KPMG v Network Rail Infrastructure Ltd (2007)
A prior agreement for a lease including the form and content of the draft lease attached to it was an important part of the background and was a permissible aid to construction of the lease in its final form. Where it was clear that words had been omitted and what the gist of those words was the court would supply the omission as a matter of construction.
The appellant tenant (K) appealed against a decision ((2006) EWHC 67 (Ch), (2006) 6 EG 171 (CS)) that the landlord (N) was entitled to rectification of a break clause in a lease. The relevant clause gave N the right to review the rent and gave K three possible opportunities to determine the lease following a rent review. The lease generally followed the form of a draft lease attached to a preceding agreement for a lease. However, some words had been omitted from a parenthesis in the relevant clause of the lease as executed compared with the earlier version. The earlier version contained a further limitation on K's right to determine: not only must there have been a rent review but it must have resulted in an increase in the rent. K claimed that the clause as drafted without the relevant words relating to the increased rent condition gave K two "free-standing" opportunities to break the lease in addition to the three opportunities dependent on a rent review. The judge upheld N's case for rectification of the lease, based on mutual mistake, so as to supply the missing words. The judge found that even though K's solicitors had drawn attention to the omission, which he thought was in K's favour, it had always remained K's intention to execute the lease as originally drafted without the omission. K submitted that on the evidence the judge's conclusion on intention was impossible and that the only reasonable inference was that K albeit mistakenly thought that the clause had been changed deliberately in its favour and intended to contract on that basis. N submitted that the lease should be rectified to give effect at least to the common intention that there should be only three rights to break, all dependent on rent reviews, or that as a matter of construction the lease should be interpreted as having that effect.
(1) K's solicitor had spotted the change and advised K of its effect, as he believed it to be. The only reasonable inference from the evidence was that K accepted the solicitor's view of the change and was content for the transaction to proceed on that basis. The judge should have rejected N's rectification claim. (2) Contrary to N's alternative submission it was not possible to order rectification of the clause so that it reflected those parts of the parties' respective intentions about the matter which were the same but ignored those parts which were not, Swainland Builders Ltd v Freehold Properties Ltd (2002) EWCA Civ 560, (2002) 2 EGLR 71 distinguished. (3) The judge had erred in holding that the draft lease was not relevant to the issues of construction. The draft attached to the agreement for a lease was a detailed, carefully negotiated document to be departed from only for specified reasons and was sufficient in itself to create an equitable lease. The prior agreement including the form and content of the draft lease attached to it was an important part of the background and was a permissible aid to the construction of the lease in its final form, HIH Casualty & General Insurance Ltd v New Hampshire Insurance Co (2001) EWCA Civ 735, (2001) 2 All ER (Comm) 39 considered and Ladbroke Group Plc v Bristol City Council (1988) 23 EG 125 applied. In applying the principle that prior agreements could be admissible to construe a contract, leases were not to be considered as in a separate class. (4) The general effect of the clause without the parenthesis was clearly to give the tenant three opportunities to determine the lease at specific dates. That was confirmed by comparison with the preceding draft. The parenthesis did not purport to alter that general effect but appeared as a qualification or explanation. If it had been intended to increase the break rights to five rather than three it was almost inconceivable that it would have been done in that way. It was obvious from a reading of the later version on its own that something had gone wrong. Comparison with the draft left no doubt as to the parameters of the error. The court could see that words had been omitted and what the gist of those words was and should therefore correct the error as a matter of construction, Homburg Houtimport BV v Agrosin Private Ltd (The Starsin) (2003) UKHL 12, (2004) 1 AC 715 applied. Either the relevant words should not have been left out or the whole of the increased rent condition should have been. The existence of two plausible alternatives did not undermine the case for correction. The clause should be interpreted as N contended based on the earlier draft.