Summary

A judge had been entitled to adopt a literal construction of the terms of a pre-emption right in a management lease.

Facts

The appellant investor (P) appealed against a decision ([2013] EWHC 1135 (Ch)) concerning the correct interpretation of a management lease and against a costs order made in favour of the respondents (B).

B had developed a shopping centre and arranged a chain of leases in order to provide a return to those, including P, who had financed the development. Under an agreement made in 1996, a lease was to be granted to P. In turn, P would grant B a "management lease". B would then grant occupational tenancies in the shopping centre. Under the management lease, P was entitled to 15 per cent of the net rents of the shopping centre. B had options to buy out investors other than P. Schedule 10 para.2 of the management lease provided that if B wished to exercise its options, or if by September 30, 2011 B had not exercised any of its options but another investor (X) had exercised its option, B could serve a notice on P requiring P to notify B whether P wished to increase its percentage from 15 per cent to 30 per cent (the pre-emption right). After a restructuring in 1998, X's option was cancelled. B had not exercised any of its options by September 30, 2011. P considered that it therefore had an unconditional right to the extra 15 per cent but B maintained that the pre-conditions in Sch.10 para.2 were no longer capable of being satisfied. The judge dismissed P's claim for rectification and its arguments concerning construction. He ordered P to pay costs on the indemnity basis because P had made unfounded allegations of dishonesty against B's officers. P did not appeal against the dismissal of its rectification claim.

P submitted that a literal interpretation of Sch.10 would not reflect the practical reality or commercial purpose of the lease, as the parties had intended that P would have a right to a further 15 per cent of the rents if they became available by September 30, 2011 even if B's options had not been excised by then.

Held

(Briggs LJ dissenting on the relevant time at which the contextual facts were to be considered as an aid to interpretation). (1) Viewed in isolation and in the light of the admissible background facts at the time the management lease was executed, there was plainly no ambiguity in the language of Sch.10 para.2. The provisions were perfectly clear and comprehensible. P's appeal failed for a number of reasons. The effect of P's argument was that what had previously been a conditional right under para.2 became an absolute right and P would become unconditionally entitled to a further 15 per cent of net rents on September 30, 2011 whether or not B's options were exercised before then. That would amount to a re-writing of the contract rather than its interpretation. The fact that B and X's options were the only routes contemplated for obtaining further shares of net rents for distribution could not, 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 became available for distribution. The restructuring, including the cancellation of X's option, was not in any meaningful way analogous to the exercise of X's option. In 1998 the management lease had been executed before the documentation cancelling X's option. At the moment of execution of the management lease the condition in Sch.10 para.2 remained exercisable. P had been involved in the 1998 restructuring and it was clear that a deliberate decision was made not to alter the terms of Sch.10 para.2 despite the intended cancellation of X's option (see paras 57-64 of judgment). (2) The judge could not be faulted for his decision that P's allegation of impropriety by B took the proceedings out of the ordinary and justified an order for indemnity costs, at least as regarded the claim for rectification. However, he was not justified in refusing to make a distinction between the issue of construction and the claim for rectification. P had issued a claim for a declaration, but B itself had commenced litigation on the construction issue. P's arguments on construction were not so frivolous as to warrant indemnity costs. The costs order was therefore set aside. P was ordered to pay the costs of both proceedings on an indemnity basis other than those costs which would necessarily have been incurred on the construction issue. Those costs were to be assessed on the standard basis (paras 67-70). (3) (per Briggs LJ) The purpose of looking at the matrix of fact was to conduct an analysis by reference to the background at the time the parties made their bargain. The bargain pursuant to which the management lease was executed was made in 1996. The bargain remained unaltered after the restructure in 1998 (paras 73-77).

Main appeal dismissed, costs appeal allowed