England and Wales Court of Appeal (Civil Division) Decisions

CCRTF 1999/1308/B2

IN THE SUPREME COURT OF JUDICATURE

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM SLOUGH COUNTY COURT

(HIS HONOUR JUDGE HOLDEN)

Royal Courts of Justice

Strand, London WC2A 2LL

Friday, 8 December 2000

Claimant/Respondent

Defendants/Appellants

MICHAEL KING (instructed by Messrs Gordons of Marlow, Bucks) appeared on behalf of the Appellants.

TIMOTHY DUTTON (instructed by Messrs Stevens & Bolton of Guildford) appeared on behalf of the Respondent.

POTTER LJ:

Introduction

1. This is an appeal by the defendants against the judgment of HH Judge Holden in the Slough County Court on 18^th November 1999 and his order of the same date whereby he gave judgment for the claimant for damages to be assessed in lieu of specific performance in respect of the breach by the defendants of a covenant to erect an office building pursuant to Clause 3(2) of a lease dated 2^nd May 1992 made between the first defendant as freehold owner and lessor and the claimant company under its previous trading name as lessee (In 1995 the first defendant transferred the freehold into the name of himself and his wife jointly.) The judge also dismissed the defendants' counterclaim for rectification of the lease by deletion of Clause 3(2), alternatively a declaration that the covenant was void for uncertainty or otherwise imposed no obligations upon the defendants. The appeal turns upon the issue of uncertainty.

The History

2. The lease related to premises known as The Yard, Low Meadow Farm, Windsor Road, Gerrards Cross, which was demised to the claimant for the purposes of its fleet transport business for a term of twelve, subsequently increased to twenty-five, years at a rent of £25,000 per annum subject to rent reviews every three years. The user of the premises was limited to that of a haulage contractor unless altered with the previous consent in writing of the lessor. By clause 3(2), the lessor covenanted as follows:

`To erect in the position shown edged blue on the plan herewith a permanent office building in accordance with the specification contained in a letter of even date and signed by the parties a copy of which is annexed hereto ... .'

The plan attached to the lease showed a rectangular area edged blue on open ground immediately adjacent to a large hangar like structure used as workshops and the forecourt area in front of it. The area was designated "New Offices". However, no signed, or any, letter of specification was annexed to the lease and, as the judge held, none existed. Oddly, no period for compliance with the covenant was provided for and, for a considerable period after the claimant went into possession as lessee the parties took no steps to implement the clause. Indeed, without the matter being further pursued or discussed, the claimant, rather than requiring implementation of the covenant, erected on open ground a little way from the blue edged area marked on the plan a two-storey Portakabin which the claimant occupied as offices in place of a single Portakabin already there which the first defendant had removed at the claimant's request. The claimant also demolished the workshop and replaced it with a timber-framed barn. Other works were also carried out elsewhere on the premises, by agreement with the first defendant, on the basis that the claimant paid for them and obtained any necessary planning permission.

3. The matter only came to a head when the local authority served a planning enforcement notice for removal of the two-storey Portakabin and the claimant gave notice to the defendants that he required them to comply with the covenant in Clause 3(2).

4. It was not possible for the judge to reach any conclusion as to the intention of the parties as at the time the lease was signed so far as the nature or detail of the office building contemplated by Clause 3(2) was concerned. Neither party asserted that such details had been agreed or discussed and, in any event, the judge held that neither of the protagonists, namely the first defendant as lessor and Mr Parker for the claimant lessee, was a witness of truth. It was the first defendant's case, as pleaded in paragraph 4 of his Amended Defence and Counterclaim, that, in negotiations prior to the grant of the lease, Mr Parker informed him that the claimant had plans for improving the premises, including the building of a new office on the blue land if planning permission could be obtained Mr Parker also stating that the claimant would pay for the improvements. The first defendant elsewhere pleaded that, having orally agreed that the claimant could carry out the improvements provided that he paid for them and obtained the necessary planning permission, he was unaware that Clause 3(2) had been included in the lease at all. His case at trial was that he had been tricked by the claimant and his solicitor, who acted for both parties in drafting the lease, into signing the lease in a form which included Clause 3(2).

5. The claimant on the other hand pleaded at paragraph 3 of the Reply that, in the prior negotiations, it had been agreed that the defendants would be responsible for the construction of the new office building and for obtaining the necessary planning consent.

6. The judge made no detailed findings upon these matters. The greater part of his judgment is taken up with the allegation of trickery and what may or may not have been the first defendant's true state of mind as to who was to build any proposed office premises. He concluded that the first defendant in fact had known what he was signing. He also dealt at length with Mr Parker's credibility, not least because at a late stage, Mr Parker had produced a form of specification which he said existed at the time the lease was signed and was that referred to in Clause 3(2); however, the judge had little hesitation in rejecting that evidence. Finally, the judge was highly critical of the role and performance of the solicitor.

7. The judge dealt with the question of whether or not the Clause 3(2) was enforceable or void for uncertainty relatively briefly. He said that if the covenant was to `stand up':

"it can only do so if there is a sufficient degree of certainty, and this has been the subject of very interesting submissions .. . I have reached the conclusion that the covenant (and of course I am talking only of the main covenant in real terms) is not void for uncertainty. I think if, as I concluded, there was an intention that an office building should be built on a site, the site being well delineated, I ought to strive, as Mr Dutton [for the claimant] says, to see that situation achieved and in so doing I think it is again a question of attempting to use my common sense and to ask myself again another question. What would the parties have thought in the circumstances to be an appropriate office building? I do not really have great difficulties in that, because it would be a building which the landlord would know would be appropriate and necessary for his tenant. To some extent it would have some relationship to the original defunct building but that is not in itself an important aspect. It would have to be a building that would have to be placed in a certain situation having regard to the plan attached to the lease. I agree with Mr Dutton that its eventual size will be to some extent limited, not only by the planning permissions but the size of the plot, but more importantly by the needs of the tenant. I think the most attractive aspect of the submission that Mr Dutton made is this, that in the end it is a decision for the landlord to make. He is the controlling factor and can only be forced to agree to a building which he regards in all the circumstances to be reasonable. I suppose it is trite to say, if there is a disagreement in relation to that aspect, it is another contention that some court will have to sort out as between the parties. As Mr Deung I think put it in his report, it has got to be a permanent building of reasonable construction ....

... I appreciate that to some extent we are on newish ground here and I have to say I have reached the decision with a degree of diffidence because I well understand and have carefully considered Mr King's very strong submissions in relation to this aspect. It is, as he says, a question of degree, but I think on balance there is sufficient here to say that there is not the degree of uncertainty in the situation that [the first defendant] would wish there to be ...

That effectively is the judgment as far as it goes. But it really seems to me, gentlemen, that the interesting area of the case may well turn out to be the question of whether or not in all the circumstances I am going to exercise a discretion."

In that last sentence, the judge was referring to the claim for specific performance pleaded by the claimant. However, Mr Dutton for the claimant then indicated that the claim for specific performance was no longer pursued and the judge accordingly ordered that there be judgment for damages to be assessed.

The Principles Relating to Uncertainty

8. As stated in The Interpretation of Contracts (2^nd Ed) by Kim Lewison QC at para 7.10, p.213, the task of the court is to construe the contract or other document in issue according to the ordinary canons of construction and then to determine whether the document, as so construed, is void for uncertainty. Thus, the first step necessary to be taken in respect of a lessee's or landlord's covenant alleged to be void for uncertainty is to identify the obligation which the parties intended to impose upon the covenantor by reference to ordinary principles of construction. In this respect, where parties have entered into what they plainly believe to be a binding agreement, the court is reluctant to hold that the agreement (or any provision in it) is void for uncertainty and will only do so as a last resort. As stated by Megarry J in Brown -v- Gould [1972] Ch. 53, after reviewing various of the authorities relating to provisions in leases:

"No doubt there may be cases in which the draftsman's ineptitude will succeed in defeating the court's efforts to find a meaning for the provision in question; but only if the court is driven to it will it be held that a provision is void for uncertainty."

9. In that case, Megarry J identified "two main ways" in which a provision may be void for uncertainty; the first, where it is either unintelligible or meaningless and the second, where there are a variety of meanings fairly attributable to it and it is impossible to say which of them was intended. He might have added the situation in which words chosen by the parties have no clear objective meaning, but depend on subjective rather than objective criteria. In Murray -v- Dunn [1907] AC 283, a building restriction prevented a landowner from erecting "any building of an unseemly description". In holding that word "unseemly" was too uncertain to be enforceable, the Earl of Halsbury observed:

"What may reasonably be `seemly' appears to be a question rather of the personal conduct of the individuals engaged than any characteristic of the building which is supposed to be itself an infraction of the covenant which has been entered into."

10. Equally, questions of uncertainty may arise where the terms of the contract require further agreement between the parties in order to implement them. As Lord Russell of Killowen stated in Scammell (G) and Nephew Limited -v- Ouston [1941] AC 251, when holding void for uncertainty an order given `on the understanding that the balance of the purchase price can be had on hire-purchase terms over a period of two years':

"In view of the numerous forms of hire-purchase transactions, and the multiplicity of terms and details which they involve, the respondents are faced with what appears to me to be a fatal alternative, namely either (1) this term of the alleged contract is quite uncertain as to its meaning, and prevents the existence of an enforceable contract, or (2) the term leaves essential contractual provisions for further negotiation between the parties with the same result."

11. In all such cases the court will hold the agreement void for uncertainty only as a last resort, its reluctance to do so being all the greater when the contract has been partly performed, particularly in the case of a lease or conveyance, see Sudbrook Trading Limited -v- Eggleton [1983] 1 AC 444 per Lord Fraser at 484E-G and Sheffield City Council -v- Jackson [1998] 1 WLR 1591 (CA) per Nourse LJ at 1599G-H. That said, however, while the court will push principles of construction to their limit in order to avoid a finding of uncertainty in respect of a provision in a lease, it should not go so far at to import a construction or imply a term which is plainly inconsistent with the express words or clear intention of the parties.

The Surrounding Circumstances

12. Whilst I have earlier set out the background facts relevant to the various issues before the judge, including the claim of the defendants for rectification, the parties have agreed a statement of facts in relation to the circumstances surrounding the execution of the lease. The relevant facts are that, during the negotiations between Mr Parker, his solicitor, Mr Steele, and the first defendant between April and June 1992, a plan was produced which was the plan later annexed to the lease in (immaterially) amended form identifying the area edged blue and designated "New Offices", which area was at the time vacant of any structure save for a small toilet block of brick construction. The parties knew that there had previously been a structure on the area which had burnt down save for the toilet block. That structure had contained offices, but the structure and offices had not formerly been part of or used in connection with the haulage yard. The parties knew that there was no planning permission in existence for offices on the area identified for New Offices. The lease prepared by Mr Steele included no specification as referred to in Clause 3(2) of the lease.

The Grounds of Appeal

13. Mr King for the claimant has submitted to us that, whether or not one has regard to the surrounding circumstances as set out in the agreed statement of facts, and applying commercial common sense to the wording of Clause 3(2), it is clear that the parties intended that the office premises contemplated by the clause should be the subject of a written specification agreed between the parties. Further, the premises contemplated to be built by the landlord were to serve as offices for the business of the tenant who would be in occupation for at least twelve years and, while the costs of construction would be borne by the landlord, they would, on the rent reviews provided for in the lease, significantly affect the tenant's liability for future rent as well as the capital value of the land at the end of the lease. They were also premises in respect of which no planning permission yet existed. That being so, it is plain that the parties intended on any view to provide, with a degree of detail, for the nature, extent and layout of the office accommodation both to elaborate the content and define the extent of the landlord's obligation and to form the basis of an application for planning permission. Mr King submitted that it is impossible for the court to determine or infer the intention of the parties in respect of such details and hence what the specification would have contained had it in fact been agreed and provided for.

14. In these circumstances, Mr King submitted that the covenant was void for uncertainty for at least three reasons. First, to seek to enforce it would be to write the parties' bargain for them. In a position where they plainly intended to provide a specification, they had, whether by accident or oversight failed to do so, in circumstances where the court is in no position to fill the gap whether by reference to custom, practice, mutual intention, or inference from any formula or other available yardstick referred to in the agreement.

15. Second, Mr King submitted that the position is analogous to that in Scammell v Ouston, where the parties agreed that the balance of the purchase price for a car could be paid "on hire-purchase terms over two years". In that case, Lord Wright stated at 269-70:

"The furthest point they reached was an understanding or agreement to agree upon hire-purchase terms. But as Lord Dunnedin said in May & Butcher -v- The King, reported in a note to Foley -v- Classique Coaches Limited, "To be a good contract there must be a concluded bargain and concluded contract which is one that settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. Of course it may leave something which has still to be determined then that determination must be a determination which does not depend upon the agreement between the parties." McKinnon LJ thought that in this case the agreement of the parties was complete and nothing was left for them to agree. Whatever was lacking in their agreement could and should, he thought, be implied by the court by invoking the standard of reasonableness, on the principles laid down by this House in Hillas & Co. -v- Arcos ... . The Lord Justice's view as I have already indicated, was, if I have understood it correctly, that there was a contract for a hire-purchase agreement, that no further agreement of the parties was necessary because the court could determine for the parties what was a reasonable hire-purchase agreement, and thus the contract would be complete. I am unable to concur in this conclusion."

Similarly, Mr King submits that, although a bare covenant to erect a permanent office building is at first sight a clear, if very general, expression of the parties mutual intention, the addition of the words "in accordance with the specification ..." immediately makes clear that it was the parties' intention to refine and confine such intention to a building which had been the subject of an agreed specification. Because the specification could contain a variety of provisions binding upon the parties which the court is not in a position to determine, the covenant as a whole is void for uncertainty.

16. Third, Mr King submits that this is not one of those cases where it is open to the court to cure the defect in the parties' agreement and to give the covenant validity by itself supplying or assuming minimum terms by way of specification on the basis of "reasonableness". There are two reasons why not. The first is that this is not a case where the court can perform an equivalent exercise to that which it is ready to perform in cases where matters of price or valuation are in issue. In such cases, the court will readily resort to a construction that the bargain is essentially for sale at a `reasonable' price or a `fair' valuation (cf. Sudbrook Trading Estate -v- Eggleton [1983] 1 AC 44). Here however, the court would have itself to arrive at a specification relating to the nature, size and quality of the building as to which no yardstick of reasonableness or formula for calculation is available either within or without the confines of the contract.

17. The second reason is that, given the manifest intention of the parties to agree the content and detail in the form of a specification, if the court were to imply or write in those details ex post facto, it would be inconsistent with the parties' intention that the details (a) should be agreed and (b) should not be left open for later agreement but should be set out in the lease: c.f. the approach of the Court of Appeal in Gillatt -v- Sky Television Limited [2000] 1 All ER (Comm) 461. In that case, Clause 6 of a share acquisition agreement provided that, if S sold or otherwise disposed of his share capital in T, N would be entitled to payment by S of a percentage of `the open market value of such shares ... as determined by an independent chartered accountant'. The court held that, as a matter of the natural ordinary meaning of the language in Clause 6, the expression `as determined by an independent chartered accountant' was an integral and essential part of the definition of the payments to which M was entitled on the sale of the shares. The reference to `open market value' of the shares did not provide the court with adequate objective criteria to determine the value of those shares. Although it would be possible for expert valuers called by the parties to offer reasoned opinions on the value, the agreement contained no definition of `open market value' or any indication of the basis on which it was to be ascertained otherwise than by reference to the opinion of the independent chartered accountant. The parties had expressly recognised that the valuation was pre-eminently a matter of judgment for the independent chartered accountant entrusted with the task by the parties and it was not a function of the court to modify clause 6 so as to enable it to intervene to make its own valuation: see in particular the observations of Mummery LJ at 470a-d.

18. Finally, Mr King submitted that the covenant in Clause 3(2) was not an essential stipulation of the lease and thus may itself be treated as of no effect without prejudicing the remainder of the terms in the lease.

19. For the claimant, Mr Dutton did not dispute that last point. However, he placed reliance upon those authorities which state that the court should be particularly reluctant to hold void for uncertainty any provision in a lease or conveyance.

20. As a preliminary to his principal submissions, Mr Dutton attempted to alleviate the difficulties he faced with an argument which I reject. He sought to argue that, in approaching Clause 3(2), the court could and should infer as part of the surrounding circumstances that the parties positively intended to sign the lease without the specification attached and therefore intended that there should be no specification or further definition of the landlord's obligation, despite the wording of Clause 3(2). Therefore, he submits, the lease should simply be approached and construed as if the words `in accordance with the specification ...' did not exist and the parties had simply agreed that the lessor `erect in the position shown ... a permanent office building'. That would have the effect (as Mr Dutton submitted was the proper construction) that the nature and details of the building were entirely a matter for the landlord, who would adequately comply with the covenant provided that he erected a structure which complied with the relevant description (i.e. `permanent', `office', and `in the position shown').

21. I do not consider that is the right approach. First, the parties' mutual realisation and/or common acceptance that the specification did not exist and/or that it would not exist at the time when the lease became binding, is no part of the agreed facts and should not in my view be inferred. Second, the intention of the parties as to the meaning and ambit of their obligations under the agreement is, in the absence of a successful claim for rectification, to be inferred from the words of the agreement which include reference to the specification ... annexed hereto. That reference imports an intention or assumption that the specification indeed exists and the task of the court is to ascertain whether, in the light of its omission, the wording of the agreement is such as to identify the obligations of the parties with sufficient certainty.

22. As to that question, Mr Dutton submitted that what he calls the `broad bones' of the obligation are clear from the lease to the extent that the building is (a) permanent, (b) to contain offices and (c) of the approximate size of the blue edged area on the plan. He acknowledged that the omission of the specification meant that a number of details one might have expected to see included in any specification were absent, including some reference to the floor area, if only by reference to the number of storeys anticipated, the nature or standard of construction and the type of materials and/or finishes. However, he submits that, as the judge held, all those matters might properly be left to the discretion and decision of the landlord, who would not be in breach of the covenant unless he erected premises which did not comply with any of the core obligations set out at (a)-(c) above. Mr Dutton accepted that, whether or not a contractual provision permits questions of uncertainty to be resolved by the unilateral decision of one party to a contract (or by some third party) is ultimately a matter of construction: see Bushwall Properties Ltd -v- Vortex Properties Limited [1976] 1 WLR 591. That was a case in which a contract for the sale of land for completion in phases, the power to select the land to be included in each phase represented an element, which, if left uncertain, would render the contract as a whole uncertain and for that reason unenforceable. It was held that there was no ground on which, as a matter of law, the power to select the land where no provision had been made had to be regarded as vested in the purchaser because, should that be so, the vendor might be seriously prejudiced by the manner in which that power was exercised: per Sir John Pennycuick at 599A-D (c.f. the approach of the court on different and somewhat complicated facts in Abbey Homesteads (Development) Limited -v- Northamptonshire CC [1986] 1 EGLR 24 per Nourse LJ at 27F-H).

23. Finally, Mr Dutton submits that there is a distinction to be made between this case and those cases where the parties reach an `agreement to agree'. In the latter case they express themselves in terms which contemplate future agreement as to details, which agreement never takes place; whereas here the contract refers to an existing further agreement which either does not exist or the contents of which are unknown. He submits that, in this case, the problem is not one of uncertainty in relation to an `agreement to agree' but one of interpretation and inference as to the type and details of the building the parties had in mind.

24. I accept the submissions of Mr King. It does not seem to me that the distinction between an agreement to agree in the future and an existing agreement in terms which are incomplete and uncertain, is one which goes to the heart of the matter. In both cases, the parties have failed to elaborate upon basic terms which they have agreed in a manner which enables the court to elicit with sufficient certainty what bargain they have in fact made or intended. It seems to me that the situation in Scammel -v- Ouston is analogous to the problem which faces the court in this case. This is a case where, as submitted by Mr King (see para 15 above), the parties plainly intended to define their obligation by reference to a further document which would have required agreement between them on a 'give and take' basis. On the one hand it would have taken into account the requirements of the lessee, (the offices were to be constructed and occupied for the benefit of its business) and, on the other, that it was to be built at the expense of the lessor, who might wish to contain the capital cost or, alternatively to invest in an expensive project with an eye to the increase in the capital value and his increased entitlement to rent on any future rent reviews. It does not seem to me that these are matters in relation to which it was contemplated would be right to infer that the lessor was to decide upon the specification of the building to be provided. Nor is it feasible for the court to `fill in the gap' or write the parties bargain for them. It seems to me that the most vital element of the specification missing was the size, in terms of the floor space to be provided. There is no indication, as argued by Mr Dutton, that the parties intended that only a single-storey building should be erected, thus leaving a question mark impossible to fill as to whether one or both of them intended the floor area to be limited to the approximate area of the land marked blue or to be approximately double that area, by the addition of a second storey. Certainly the history showed the claimant's preference for double the area which had formerly been provided. Other matters of detail may well have been of less significance, but nonetheless of importance to one or other of the parties to the extent that they would have been provided for in the specification. Nor can the court be in a position to impute the parties' intention on the basis of `reasonableness'. In that respect, I accept Mr King's second and third submissions (see paras 15-17 above).

25. Accordingly, I consider that the judge was wrong in the decision to which he came.

26. I would only add for completeness that the judge's reference to a 'Mr Deung' appearing at the end of the first paragraph of the passage of his judgment quoted at paragraph 7 above, was a reference to a surveyor who acted for the first defendant when valuing the premises in connection with a loan required by the first defendant from the Chesham Building Society. For that purpose Mr Deung, on the understanding that no specification for the works existed in relation to Clause 3(2), was prepared to effect a valuation of the land on the assumption that the works would be a single-storey, new office `of good quality, prominent structure and adequately equipped'. Mr Dutton sought to argue that this assumption in a report prepared for the purpose mentioned was in some way supportive of his contention that Clause 3(2), as originally agreed, had sufficient substance and was not so vague in detail as to be void for uncertainty. Without prejudice to the validity or otherwise of that argument, the Agreed Statement of Facts summarised at paragraph 12 above also included a reference to Mr Deung's assumption. I do not consider that Mr Deung's ex post facto assumption for a different purpose can be of relevance or assistance to the court in reaching its conclusion as to the proper construction of Clause 3(2) or as to the contemporary intention of the parties in relation to it at the time the lease was signed.

27. I would allow the appeal and set aside the judgment for the claimant for damages to be assessed. I would also, subject to any further submissions of counsel on the terms of the order, give judgment on the counterclaim in the form of a declaration that the covenant in Clause 3(2) of the lease as set out in the Schedule to the Notice of Appeal is void for uncertainty and imposes no obligation on the defendants.

THORPE LJ:

28. I agree that this appeal should be allowed for the reasons given by my lord, Potter LJ.