Summary

A judge had erred in his construction of a clause in a sub-sub-underlease, which was inconsistent with the relevant lease when read with the supplemental agreement. Statements made in the course of the pre-contractual negotiations were no more than statements of the negotiating stance at that point in time, and could not be relied on as evidencing the parties' objective aim in completing the transaction.

Facts

The appellant (B) appealed against a decision ([2011] EWHC 729 (Ch)) in favour of the respondent (S) in a dispute concerning construction and rectification claims in respect of a sub-sub-underlease.

S was the sub-underlessee of two floors of a building for a term of 20 years with five-yearly rent reviews commencing in 1996. The rent at the inception of the lease exceeded the market rent, and so the premises were "over-rented". In 1996 S did not require the premises for its own use and entered into a sub-sub-underlease with a view to terminating its own obligations to its own sub-underlessor. The terms of the sub-sub-underlease mirrored those of the sub-underlease, save that clause 2 contained certain incentives by way of reduced rent. Clause 2(c), in the form that it appeared in the sub-sub-underlease, would have achieved parity with the rent that S was paying under the sub-underlease in a rising rental market. However, in the instant case it did not, due to a severe dip in the market rent on the relevant review dates. S's case was that a mistake had been made in clause 2(c) of the sub-sub-underlease, and that the reference in the clause to market rent meant the higher of the market rents on the review dates; as a result it would have been possible for the rents payable under the sub-underlease and the sub-sub-underlease to be aligned, as the parties had intended. S and B agreed, in clause 3.3 of a supplemental agreement, that it was their intention that the rent payable under the sub-underlease and the sub-sub-underlease should be the same, and provided for the assignment of the sub-sub-underlease to B when the rents were the same.

S submitted that it was clear from the admissible background that B had agreed to take on the onerous sub-underlease, and that pre-contractual negotiations established that the common object of the transaction was that S would give B the equivalent of a reverse premium of £10 million and that B would then take over the sub-underlease.

Held

(1) The provisions of clause 2(c) of the sub-sub-underlease had to be interpreted by reference to the remainder of that document and against the admissible background, which included the supplemental agreement, but that did not, in general, include pre-contractual negotiations, Investors Compensation Scheme Ltd v West Bromwich Building Society (No.1) [1998] 1 W.L.R. 896 and Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 A.C. 1101 applied. The terms of the sub-sub-underlease, taken on their own, were clear. Clause 3.3 of the supplemental agreement was only a statement of common intention that the rent under the sub-underlease and the sub-sub-underlease should be aligned. The parties did not enter into an obligation to produce that result, and they therefore recognised that there was a risk that rent alignment would not happen. The statement of intention was itself qualified because that clause was prefaced by a statement that clause 3.3 was to be "without prejudice" to clause 2 of the sub-sub-underlease. Clause 2 was thus the paramount provision. The parties evidently agreed that clause 2 represented the deal between them and that everything else was subsidiary to that deal (see paras 16, 24-26, 28 of judgment). Statements made in the course of negotiations were often no more than statements of a negotiating stance at that point in time, thus shedding more heat than light on issues as to interpretation of the final deal. Judges had to exercise considerable caution before treating as admissible communications in the course of pre-contractual negotiations relied on as evidencing the parties' objective aim in completing a transaction, Square Mile Partnership Ltd v Fitzmaurice McCall Ltd [2006] EWCA Civ 1690, [2007] 2 B.C.L.C. 23 considered. The judge had erred in holding that the correction of a mistake was justified. It had to be clear from the relevant lease and the admissible background both that there was a mistake and how it ought to be corrected before the court could proceed to interpret the contract as he had done. In any event the judge's construction was inconsistent with the relevant lease when read with the supplemental agreement. (2) The burden of proving that the requirements for rectification had been fulfilled lay on S, and the main focus of the claim involved looking at the negotiations between the solicitors for S and B respectively, Swainland Builders Ltd v Freehold Properties Ltd [2002] EWCA Civ 560, [2002] 2 E.G.L.R. 71 applied. The court had to apply an objective test to the parties' communications and ask whether a reasonable observer would have concluded that the parties had a common continuing intention that B would become liable for rent in an amount equal to the onerous rent payable under the sub-underlease as soon as the rent reduction period came to an end, Daventry DC v Daventry and District Housing Ltd [2011] EWCA Civ 1153, [2012] Bus. L.R. 485 applied. Analysis of the negotiations showed that the shape of the transaction remained fluid until a late stage. The judge was correct to dismiss the alternative claim for rectification (paras 43-46, 61, 65).

Appeal allowed, cross-appeal dismissed