England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MANCHESTER COUNTY COURT
RECORDER HOWELLS

		Royal Courts of Justice Strand, London, WC2A 2LL
		6th August 2013

Lady Justice Arden:

1. The order dated 20 July 2012 of Recorder Howells, sitting in the Manchester Count Court, is now the subject of this appeal. It provides for rectification. Where the terms of a contract do not reflect what the parties have agreed, the court may, subject to a number of conditions, make an order for rectification. This will amend the terms of the contract they have signed.
2. The Recorder found that the parties entered into a seven-year lease of a property known as Oakcroft, Hasty Lane, Hale Barns, Altringham, Cheshire. (which I shall call "the property"). The terms of the lease were, on the Recorder's findings, spread over two documents, both of which were signed by both parties. The later document ("Lease 2") referred to unspecified additional terms but those terms could not be identified from Lease 2 itself.
3. Because Lease 2 would have to be registered at the Land Registry, the terms which did not appear in Lease 2 would not be enforceable without an order for rectification. The defect in Lease 2 could not be filled by interpretation: see Cherry Tree Investments Ltd v Landmain Ltd [2013] I BCLC 484.
4. The Recorder made an order rectifying Lease 2 so that it contained the amendments to its terms agreed in an earlier document ("Lease 1").
5. From that order, the appellant appeals. The grounds of appeal concern: (1) the quality of the evidence from which the Recorder found that there had been a common mistake as to the effect of Lease 2; (2) the nature of the mistake; and (3) the failure of the Recorder to decline to make an order for rectification as a matter of discretion.
6. Having carefully considered the submissions, I have concluded that the appeal fails for the reasons set out below. I have come to the clear conclusion that the Recorder was entitled to make an order for rectification on the facts as she found them to be.

Negotiations for the lease of Oakcroft

7. There is no challenge to the Recorder's findings of primary fact, and so I can set out the story from the facts found by the Recorder. She had heard evidence from both parties.
8. The lessor of the property is the claimant/appellant, Mr Riaz Ahmad, described by the Recorder as an experienced property manager with a considerable portfolio of properties. The tenant is Secret Garden (Cheshire) Ltd., the respondent/defendant. Mr Shahid Saleem is the driving force behind the respondent, which he also owns. He works in IT. The Recorder described him as naïve, and as having signed Lease 2 naively.
9. The parties first discussed the possibility of the respondent taking a lease of Oakcroft in June 2010. Mr Saleem was interested in the property because he had plans to convert it into a children's nursery and also to live there with his family. To effect the conversion, he would need planning permission and other consents. Mr Ahmad knew that this was Mr Saleem's plan and was agreeable to it. Mr Saleem agreed to join in the lease as a guarantor of the respondent's obligations under the proposed lease.
10. To enable Mr Saleem to carry out his plans, any lease of the property would have to permit

subletting

alteration of the premises

? use of the premises for any purpose

? delivery up of the premises at the end of the lease without re-instatement to the condition of the premises before the alteration.

11. The Recorder found that the parties agreed terms for this purpose on 17 March 2013. This sequence of events was as follows. On 16 March 2011, Mr Ahmad produced a one-page agreement referring to a seven-year lease of the property. Mr Saleem emailed his response, containing six points. On 17 March 2011, the parties met. They went through a standard form of business lease, namely form LS2 produced by The Law Society. They agreed that this would be amended to reflect the particular terms that were agreed between them. The parties then both signed a written agreement on Mr Ahmad's business notepaper for a lease on these terms. This is the document which I call "Lease 1". It was not legally enforceable because (1) not all the terms were agreed, and (2) it contemplated that the parties would sign a final lease. But it did reflect the parties' agreement as to some of the terms that should be in the lease. The law of rectification does not now require a concluded prior agreement (see Joscelyne v Nissen 1970] QB 86). This is common ground.
12. The parties also agreed that the formal lease would be signed within four weeks. Mr Saleem paid a deposit of £2,500.
13. On 18 March 2011, Mr Ahmad filled in a copy of form LS2 with the names of the parties and particulars of the premises and wrote "any" in the space left for describing the purpose for which the tenant could use the property. He signed the document and sent it to Mr Saleem telling him to amend it to reflect Lease 1. Mr Saleem replied on 22 March saying that two points were outstanding. Mr Saleem also amended the form LS2 he had received from Mr Ahmad in red ink ("the red-ink amended lease").
14. On 24 March 2011 Mr Saleem sent this document by email to Mr Ahmad. Of course the red-ink amended lease did not bind Mr Ahmad because Mr Saleem had altered the deed after Mr Ahmad had signed it, as he was asked to do. Mr Saleem conceded that at trial.
15. Mr David Berkley QC, for Mr Ahmad, who did not appear below, initially contended that the concession related to the document signed on 17 March 2011 but did not pursue this position when Mr Matthew Hall, who did appear below, as well as in this court, for the respondent, corrected the position. A concession was made, but, as the judgment of the Recorder confirms, it related to the red-ink amended lease.
16. On 29 March 2011, Mr Ahmad and Mr Saleem had another meeting. Mr Ahmad's evidence was that he told Mr Saleem that the amendments in red ink were not agreed but the Recorder did not make a finding to this effect.
17. On 1 April 2011, the parties met together with Mr Ahsam Bhutta, Mr Saleem's prospective business partner, to discuss the one outstanding issue on the lease, namely rent review. The parties agreed that the initial rent would be £2,500 per month, rising to £3,000 on 1 April 2012, and in addition from 1 April 2013 Mr Ahmad would receive 30% of the profits of the nursery business. (It appears that the Recorder accepted that the parties thereafter agreed that the rent should be reviewed three-yearly from 1 April 2013). Mr Bhutta wrote these terms on Lease 1. The term of the lease was expressed to commence on the date of the meeting.
18. On 4 April 2011, Mr Saleem and Mr Ahmad, both signed Lease 2. It was dated 1 April 2011. It was in form LS2. It did not contain the amendments shown in Lease 1. The Recorder held that, when the parties signed the lease on 4 April 2011, they were agreed that the terms in Lease 1 were to be terms of the lease.
19. Thereafter, the respondent went into possession. Mr Saleem and his family occupied part of the premises as their home.
20. Mr Saleem was unable to obtain planning permission to convert the property into a children's nursery. With Mr Ahmad's consent, he sublet the property and took in lodgers. However, he had some difficulties with paying the rent. Mr Ahmad wanted him to leave the property. Mr Saleem refused without proper compensation. There were communications between the parties which I need not set out.
21. On 16 August 2011, Mr Ahmad asked Mr Saleem to sign a notice stating he would agree to leave the property because Mr Ahmad was having problems with his bank and needed to show that he was taking steps to obtain income from the property. The Recorder went on to find that this notice was not executed so as to bind Mr Ahmad. Mr Berkley concedes it was not valid for the purpose of surrendering the tenancy to a business lease. The respondent did not leave the property in accordance with the intention stated in this letter.
22. Mr Ahmad then took the present proceedings for possession of the property, alleging subletting without consent and other breaches of Lease 1. He relet the property to Cliffemount Community Care Ltd ("Cliffemount") on a date which the Recorder found to be after 1 September 2011.
23. The respondent filed a defence and counterclaim. It contended among other matters that Lease 2 should be rectified because it did not set out the full terms that the parties had agreed. The Recorder held that the parties executed Lease 2 under a mistake and that Lease 2 should be rectified:

"I conclude that both parties shared the mistake, i.e. Mr Ahmad and Mr Saleem both mistakenly thought that the effect of the 4 April lease was that it would run in conjunction with the terms previously agreed. " (judgment, paragraph 52)

24. I shall next explain the requirements for rectification.

Requirements for rectification

25. The classic statement of the requirements for rectification in a case where both parties were mistaken about the effect of their agreement is contained in the judgment of Peter Gibson LJ in Swainland Builders Ltd v Freehold Properties Ltd [2002] 23 EG 123. This passage was approved by the House of Lords in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at [48].
26. Peter Gibson LJ held:

"32. Before I turn to the rival contentions advanced before us, let me state the conditions that must be satisfied if the court is to order rectification in a case where it is alleged, as it is here, that there has been a mistake common to the parties.

33. The party seeking rectification must show that:

(1) [intention to be common] the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;

(2) [quality of evidence] there was an outward expression of accord;

(3) [intention to continue down to execution] the intention continued at the time of the execution of the instrument sought to be rectified;

(4) [nature of the mistake] by mistake, the instrument did not reflect that common intention.

34. I would add the following points derived from the authorities:

(1) The standard of proof required if the court is to order rectification is the ordinary standard of the balance of probabilities:

"But as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties' intention displayed by the instrument itself;…"

(See Thomas Bates & Sons Ltd v Wyndham's (Lingerie) Ltd [1981] 1 WLR 505 at p521 per Brightman LJ.)

(2) 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: Co-operative Insurance Society Ltd v Centremoor Ltd [1983] 2 EGLR 52 at p54, per Dillon LJ, with whom Kerr and Eveleigh LJJ agreed

(3) The fact that a party intends a particular form of words in the mistaken belief that it is achieving its intention does not prevent the court from giving effect to the true common intention: see Centremoor at p 55A-B and Re Butlin's Settlement Trusts [Rectification] [1976] Ch 251 at p260 per Brightman J. " (italicised words in square brackets added)

27. It is now settled that the court may rectify a document even if the terms of the agreement are those which the parties agreed but they were both mistaken as to their meaning: see Re Butlin's Settlement Trusts, cited above. However, Peter Gibson LJ went further than to say that there could be rectification if there was a mistake as to meaning. He clearly contemplated that rectification could be granted if the parties had had a clear intention and their executed intention did not achieve this intention (see paragraph 26 above, at [34] (2) and (3)). In other words, the mistake may be one as to the effect of the document signed. This point is directly relevant to the present case because what the Recorder held was that the parties were both mistaken as to the effect of the terms of Lease 2 and mistakenly believed that it would be take effect in combination with Lease 1 in order to set out the terms of their agreement.
28. The remedy of rectification entitles the court to give effect to the reasonable expectations of contracting parties as to the meaning of their executed agreement. Rectification is, in a sense, an instance of English and Welsh law applying a concept of good faith (that is, fair dealing) without actually calling it such.
29. However, rectification obviously involves interfering with the sanctity of a contract. So there must be an outward expression of accord continuing down to the making of the agreement.
30. In the case of common mistake at least, the existence of the parties' common intention is to be ascertained on an objective basis: Chartbrook, per Lord Hoffmann at [60].
31. There are factors in the present case which may have made it easier for the respondent to show that outward expression of accord than might be the case on other facts. The negotiations were not prolonged. The parties were dealing with detailed standard forms, not custom-made documents. They were negotiating as lay persons, without the intervention of lawyers at their meetings.
32. Rectification is an equitable remedy. The court may refuse it if it thinks fit to do so. This may be because an innocent third party has acquired rights or because the party seeking rectification has affirmed, that is, accepted that he is bound by, the unrectified agreement knowing that it did not reflect the parties' agreement.
33. The issue on this appeal is whether the requirements for rectification were made out.

Were the conditions for rectification satisfied?

34. As the hearing of the appeal progressed, it became clear that Mr Ahmad's case rested on whether the conditions for rectification set out by Peter Gibson LJ (paragraph 26 above) had been satisfied.
35. Mr Berkley's core argument turns on inconsistency or incompatibility. The respondent's case had been that the two signed forms of lease could be used in conjunction with one another but that was palpably not so. Mr Berkley submits that there was no cross-examination of Mr Ahmad on the operation of the two signed leases. However, the transcript shows that it was certainly put to him that the parties had agreed that the first lease would operate in conjunction with the second lease.
36. Mr Berkley submits that there was no outward expression of accord. In this case, Mr Saleem checked Lease 2 before he signed it and saw that it was different from Lease 1. Mr Berkley submits that, when a party is fully aware that the terms he desires are not in the document he is signing, the ingredients for common mistake are not satisfied.
37. Alternatively, on Mr Berkley's submission, the parties had made a deliberate decision to have some terms in a separate agreement.
38. Finally, Mr Berkley submits that the Recorder exercised her discretion whether to grant rectification without regard to all the relevant factors. The Recorder should have considered the effect of affirmation and delay. In addition, while Mr Berkley accepts that Cliffemount did not acquire any rights having priority over those of Mr Saleem, he submits that the Recorder should have taken its position into account when exercising her discretion.
39. Mr Hall submits that the leases were capable of running in conjunction with one another. He further relies on Re Butlin's Settlement Trusts, above.
40. Mr Hall further submits that there was no evidence of affirmation. In any event, Mr Saleem did not know about his right to claim rectification until Mr Ahmad made it clear that he did not accept that the terms of both leases applied.
41. Moreover, submits Mr Hall, the Recorder was right not to take the position of Cliffemount into account since it signed its lease without any knowledge that Mr Saleem had signed the letter of purported surrender on 19 August 2011. Cliffemount's rights were, therefore, necessarily subject to those of the respondent.

Discussion

42. In my judgment, there are three issues:

(1) the quality of the evidence as to common mistake;

(2) the nature of the mistake;

(3) the question whether the order should have been refused as a matter of discretion.

(1) Quality of the evidence

43. The evidence must meet the requirement for the outward expression of accord. This stems from the law's concern that parties should not be able to disassociate themselves from their agreement simply because it has become commercially undesirable. They have to show clear evidence of a consensus on some issue which the executed and unrectified agreement does not reflect. The agreement has to be objectively ascertained by reference to what they both did and said, and not to what each of them may privately have thought.
44. In my judgment, this evidential requirement was satisfied. Mr Berkley is clearly right to submit that execution of Lease 2 without amendment so as to incorporate the terms of Lease 1 is, on the face of it, evidence against the respondent. It was clearly evidence that by that date any agreement between the parties that the amendments to LS2 made by Lease 1 should be adopted was at an end.
45. However, as Lord Neuberger MR held in Daventry District Council v Daventry Housing Ltd [2012] 1 WLR 1333 at [212]:

"As with virtually any issue involving the effect of the contents of a document, the question has to be assessed not merely by reference to the words of the document, but also to the factual and commercial context in which the document is produced."

46. In this case, the evidence of execution has to be seen in the light of the other evidence in the case, particularly the Recorder's clear finding that only a few days before the execution of Lease 2 Mr Ahmad had assured Mr Saleem that those amendments would apply:

"On 1 April, the claimant reassured the defendant, in the form of Mr Saleem, and in the presence of Mr Bhutta, that the previous amendments to the Law Society lease, as set out in the 17 March signed document, were still binding and agreed. On 4 April, relying upon that assurance, Mr Saleem signed the unamended lease dated 4 April, in addition to the lease deed, which refers to the agreement as to rent review drawn up by Mr Bhutta on 1 April. At that date, 4 April 2011, the parties were in agreement that the terms agreed and set out in the 17 March document were to be the terms of the lease. In so far, therefore, that the 4 April lease is unamended and does not reflect those terms, the written document is in error. The agreement was as set out in the 17 March document plus the amended terms as to rent review." (judgment, paragraph 48)

47. The Recorder concluded that this was a case where Mr Ahmad had changed his mind about the terms of the lease to the respondent after Lease 2 was executed. In my judgment she was entitled to make these findings of fact and they satisfied the evidential requirement for rectification.

(2) Nature of the mistake

48. In my judgment the parties were, on the Recorder's findings, mistaken as to the legal effect of the words in Lease 2. There was a mistake as to the two leases taking effect in conjunction with one another. That was their intention. The parties clearly intended both Lease 1's amendments to LS2, and Lease 2, to be binding.
49. The court may rectify a document to achieve what it was objectively intended to achieve. Furthermore, contrary to Mr Berkley's submission, the court may, if it thinks fit, make an order rectifying a document even though the effect of the order will be to strike out terms in the document to be rectified. It would greatly diminish the utility of rectification if this were not so.
50. I do not accept the submission of Mr Berkley that there is no means of harmonising the two leases which would demonstrate a continuing common intention to be bound by the earlier document. Mr Saleem's case was that Lease 1 and Lease 2 would operate in conjunction with each other. In my judgment, an order for rectification can provide for the deletion or amendment of clauses on which the parties were agreed. Accordingly, the two leases could operate in conjunction with each other once rectified
51. But, submits Mr Berkley, the parties intended that there should be two separate lease documents. In effect rectification on this submission is not of the terms of the lease but of the parties' bargain, which is outside the proper scope of rectification. In giving permission to appeal, Patten LJ distinguished the case where the parties specifically agree to retain some terms in a separate document. They might do this for a whole host of reasons. It may be that Patten LJ had in mind Oun v Ahmad [2008] EWHC 545 Ch In that case, Morgan J refused to order rectification of an agreement which did not comply with section 2 of the 1989 Act when it needed to do so on the ground that the parties had deliberately chosen to put terms in the second document into a separate agreement.
52. In my judgment, there was no deliberate decision of that kind in the present case. The decision which they made was to execute Lease 2 without incorporating the amendment made by Lease 1, but their reason for doing so was that it was unnecessary to do this to achieve their purpose. They made a conscious decision but acted under a mistake as to the legal effect of the terms of Lease 2.
53. That is an entirely different situation from the case where the parties make a deliberate decision to leave certain terms of a contract in a separate document because they desire to achieve the effect of its being a separate document. As explained, parties cannot obtain an order for rectification by showing that they have changed their minds. In my example, they would be unable to show that they had a continuing common intention to implement their agreement in a single document.

(3) Discretionary factors

54. Mr Berkley does not rely on delay and affirmation as defences in themselves but criticises the Recorder for not taking account of these matters when deciding whether to grant relief. On the question of delay and affirmation, Mr Berkley refers to a number of emails sent by Mr Saleem after Lease 2 was signed referring to "the lease" in the singular. He also refers to the point that rectification was not claimed until the respondent filed a counterclaim in these proceedings.
55. Mr Berkley also submits that third party rights were created by Mr Ahmad when he granted a new lease to Cliffemount. Mr Berkley accepts that Cliffemount did not acquire any proprietary right which overrode that of the respondent (which would prevent the court from making an order for rectification: see Smith v Jones [1954] 1 WLR 1089). Nevertheless, he submits that the fact that rescission of that lease was impossible was a factor which the Recorder should have taken into account and that the Recorder should have refused rectification because Mr Saleem had not asserted his right of rectification before the third party had taken its lease.
56. I do not consider that any of these factors were matters which should have led the Recorder to refuse an order for rectification. The emails on which Mr Berkley relies do not identify what Mr Saleem meant by "the lease", and there is no evidence that prior to the start of these proceedings Mr Saleem knew that Mr Ahmad contended that the respondent's lease was on the terms of Lease 2 only. Mr Ahmad, for example, permitted subletting in that period. Thus the ingredients for affirmation are not met and the delay was not the inordinate delay that would be necessary to deprive a person of his right to apply for rectification.
57. Cliffemount's later lease cannot override the respondent's rights under Lease 2. The terms of Lease 2 as rectified will not enlarge the respondent's interest in the property. In those circumstances the Recorder was not, by reason of the grant of the lease to Cliffemount, bound to refuse rectification.

Conclusion

58. For these reasons I would dismiss this appeal. In my judgment, the Recorder was correct to conclude that the parties were mistaken as to the effect of Lease 2 and that Lease 2 should be rectified to incorporate the amendments to LS2 which the parties had agreed in Lease 1.

Lord Justice Lloyd Jones:

59. I agree.

Lord Justice Fulford:

60. I also agree.