Summary

A deed of variation which was designed to incorporate the terms of an overage agreement into a lease was not intended to vary a break clause in the lease by making its exercise dependent on a valuation of the property in question rather than a sale. Even if the deed of variation did have that effect, it was contrary to the common intention of the parties and ought to be rectified.

Facts

The claimant landlord (H) brought proceedings against the defendant tenant (P) seeking possession of four petrol filling stations operated by P under leases entered into with H's predecessor in title. P brought a claim for rectification of deeds of variation.

The leases in question were for a period of 25 years and contained break clauses permitting H to terminate on notice. In each case there was a separate overage agreement. Under cl.8.2 of the leases, H was not entitled to invoke the break clauses unless the value of the premises on the date the break clause was exercised exceeded the price H had paid for the freehold of the relevant site with vacant possession ("the Price"). Under cl.8.3 of the leases, if H exercised the break clause it was obliged to pay overage to P on completion of a sale of the premises. Clause 1 of the overage agreements provided that S would not invoke the break clause in the lease unless the value of the property exceeded the price of that property ("the New Price"). Clause 2 of the overage agreements provided for the payment of overage to P upon selling the property if H became entitled to exercise the break clause. Due to difficulties in registering the overage agreements, they were replaced by deeds of variation which incorporated their terms into the leases. H served break notices on P along with a letter from a valuer purporting to confirm that the value of the premises exceeded the price referred to in the lease as varied. H denied that it was obliged to sell the properties in order to exercise the break option and revealed that it had entered into an agreement to lease the sites to a new tenant. The issues were (i) whether, as a matter of construction, H was entitled to exercise the break clause if there was no agreed sale of the premises with vacant possession at the date of sale; (ii) if so, whether cl.8.2 of the leases should be rectified on the ground of mutual mistake. The parties disagreed on the meaning of "the value of the premises" under cl.8.2.

P contended that the deeds of variation were not intended to vary the break clause and overage arrangements by making the break clause operable on a valuation rather than a sale; if the deeds of variation did change the effect of the break clause, it was contrary to the common intention of the parties and the deeds of variation ought to be rectified. H contended that the deeds of variation contemplated the service of the break notice and the sale of the premises as two entirely separate events.

Held

(1) Clause 8.2 was designed primarily for P's protection and was intended to fetter H's right to exercise the break clause. It was far more likely from a commercial point of view that cl.8 2 was linked to cl.8.3 and that the break clause could only be exercised on a sale. On H's construction, the overage might not be payable for many years, if at all, and the amount of the overage would bear no relation to the value at the time the break clause was exercised. A reasonable person would understand the term "value of the property" to mean the new price of the property achieved on a sale with vacant possession. The use of the term New Price in cl.1 was significant and was linked to cl.2. It was highly unlikely that the parties contemplated that there would be both a sale and a valuation of the property. If there were no such linkage, it would mean that the overage payable would be related to the value as opposed to the sale price, which seemed unlikely. The term "value of the premises" was unclear and it was therefore appropriate to have regard to the common business sense of the transaction. Accordingly, the break clause in cl.8 of the lease could only be exercised if the sale price on a sale with vacant possession exceeded the Price (see para.65 of judgment). (2) (Obiter) A party seeking rectification for mutual mistake had to show that the parties had a common continuing intention in respect of the matter to be rectified. Although that common intention was to be judged objectively, evidence of subjective intention was admissible and might be significant where the prior consensus was based on oral exchanges or conduct, Daventry DC v Daventry and District Housing Ltd [2011] EWCA Civ 1153, [2012] 1 W.L.R. 1333 considered. In the instant case there was a clear agreement, continuing at the time of completion, that only three changes would be made to the overage agreements. Even if the break clause trigger in the deeds of variation required a valuation rather than a sale, P was entitled to rectification of the deeds of variation to give effect to that agreement (paras 68, 100).

Judgment for defendant