Scottish Widows Fund & Life Assurance Society v BGC International (2011)
The court construed a lease in a way that the court considered a reasonable person would have understood the parties to have meant by the words they actually used.
The claimant (S) brought construction and rectification claims in respect of a sub-sub-underlease which it had entered into with the defendant (B). For commercial reasons, S had taken a sub-underlease of premises from a company (X). The rent of £1,285,424 was much higher than the market rent and as the rent review provisions were upwards only S was locked into paying the onerous rent until the market improved. S entered into a sub-sub-underlease of the premises with B in September 1996 at an initial rent of £752,765. S subsidised B's rent until December 18, 2010 which represented a discounted cash equivalent of a notional reverse premium of £10 million. The rent from 2001 was calculated as £752,765 plus the excess of the open market rent on the review date over £1,285,424. From 2006, the rent was the excess of the market rent on that review date over £1,285,424. A dispute arose in relation to the period after December 2010 as a comparison had to be made between £1,285,424 and the market rent on the "immediately preceding Review Date": the market rent in September 2006. S submitted that the lease was not supposed to lead to S potentially continuing to subsidise, by an unspecified amount, B's sub-sub-underlease after December 2010, and if the "problem" could not be solved by construing the document then the lease had to be rectified.
(1) The clause was relatively clear as it stood. It was only if the market recovered irregularly so that the 2001 market value was above £1,285,424 and the 2006 market value was below the 2001 market value that any difference would emerge between what S was liable to pay X under the upwards-only rent reviews in the sub-underlease and what B was liable to pay S (see paras 19-20 of judgment). Whilst the court should be cautious in reading the actual words of documents in a sense different from their natural meaning, and in the instant case the parties were sophisticated and advised by top quality transactional lawyers, even careful lawyers could allow errors of expression to creep into a complex transaction, and an error could lie hidden until some triggering event occurred. The court had to draw together a number of indicators as to the meaning intended of the words used in the relevant clause. Something undoubtedly had gone wrong with the language of the clause. Surprisingly, only one of the options provided as to the calculation of the market rent from December 2010 recognised the effect of upwards-only rent review provisions. Whilst an incoming tenant would expect to be compensated for taking on over-rented premises there was no evidence to suggest he would expect to be compensated for the future routine operation of an upwards-only rent review. There was no commercial purpose apparent for providing a continuing subsidy once the market rents were aligned and the discount period deriving from the reverse premium had ended. There was no consistent allocation of risk between the parties and the instances that existed looked more like drafting consequences than the results of bargaining. It looked as though B had bargained to receive £10 million as compensation for all over-renting risk in return for taking a lease under which it would eventually pay the rent due to X. It would be odd to have a continuing subsidy in relation to over renting after December 2010 that was not related to the £10 million (para 32). The lease was to be read as achieving the objective of transferring S's responsibility for rent under the X lease and the sub-underlease to B and in return to provide B with value amounting to £10 million. The relevant clause would be construed as meaning that from December 2010 B had to pay a rent equal to the higher of £1,285,424 or the rent that would have been payable under the review provisions absent any subsidy. That was what a reasonable person would have understood the parties to have meant by the words they actually used (paras 29,31,33). (2) If it had been necessary to decide the issue, the court would not have rectified the lease in the manner sought by S. That would have required S to show that the parties had had a common continuing intention as to the rent payable after December 2010 which had been objectively manifested by words and acts demonstrating that intention. The correspondence, attendance notes and drafts showed that there was no prior accord. The meeting of minds was in the engrossed document (paras 34, 57).
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31 Mar 2011
LTL 5/4/2011;  EWHC (Ch) 729
John McGhee QC