England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
HHJ KAYE QC sitting as a Judge of the High Court
6LS30332

		Royal Courts of Justice Strand, London, WC2A 2LL
		19/06/2008

Lord Justice Mummery :

Introductory summary

1. This appeal is from an order of 7 June 2007 by HHJ Kaye QC, sitting as a judge of the High Court, for rectification of a lease (the Lease) of Bottoms Mill, 286 Bradford Road, Batley, West Yorkshire (the Premises) granted by Mr Mohammed Zafar on 24 December 2002 to the respondent tenant, Bradbury Investments Limited (Bradbury).
2. The appeal, for which permission was granted on 9 November 2007, turns on a refined point taken against the rectification ordered in this case.
3. The Lease was for a term of 30 years at an initial annual rent of £20,000 subject, after 3 years, to rent reviews that were linked to increases in the retail price index. Clause 20.2 conferred on the tenant a right of pre-emption of the freehold reversion as detailed in Schedule 4 to the Lease. There is no dispute that what was being acquired under the pre-emption was the freehold Premises subject to the Lease and that the price to be paid was the "Open Market Value" of the freehold. The dispute centred on the definition in the Schedule to the Lease of "the Open Market Value" which, failing agreement, was to be determined by an independent valuer. Bradbury's rectification claim arose from the presence of the words "with vacant possession" in the definition of "Open Market Value" in paragraph 1.2 of Schedule 4 as:

" …the best price at which the sale of the freehold interest in the Premises…..would have been completed unconditionally for cash consideration by private treaty at the date of the Landlord's Offer Notice with vacant possession [emphasis added] on completion of the sale assuming [the assumptions are not material to this appeal]…"

4. After the grant of the Lease, Bradbury, which owned adjoining property, redeveloped the Premises at a cost of about £1m and sublet parts.
5. On 9 March 2004 Mr Zafar gave Bradbury notice of his intention to sell the freehold reversion subject to the Lease. On 11 March 2004 Bradbury served a counter-notice exercising the right of pre-emption. On 23 March 2004 Bradbury offered to buy the freehold from Mr Zafar for £275,000.
6. On 13 December 2004 the appellant Hicklane Properties Limited (Hicklane) purchased the reversion of the Property from Mr Zafar and agreed to be bound by Mr Zafar's offer notice under the pre-emption provisions. The transfer to Hicklane was made in December 2004 pursuant to an agreement of November 2003 settling litigation between Mr Zafar and his business and property partner, Mr Mohammed Rafiq, who was managing director and shareholder in Hicklane. Mr Rafiq was not a party to the grant of the Lease and was therefore in the difficult position of being unable to give any relevant evidence of what was agreed or intended by the parties to it.
7. Bradbury and Hicklane then conducted negotiations under paragraph 4.1 of Schedule 4. In February 2005 Bradbury offered £260,000 to Hicklane for the freehold reversion. The offer was not accepted. As the parties were unable to agree on a price, an independent valuer, Mr Butterworth of Carter & Co, was appointed in July 2005 to determine the price. Submissions to him by the parties revealed the cause of division on valuation. Hicklane contended that the freehold of the Property should be valued "with vacant possession", as stated in paragraph 1.2 and that the Lease should be ignored (value £2.9m). Bradbury contended that the freehold should be valued subject to the Lease (value £250,000).
8. On 21 October 2005 the independent valuer, after taking Leading Counsel's opinion on the construction of the valuation provision in Schedule 4, concluded that paragraph 1.2 meant that the open market value was "with vacant possession" and that he proposed to value it accordingly.
9. On 30 June 2006 Bradbury started rectification proceedings, pleading that the valuation provisions in Schedule 4 failed to record correctly the agreement reached between the original contracting parties by the date of or at the date of a meeting on 10 September 2002. The judge held that the requirements for rectification were satisfied and made an order that the Lease be rectified, as claimed, omitting the words "with vacant possession on completion of the sale" from the definition of "Open Market Value" mentioned earlier and inserting the words italicised in the following paragraph, as set out in the Schedule to the judge's order:

"1.2 "Open Market Value" means the best price at which the sale of the reversionary freehold interest in the Premises [immaterial provisions omitted] would have been completed unconditionally for cash consideration by private treaty at the date of the Landlord's Offer Notice assuming:

(a) a willing seller

(b) that prior to the date of the Landlord's Offer Notice there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest the agreement of price and terms and the completion of the sale

(c) that both parties to the transaction had acted knowledgeably prudently and without compulsion

(d) that this Lease dated 24^th December 2002 continues to exist

and taking into account any increase in the value of the Premises by way of marriage value attributable to the fact that the Tenant will upon completion of the sale own the freehold interest in both the Premises and the Tenant's Adjoining Property (as defined in Schedule 2) but disregarding the existence of the Right of Pre-emption contained within this Schedule."

The law

10. There was no dispute that the relevant legal principles were correctly summarised in the judgment of Peter Gibson LJ in Swainland Builders v. Freehold Properties [2002] EGLR 71 at 74 both as to what the party seeking rectification of a document has to establish and as to the convincing proof that is required "in order to counteract the cogent evidence of the parties' intention displayed by the instrument itself." On this appeal the arguments focused on the passage in which Peter Gibson LJ said that:

"While it must be shown what was the common intention, the exact form of words in which the common intention is to be expressed is immaterial, if in substance and in detail the common intention can be ascertained."

11. A passage from the speech of Lord Chelmsford LC in Fowler v. Fowler (1859) 4 De G & J 250 at 265 was also cited:

"It is clear that a person who seeks to rectify a deed upon the ground of mistake must be required to establish, in the clearest and most satisfactory manner, that the alleged intention to which he desires it to be made conformable continued concurrently in the minds of the parties down to the time of its execution, and also must be able to shew exactly and precisely the form to which the deed ought to be brought. For there is a material difference between setting aside an instrument and rectifying it on the ground of mistake. In the latter case you can only act upon the mutual and concurrent intention of all parties for whom the court is virtually making a new written agreement."

12. Crane v. Hegeman-Harris Co Inc [1971] Ch 1390 at 1391[Note]; [1939] 1 All ER 662 (affirmed on appeal at [1939] 4 All ER 68) was cited for the statement by Simonds J that:

"It is a jurisdiction which is to be exercised only upon convincing proof that the concluded instrument does not represent the common intention of the parties. That is particularly the case where you find prolonged negotiations between the parties eventually assuming the shape of a formal instrument in which they have been advised by their respective skilled advisers. The assumption is very strong in such a case that the instrument does represent their real intention, and it must be only on proof which Lord Eldon, I think, in a somewhat picturesque phrase described as 'irrefragable' that the court can act. I would rather, I think, say that the court can only act if it is satisfied beyond all reasonable doubt that the instrument does not represent their common intention, and is further satisfied as to what their common intention was; for let this be clear that it is not sufficient to show that the written instrument does not represent their common intention unless positively also you can show what was their common intention."[emphasis added].

The appeal

13. There was no criticism of the judge's statement of the legal requirements for rectification or of the burden and standard of proof. The substance of the criticisms was directed to his alleged failure to make precise findings on the evidence in accordance with the stringent tests that are required to be satisfied before a written instrument can be rectified by the court. There was missing from his judgment a finding, in substance and in detail, on the parties' prior agreement or common intention regarding the pre-emption valuation formula.
14. It was submitted that the evidence at trial was deficient in this vital respect. Each party's evidence of intention on the valuation formula was different. There was no continuing common intention. There were competing valuation formulae which produced different results in practice. Even if the formulae produced comparable figures in the early years of the Lease, as the term of the Lease expired, the bases of the valuation would diverge. Bradbury had accordingly failed to establish a continuing accord on a valuation formula. The judge did not find one. Indeed, it was submitted that it was not open on the evidence for the judge to find that there was one. The most that Bradbury had proved was that the words "with vacant possession" were included in the Lease by mistake. Proof of what should not have been included was not, however, enough to justify rectification of the Lease. It was necessary for Bradbury to prove positively what was the parties' common intention on the pre-emption valuation formula. Failure to do so was fatal to the rectification claim.

The judgment

15. In his detailed judgment the judge referred to the correspondence between the solicitors, the successive drafts of the Lease leading up to its execution, which he did not think were illuminating, and to aspects of the oral evidence that he described as "muddled" and "confused." Nevertheless, he found that it was "reasonably clear" what the parties had agreed and intended. He heard oral evidence from Mr Zafar and from Mr Paul Bailey, a director of Bradbury, about the meeting attended by them and their advisers on 10 September 2002. Agreement on certain fundamentals had been reached before the meeting, but not on the ascertainment of the price to be paid on the exercise of the right of pre-emption. The evidence of the meeting was crucial. The judge found as follows:

"60. In my judgment, despite the confusion in the letters, notes, drafts and correspondence of the solicitors on both sides who no doubt struggled to understand just what their clients had agreed, and despite Mr Bailey's muddled evidence, I find that the parties were reasonably clear on what they agreed and intended, at least by and at the meeting of 10 September 2002, and that understanding between them continued up to the date of execution of the Lease. Both plainly knew what was being purchased under the pre-emption rights. The Claimant was to have a right of pre-emption to purchase Mr Zafar's reversionary freehold interest, that is the reversion to its the Claimants', Lease.

61. What was being purchased was in essence the capitalised value of the passing rent at the date of sale, i.e. as at the date of the landlord's offer notice. That, after all, was what the landlord was first proposing to sell to a third party, which triggered the necessity for serving notice on the tenant. They each struggled to find a formula to assess the right price at the date of sale when the pre-emption right was exercised, whatever that was.

62. It seems to me that both clearly understood that it was the value, subject to the Claimant's Lease, and discounting or disregarding the money the Claimants had spent on improving the Mill by i.e. the money they had invested in refurbishing the property. That makes commercial sense, otherwise the Claimants would end up effectively paying twice. Again that left Mr Zafar's capitalised rent at 10 to 12 times i.e. as he usually did the deal. In substance in my judgment, it was the same thing. If I had to state a preference, it would be for Mr Bailey, despite his inconsistencies, i.e it was intended to be the value of the reversion as it would be on the open Market, subject to the Claimants' Lease, but both sides, however, anticipated that that would be no more than 10 to 12 times the passing rent at the date of the exercise of the pre-emption right. The form of words used in the Lease does not achieve this purpose."

16. The judge referred to the construction of the Lease adopted by the independent valuer on advice that it meant "value with vacant possession, not subject to the Claimants' Lease" and added that:

" 63. ……it is plain that the form of words used in the Lease did not achieve what the parties' common intention and purpose was, and indeed the construction favoured by the independent valuer was not what the parties' true and common intention and understanding was as well. The parties thought that the Claimant was buying the reversion, and it was that that was to be valued. Mr Bailey thought it was whatever a third party would bid for it at auction. Mr Zafar thought that he might expect 10 times the passing rent, and that was what he would get. It was, as I have previously said, in my judgment in substance the same thing, and both thought each was talking about the same thing. Both assumed it was, and would be therefore subject to the Claimants' existing Lease."

17. The judge concluded (paragraph 64) that the legal requirements for rectification were fulfilled, as the parties agreed in substance and in detail to the extent outlined by him:

"Both thought they were in substance, in my judgment, talking about the same thing, albeit they might have been coming at it from slightly different standpoints."

18. It followed that the words "with vacant possession" in the Lease as executed did not correctly reflect the common intention of the parties that the open market value of the freehold interest was to be ascertained subject to the Lease. The Lease was ordered to be rectified by omitting the words "with vacant possession" and by including consequential words to make the position plain.

Hicklane's submissions

19. The essence of Hicklane's appeal was that the case for rectification had not been made out on the evidence. Bradbury had not produced convincing proof that the parties had a common continuing intention as to the valuation formula for the ascertainment of the price in the right of pre-emption. It was insufficient to show that the words "with vacant possession" did not accord with the common intention of the parties. Bradbury had to go further and positively prove the existence of the parties' agreement or common intention on a formula for ascertainment of the price to be paid on exercise of the right of pre-emption. The judge had not found an agreement or continuing common intention of the parties on a valuation formula. He had ordered rectification on an impermissible selective basis. Partial rectification was achieved by removing the words "with vacant possession", on the basis that they were included by mistake, but leaving the rest of the definition of "Open Market Value" in place without any clear proof of the parties' prior complete common intention on a valuation formula.
20. In his submissions Mr Kirk Reynolds QC skilfully concentrated on the requirement that Bradbury should establish that the parties had precisely the same intention on a valuation formula in substance and detail. In their evidence of the meeting the parties and their witnesses were at odds on the substance and detail of the valuation formula. The oral evidence was crucial. There was no contemporaneous documentary evidence of the common intention pleaded by Bradbury, which had not called its own conveyancing solicitor (Mrs Jenny Black of Rollits) to give evidence or to produce the notes made by her of the meeting to prove the alleged common intention. In the absence of convincing proof of the parties' common intention on the particular matter of a valuation formula for the right of pre-emption other than stated in paragraph 1.2, the judge was wrong to order rectification of the definition in paragraph 1.2. He ought to have dismissed Bradbury's claim.
21. By reference to passages in the transcript of the oral evidence and to the witness statements it was argued that the evidential position on the alleged common intention was that each side had its own valuation formula leading to different values. On the one hand, in accordance with his usual practice, Mr Zafar's formula was that he wanted a capital sum of 10 to 12 times the capitalised value of the rent at the date of the sale. Neither vacant possession of the Premises nor the existence of the Lease expressly featured in his formula. On the other hand, Mr Bailey of Bradbury thought that the value should be the price that the freehold, subject to the Lease, would be bought for on the open market. This conflicting evidence of intentions did not establish that the parties had a common intention on the substance and detail of a pre-emption valuation formula.

Discussion and conclusions

22. In my judgment, the central point is the judge's finding that Mr Zafar and Bradbury agreed and intended that the open market value of the freehold was to have regard to the continued existence of the Lease, expressly disregarding the money spent by Bradbury on re-furbishing the Premises. This agreement and intention is not correctly recorded in the Lease which refers to "with vacant possession" instead of "subject to the Lease."
23. The issue before the judge was whether the words "with vacant possession" in paragraph 1.2 reflected what was agreed and intended by the parties to the Lease. It should be noted that it was not pleaded or asserted that any other part of paragraph 1.2 failed to record correctly the agreement or common intention of the parties.
24. It cannot be seriously disputed that the judge's conclusion on this issue and his rectification order make commercial sense. Mr Reynolds accepted that there was evidence entitling the judge to find that the valuation of the freehold was subject to the Lease. That was what had to be valued. He did not, however, accept that there was a common intention on a valuation formula providing for how the freehold subject to the Lease was to be valued.
25. This distinction is, in my judgment, too subtle. There was ample evidence to justify the judge taking the course that common sense indicated. Far from there being any indication in the evidence that the parties had agreed or intended there to be a valuation formula based on an hypothetical assumed vacant possession valuation of the Premises, the oral evidence, the written evidence and the inherent probabilities in the situation were clearly against any such agreement or common intention. The substance of the oral evidence and written evidence of Mr Zafar, which was supported by Mr Maloney's evidence, was that the valuation was to be on the basis of the freehold subject to the Lease. His capitalisation of the actual rental income receivable by the freeholder under the Lease by a preferred multiplier of 10, which would give a figure of between £200,000 and £250,000, was on the basis that what was being valued was a freehold reversion i.e. the freehold subject to the Lease. Mr Bailey's evidence was that the valuation would be based on what the freehold subject to the Lease could be bought for in the open market i.e. on the sale of the freehold reversion.
26. The fact that the parties to the agreement explained their perception of the price to be paid under the pre-emption in different language does not prevent the judge from finding as a fact that they were agreed on or had a common intention in substance and in sufficient detail that the freehold interest was to be valued on the basis that it was subject to the Lease. The parties did not use the same words to explain their respective perceptions, but they were in substance saying the same thing - the valuation of the freehold was subject to the Lease. As for the remaining detail of the valuation it was not an issue between the parties. It was unnecessary for the judge to make a fuller finding about their prior intentions on a valuation formula.
27. If paragraph 1.2 were not rectified as ordered by the judge, the parties and their successors would, as a result of a drafting error by their advisers which was not spotted when the Lease was executed, be bound by a different bargain than the one that they had made. The objection that there was no proof as to the common intention of the parties on a valuation formula and that a required element for rectification was missing from the case was misplaced. There was nothing to indicate that paragraph 1.2 failed in any other respect to reflect what had been agreed and intended by the parties to the Lease. The only issue for the judge was on the words "with vacant possession" and their effect on the construction of the paragraph. He rightly decided that those words were there by mistake and should be removed by rectification. There was no need for him to make any other finding on the intentions of the parties regarding the valuation provisions in paragraph 1.2 of Schedule 4 to the executed Lease.

Result

28. I would dismiss the appeal. There is nothing wrong in the judge's decision to order rectification of the Lease so that the freehold interest acquired under the pre-emption is valued by the independent valuer at Open Market Value as defined but subject to the Lease, instead of "with vacant possession" as stated in the document executed by the parties.

Lord Justice Moore-Bick:

29. I agree.

Lord Justice Toulson:

30. I also agree.