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KPMG LLP v Network Rail Infrastructure Ltd (2006)


In the circumstances, a defendant was entitled to the rectification of a reversionary sub-underlease to include words that had been omitted from the original underlease where the sub-underlease did not express the common continuing intention of the parties.


The claimant tenant (K) sought the construction of a break clause contained in a reversionary sub-underlease. K occupied a property as a sub-undertenant of the defendant (N), pursuant to a reversionary sub-underlease. The sub-underlease was originally made between the landlord (B) and the tenant (P) for a term of 31 years. It was intended that upon completion of development on the site a lease and underlease would be granted so that B would hold the premises as undertenant and would grant a lease to P. As far as P was concerned, the structure was contained in an agreement for lease. Due to a delay in the completion of the development, B wished to make a number of amendments to the sub-underlease. It was agreed between P and B that the sub-underlease would be split in two. The first sub-underlease was for a period of 21 years and the second was for the 31 year reversionary sub-underlease. Paragraph five of the reversionary sub-underlease contained break clauses that had not been included in the initial sub-underlease. The issues for determination were whether (i) K enjoyed a free-standing right to break the lease; (ii) N was entitled to have the reversionary sub-underlease rectified due to a unilateral mistake; (iii) N was entitled to have the reversionary sub-underlease rectified due to a mutual mistake.


(1) Paragraph five of the reversionary sub-underlease could not be read as if the relevant words had been inserted. It must be clear to the court not only the construction of words that had been erroneously omitted but also what those words were, Homburg Houtimport BV v Agrosin Private Ltd (2004) 1 AC 715 considered. It was not right to simply have regard to the agreement for lease as a relevant background circumstance against which to construe the reversionary sub-underlease without also having regard to the fact that the parties thereafter set about negotiating amendments to the annexed sub-underlease between when the agreement for lease was entered into and when the sub-underleases were executed. It was not clear that there had been an erroneous omission of the relevant words and it was not possible to conclude that the omission of the relevant words was simply because that is how part of the paragraph appeared in the annexed sub-underlease. It was also the plain and obvious intention of the parties that the reversionary sub-underlease should set out the terms of the leasehold relationship between the parties to the exclusion of the terms set out in the annexed sub-underlease, which the parties had earlier agreed should govern the relationship. Once that position was reached, the parties' contract must be found exclusively in the terms of the initial and reversionary sub-underleases, and the annexed sub-underlease could not be used to contradict those terms, HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co (2001) EWCA Civ 735 , (2001) 2 Lloyd's Rep 161 applied. K had the opportunity, independent of any rent review, to break the lease in the 10th and 20th years of the term and in addition a right to break in the 3rd, 13th and 23rd years of the term. (2) B did not intend either to confer on P any additional break rights or to relax the circumstances in which the existing break rights were exercisable. There was no suggestion that the omission of the relevant words was unintended on B's part. It was clear that P had not kept quiet about the matter to benefit from B's omission. Therefore, N's claim based upon unilateral mistake was rejected. (3) It was clear that, if P had executed the reversionary sub-underlease without any awareness, let alone intention on the part of anyone with authority to form P's intentions in that regard, that there was to be any change in circumstances in which a tenant would break its lease, there could be no question that the paragraph ought to be rectified to include the relevant words. In such a case the paragraph would not have expressed the common continuing intention of the parties. That common intention would have been to have as a term of the sub-underlease the same break rights that were to be found in paragraph five to the annexed sub-underlease that the parties, by the agreement for lease, had bound themselves to include in the sub-underlease when finally executed. The change to paragraph five caused by the omission of the words had not been previously discussed. Given the fact that the omission was not discussed and that there had been no conspiracy of silence, on the balance of probabilities, by the agreement for lease P had intended to enter into a reversionary sub-underlease that gave it the same three break clauses as were conferred by the sub-underlease. The obvious reason why the reversionary sub-underlease was executed containing a clause as ineptly drafted as paragraph five was simply that when the matter eventually came to be considered by P the omission was overlooked. N was entitled to rectification. (4) The sending of the clean copy of the draft sub-underlease rather than one showing the amendments that B was proposing did not disentitle N to rectification.

Judgment for defendant.

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31 Jan 2006

Chancery Division
Blackburne J

‚ÄčLTL 7/2/2006 : (2006) 6 EG 171 (CS) : (2006) NPC 11

Practice areas
Commercial Disputes
Real Estate