It then looked into whether the wording should be rectified on the basis of “common mistake” in relation to rent payable from December 2010. To succeed with a rectification claim, a party must establish that both sides had a common, clearly expressed intention at the relevant time but, by mistake, the document does not reflect that. It is more difficult to prove a mistake has been made if a document is detailed and has been prepared with expert legal advice. The court can look at the parties’ negotiations to establish whether a mistake was made.

In this instance, there was clear reference to the rent subsidy only lasting until December 2010. However, there was no evidence on the obligation of either party if the market fell. The sublease was simply the result of agreements being made throughout the drafting process, so nothing had actually been formally agreed. There never was a consensus that the rent differential would be eliminated in 2010, and Widows only raised this issue 12 years after the sublease was completed.

This was inconsistent with there ever having been such an agreement. So the sublease remains as drafted and Widows will have to meet the shortfall for another four years.

Summing up: Scottish Widows v BGC

  • Widows sublet premises to BGC, agreeing to subsidise the difference between the market rent and its rent liability for a period.
  • The sublease led to a shortfall in the rent payable by BGC, and Widows argued that there had been a mistake in the sublease draft.
  • The Court of Appeal rejected the rectification claim and found Widows liable for the shortfall.

 

First seen in Property Week, 25 May 2012

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