Introduction
This case provides a very useful resume of the law on rectification and the courts powers where it is alleged the terms of a contract do not reflect the parties’ agreement.
It is worth recounting that rectification is an equitable remedy. The court may refuse it if for example an innocent third party has acquired rights or because the party seeking rectification has, accepted that he is bound by, the agreement knowing that it did not reflect the parties’ agreement.
Background
The Claimant the owner of a property in Cheshire discussed the possibility of the Defendant taking a lease as the Defendant had plans to convert it into a children’s nursery and to provide a family home for a director. To effect the conversion, the Defendant required planning permission.
Lease 1
The parties then entered into a seven-year lease of the property. The terms of the lease were set out in two documents. Standard Form LS2 was utilised. They agreed that this would be amended to reflect the particular terms that were agreed between them. The parties then both signed a written agreement on these terms. It was not legally enforceable because (1) not all the terms were agreed, and (2) it contemplated that the parties would sign a final lease.
Lease 2
Lease 2 referred to unspecified additional terms but those terms could not be identified from Lease 2 itself. Lease 2 would have to be registered at the Land Registry and thus the terms which did not appear in Lease 2 would not be enforceable without an order for rectification. Given Cherry Tree Investments Ltd v Land main Ltd [2013] I BCLC 484 the defect in Lease 2 could not be filled by interpretation.
The Defendant was unable to obtain planning permission to convert the property into a children’s nursery and with the Claimants consent it sublet the property. However the Defendant had difficulties paying the rent and thus the Claimant wanted possession.
The proceedings
The Claimant issued proceedings for possession, alleging subletting without consent and other breaches of Lease 1. The Defendant served a defence alleging that Lease 2 should be rectified because it did not set out the full terms that the parties had agreed.
At first instance the Court held that the parties executed Lease 2 under a mistake and that Lease 2 should be rectified on the basis that both parties shared the mistake, that the effect of Lease 2 lease was that it would run in conjunction with the terms previously agreed. The Court made an order rectifying Lease 2 so that it contained the amendments to its terms agreed in Lease 1.
The Appeal
The Claimant appealed on a number of grounds:-
As to whether there had been a common mistake as to the effect of Lease 2;
The nature of the mistake;
Whether the Court should have declined to make an order for rectification as a matter of discretion.
Rectification
The Court of Appeal considered the issue of Rectification and noted the requirements for rectification in a case where both parties were mistaken about the effect of their agreement was helpfully contained in the judgment of Peter Gibson LJ in Swainland Builders Ltd v Freehold Properties Ltd [2002] 23 EG 123.
Thus a party seeking rectification must show that:
The parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;
There was an outward expression of accord;
The intention continued at the time of the execution of the instrument sought to be rectified;
By mistake, the instrument did not reflect that common intention.
Convincing proof is required in order to counteract the evidence of the parties’ intention set out in the instrument itself .The court may rectify a document even if the terms of the agreement are those which the parties agreed but they were both mistaken as to their meaning ( see Re Butlin’s Settlement Trusts [Rectification] [1976] Ch 251).
The Court of Appeal noted that it was well settled that a court may rectify a document even if the terms of the agreement are those which the parties agreed but upon which they were both mistaken as to their meaning. Peter Gibson LJ in Swainland Builders Ltd v Freehold Properties Ltd [2002] 23 EG 123 went further than to say that there could be rectification if there was a mistake as to meaning. He contemplated that rectification could be granted if the parties had had a clear intention and their executed intention did not achieve this intention. In other words, the mistake may be one as to the effect of the document signed. This was clearly relevant as the court at first instance found that the parties were both mistaken as to the effect of the terms of Lease 2 and mistakenly believed that it would be take effect in combination with Lease 1 in order to set out the terms of their agreement.
The Appeal
The Court of Appeal noted that the Claimant’s case rested on whether the conditions for rectification set out by Peter Gibson (above) had been satisfied. It identified three issues:-
(1) The quality of the evidence as to common mistake;
(2) The nature of the mistake;
(3) The courts discretion.
The Evidence
As to the quality of the evidence the it was noted the evidence must meet the requirement for the outward expression of accord. The law was concerned that parties should not be able to disassociate themselves from their agreement simply because it has become commercially undesirable. Lord Neuberger MR held in Daventry District Council v Daventry Housing Ltd [2012] 1 WLR 1333 at [212]
"As with virtually any issue involving the effect of the contents of a document, the question has to be assessed not merely by reference to the words of the document, but also to the factual and commercial context in which the document is produced."
In this case, the evidence of execution had to be seen in the light of the other evidence in the case, particularly the clear finding that only a few days before the execution of Lease 2 the Claimant had assured the Defendant that those amendments would apply
At first instance the Recorder concluded that this was a case where the Claimant had changed his mind about the terms of the lease to the defendant after Lease 2 was executed. Lady Justice Arden held that in her judgment the court was entitled to make these findings of fact and they satisfied the evidential requirement for rectification.
The mistake
Lady Justice Arden held that in her judgment the parties were, mistaken as to the legal effect of the words in Lease 2. There was a mistake as to the two leases taking effect in conjunction with one another. That was their intention. The parties clearly intended both Lease 1’s amendments to LS2, and Lease 2, to be binding.
The decision which the parties made was to execute Lease 2 without incorporating the amendment made by Lease 1, but their reason for doing so was that it was unnecessary to do this to achieve their purpose. They made a conscious decision but acted under a mistake as to the legal effect of the terms of Lease 2.
Discretion
Counsel for the Claimant did not rely on delay and affirmation as defences in themselves but criticised the Judge at first instance for not taking account of these matters when deciding whether to grant relief. On the question of delay and affirmation, Counsel for the Claimant referred to a number of emails sent on behalf of the Defendant after Lease 2 was signed referring to "the lease" in the singular. He also refers to the point that rectification was not claimed until the respondent filed a counterclaim in these proceedings.
Counsel for the Claimant also submitted that the fact that rescission of that lease was impossible was a factor which the court should have taken into account and refuse rectification because the Defendant had not asserted its right of rectification before a third party had taken a lease.
The Court of Appeal did not consider that any of these factors were matters which should have led the court to refuse an order for rectification. The emails on which Counsel for the Claimant relied upon did not identify what the Defendant meant by "the lease" and there was no evidence that prior to the start of the proceedings the Defendant knew that the Claimant contended that the lease was on the terms of Lease 2 only. The Claimant for example, permitted subletting in that period. The ingredients for affirmation were not met and the delay was not the inordinate delay that would be necessary to deprive a person of his right to apply for rectification.
Decision
The Court of Appeal dismissed the Claimant’s appeal. In its judgment, the court at first instance was correct to conclude that the parties were mistaken as to the effect of Lease 2 and that Lease 2 should be rectified to incorporate the amendments to LS2 which the parties had agreed in Lease
Conclusion
This very helpful decision highlights the key elements of rectification and the wide discretionary power the court retains. In summary the court can grant rectification where the parties have a clear intention but their executed agreement does not achieve this intention.
The last words of great wisdom go to Lady Justice Arden
“The remedy of rectification entitles the court to give effect to the reasonable expectations of contracting parties as to the meaning of their executed agreement. Rectification is, in a sense, an instance of English and Welsh law applying a concept of good faith (that is, fair dealing) without actually calling it such.”
Kind regards
