Crest Nicholson (Londinium) Ltd v Akaria Investments Ltd [2010] EWCA Civ 1331

Case No A3/2010/0547

[2010] EWCA Civ 1331

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CHANCERY DIVISION

(SIR EDWARD EVANS-LOMBE)

HC08C02321

Venue Royal Courts of Justice, Strand, London, WC2A 2LL

Date 25/11/2010

Before

LORD JUSTICE MAURICE KAY

Vice President of the Court of Appeal, Civil Division

LORD JUSTICE LONGMORE

SIR JOHN CHADWICK

Between

CREST NICHOLSON (LONDINIUM) LIMITEDClaimant/ Respondent

AKARIA INVESTMENTS LIMITEDDefendant/ Appellant

(Transcript of the Handed Down Judgment of

WordWave International Limited

A Merrill Communications Company

165 Fleet Street, London EC4A 2DY

Tel No: 020 7404 1400, Fax No: 020 7404 1424

Official Shorthand Writers to the Court)

Mr Nicholas Dowding QC and Mr Ciaran Keller (instructed by Nabarro LLP Solicitors, Lacon House, 84 Theobald’s Road, London WC1 8RW) for Appellant

Mr John Martin QC and Miss Joanne Wicks QC (instructed by Collyer Bristow LLP 4 Bedford Row, London WC1R 4DR) for Respondent

Hearing Hearing date: 28 July 2010

Judgment

Sir John Chadwick:

[1]This is an appeal from the order made on 19 February 2010 by Sir Edward Evans-Lombe, sitting as an additional judge in the Chancery Division, on the trial of preliminary issues in proceedings brought by Crest Nicholson (Londinium) Limited (“Crest”) against Akaria Investments Limited (“Akaria”) and another.

[2]So far as material, the judge held that for the purposes of a profit sharing provision in a development agreement made between the parties:

“the open market rent for each un-let unit as at 13 March 2008 was agreed to be the figure shown in the schedule attached to the letter dated 21 June 2007 in the column headed ‘Target Rent’”

The issue raised by the appeal is whether the judge was correct to take that view. The appellant, Akaria, contends that the judge should have held that the open market rent for each un-let unit as at 13 March 2008 had not been agreed; and so remained to be agreed between the parties or to be determined by the expert to be appointed under the provisions of the development agreement.

The development agreement

[3]The development agreement is dated 27 February 2004. It was made between Akaria (therein described as “the Owner”), Crest (then known as Crest Nicholson (London) Limited and described as “the Developer”) and Crest’s parent company, Crest Nicholson Operations Limited, as guarantor for Crest’s obligations. The agreement contained the terms upon which Crest would develop property adjoining the Plough Roundabout, Hemel Hempstead, of which Akaria was the leasehold owner, by carrying out the Works and letting the Buildings as therein provided. The development was to be known as “the Riverside Development”.

[4]Clause 11 of the development agreement required Crest to carry out and complete the Development in accordance with the Approved Construction Documents with a view to achieving a Final Practical Completion Date by 29 September 2005. Clause 14 provided for the issue of a Final Certificate of Practical Completion. Clause 18 provided for the letting of the Development. In particular, clause 18.2.1 required Crest to seek prospective occupational tenants in the open market for each of the Unlet Units at the open market rent reasonably obtainable and to use reasonable endeavours to obtain the Target Rent for each Unlet Unit.

[5]In that context, “Target Rent” (so far as material) meant the rent attributable to each Unit as listed in the relevant column at Schedule 4 to the agreement. Schedule 4 takes the form of a spread sheet, described on its face as “Riverside –Hemel Hemstead – Funding Rent Schedule”, on which there are listed (in the rows) the individual units in the Buildings comprising the Development and (in the columns) information as the area and the estimated rental value (ERV) of each of those units. It is common ground that the “relevant column” for the purpose identifying the Target Rent is that headed “Say” immediately adjacent to the column in which the ERVs are set out. The figures in that column are a rounding up (or down) of the ERVs.

[6]Clause 19 contained provisions under which 92 per cent of the profit derived from the Development would be paid to Crest, as Developer. In broad terms profit is calculated by deducting expenditure from a capitalised value of the rents achieved on letting the units. Put shortly, the provisions contemplate three stages. First, the calculation, agreement and payment of an Initial Profit Payment when the capitalised value of rents achieved in respect of leases then completed first exceeds the expenditure in completing the Development: clauses 19.5 and 19.6. Second, the calculation and payment of further Profit Payments on the dates of the subsequent letting of each Unit not included in the computation of the Initial Profit Payment: clause 19.7. Third, the calculation and payment of a Profit Payment in respect of Units where no lease has been completed by the date which is two years after the Final Practical Completion Date: clause 19.8. The multiplier to be applied in capitalising the rents for the purpose of the calculations to be carried out in respect of the first two stages is 14.59 (reflecting a gross yield of 6.85 per cent); the multiplier in respect of the third stage is 12.5 (reflecting a gross yield of 8 per cent). There are provisions for additional Profit Payments in respect of Overage (that is to say, where the rents receivable from a letting exceed the Target Rent for the relevant Unit: clause 19.10) and in respect of certain other matters which are not material in the present context.

[7]The issue on this appeal arises in connection with Clause 19.8.1. The clause is in these terms: “19.8.1 Where on the date which is two years after the Final Practical Completion Date there are any Units where no lease has been completed and where there has been no payment of a Profit Payment calculated by reference to a Letting of such Unit, the Owner will pay the developer a Profit Payment calculated as follows: s = a x 92/100 x b where s is the sum so payable a is the aggregate of the open market rent for each such Unit as at such date such open market rent being agreed between the Owner and the Developer prior to such date or in default being determined by the Rental Expert which is calculated mutatis mutandis in accordance with the definition contained in paragraph 1 of the Fourth Schedule to the Lease in the Agreed Form and which will be assumed to be Let subject to the Tenant’s Incentives equivalent to such open market rent for no more than an 18 month period from such date. b is 12.5" The Final Practical Completion Date was 13 March 2006. Accordingly, 13 March 2008 was the relevant date for the purposes of clause 19.8 (as reflected in the order which the judge made). s = a x 92/100 x b where s is the sum so payable a is the aggregate of the open market rent for each such Unit as at such date such open market rent being agreed between the Owner and the Developer prior to such date or in default being determined by the Rental Expert which is calculated mutatis mutandis in accordance with the definition contained in paragraph 1 of the Fourth Schedule to the Lease in the Agreed Form and which will be assumed to be Let subject to the Tenant’s Incentives equivalent to such open market rent for no more than an 18 month period from such date. b is 12.5"

[8]The Lease in the Agreed Form is set out in the First Schedule to the development agreement. The Fourth Schedule to that form of lease contains provisions relating to the method of assessment of the rent payable thereunder. It is common ground that the reference in clause 19.8.1 to paragraph 1 of that schedule is in error: paragraph 1 is concerned with the rent period. It is paragraph 2 which defines the “annual rack rent value”. It means the yearly rent reasonably obtainable for the Premises at the relevant date.

[9]Clause 19.1 requires that, for the purpose of clause 19, reference to the Owner shall be deemed to mean reference to the Owner’s Asset Manager “who shall act on the Owner’s behalf”. The Owner’s Asset Manager is defined in the development agreement to mean Aberdeen Property Investors (“Aberdeen”). The judge found that Akaria employed Aberdeen to manage its investment in the Riverside Development pursuant to an agreement of 24 July 2002; and that Crest had no direct dealings with Akaria, but dealt exclusively with Aberdeen.

The letter of 21 June 2007

[10]As I have said, the issue on this appeal is whether, as the judge held, the open market rent for each Unlet Unit to which clause 19.8.1 of the development agreement applies was agreed between the Owner and the Developer to be the figures shown in the schedule to a letter dated 21 June 2007. That was a letter written by Mr Duncan Tindale, an employee of Crest, to Ms Helen Smith, an employee of Aberdeen. The letter followed a meeting between them on 8 June 2007. The judge set out their respective accounts of what had taken place at that meeting in paragraphs 25 and 26 of his judgment,

[2010] EWHC 243 (Ch)

. It is not, I think, necessary for me to do so in this judgment.

[11]It is, however, necessary, to set out the letter of 21 June 2007:

"Riverside Hemel Hempstead – Development Agreement/ Leasing Following on from our meeting on Friday 8th June 2007, I think that it is important to set down the approach that we have agreed for further leasing in the time remaining under the Agreement down to the second anniversary of the Final Practical Completion Date i.e. 13 March 2008, and the way that this will be treated in terms of the Development Agreement. I would also like to confirm the position in terms of Overage and the potential letting of an ATM within Unit B7. Leasing It is agreed that we will instruct the agents to carry out targeted marketing for the balance of the units, using our existing quoting and target rents together with incentive packages ranging up to 2 years rental equivalent. Crest will meet the cost of any inducements for each future letting in line with the levels anticipated in the original Funding Rent Schedule (schedule 4 of the agreement) i.e. 9 months equivalent with Akaria making up the balance. This means that in terms of the Development Agreement Any lettings on this basis will be treated for capitalisation under the terms of the Profit Payment Provisions of the agreement on the usual basis, save that any inducement beyond the 9 months equivalent will be disregarded in the calculation of the factor "d" in clause 19.5.1 relating to the initial profit payment, and the factor "c" in clause 19.7 relating to subsequent profit payments. Overage I would also like to use this letter to properly record what I understand to be the agreed position between us in relation to the treatment of Overage, following on the various historic e-mails between Ian White and Tim Turnbull. Under this arrangement, it was recognised that the balance of value between any Overage due to Crest and full value would be recognised to offset letting inducements given by Crest beyond the 9 month allowance identified in the agreement, together with the cost of a marketing launch contribution by Crest of £37500. A schedule dated 10th November 2005 is attached showing the current position on this basis which, effectively, results in all rents secured to date as being treated as being Rack Rents up to the Target Rents under clauses 19.5.1 and 19.7 of the Agreement, without Overage being calculated. This leaves an unutilised balance still to be offset against any future overage of £381,437. ATM-Unit B7 As you know we are on the point of instructing solicitors here for an ATM to be let to Nationwide Building Society at £12,000 pa to be carved out of the rear of Unit B7. As previously discussed, for this deal to progress, we need to confirm that this income is to be capitalised at the full 14.59 multiplier and that the target rent on the balance of Unit B7 remains at £101,000. I attach an updated Target Rent schedule, which reflects this change and which also shows the open market rents for the remaining un-let units, which would be capitalised at the 12.5 multiplier under clause 19.8 of the Agreement in the event that they remain un-let at 13th March next Year. I hope that the above correctly reflects the agreed position, and would be grateful if you would confirm so that we can have a clear basis to work from when we come to sort out the Development Account and Profit Payments."

The “updated Target Rent schedule” to which Mr Tindale referred in the penultimate paragraph of that letter was a revised and updated version of the Funding Rent Schedule which had been incorporated in the development agreement as Schedule 4. The column formerly headed “Say” had been re-headed as “Target Rent”. The “remaining un-let units”, as at the date of the letter, can be identified from the updated schedule; which contains particulars of the actual rents achieved (and the capitalised values of those rents) in respect of the units which had then been let.

[12]Ms Smith responded to that letter by an e-mail dated 26 July 2007:

“The proposals set out in your letter are all acceptable. For completeness can I make a proposal for if [sic] a turnover deal were to be agreed. If say a deal is in place for the final 3 months of the Development Agreement we should multiply any turnover by 4 to get a full years rental. Accordingly we will need the tenant to provide monthly turnover figures.”

A “turnover deal” may, I think, be taken to be a reference to the letting of a unit by way of a Turnover Lease: that is to say, a lease under which a portion of the rent reserved is calculated by reference to the occupational tenant’s turnover from the demised premises. Clause 19.9 of the development agreement makes provision for an adjustment to the Profit Payment in respect of a letting by way of a Turnover Lease.

[13]Mr Tindale's replied to that e-mail on 30th July 2007:

“Thank you for your confirmation on these development agreement issues. In addition I confirm that we agree the approach to the calculation of turnover rents you suggest in your email of 26 July.”

Subsequent events

[14]As the judge explained, at paragraphs 30 to 38 of his judgment, during the period from July 2007 until March 2008, when Mr Tindale left his employment with Crest, he and Ms Smith dealt with each other on the basis that it was common ground that the rents to be adopted in respect of unlet units, for the purposes of the calculation to be made pursuant to clause 19.8.1, would be the Target Rents shown in the schedule to the letter of 21 June 2007. In particular, an e-mail sent by Ms Smith to Mr Tindale on 27 February 2008 – and his reply sent on 10 March 2008 – agreeing a variation to the rents to be adopted in respect of units A5 and C4 assumes that, absent the agreed variation, the Target Rents would be adopted. That assumption seems to have persisted, following Mr Tindale’s departure, until 31 March 2008.

[15]On 31 March 2008 Ms Smith sent an e-mail to Mr David Clark, who had taken over Mr Tindale’s responsibilities for the Riverside Development, in which she raised “two more points . . . on the Development Agreement following advice from Nabarros”. As she observed, those points “will have a significant effect on the numbers”. The second of those points was:

“19.8 Profit Payment for Vacant Units – on the unlet units (a) [from the formula] is the open market rent and not the target rents that have been in existence for some time. I attach below an e-mail from the joint agents setting out their latest thinking. . . .”

The judge’s reasons

[16]The judge set out the contentions which had been advanced before him at paragraphs [47] and [48] of his judgment:

“[47] It is Crest's case that the open market rents for unlet units were agreed to be the same as the target rents for the same units provided for in the Development Agreement for the purposes of clause 19.8.1 by virtue of the letter from Mr Tindale on behalf of Crest to Ms Smith on behalf of Aberdeen of 21st June 2007 which constituted an offer; the response of Ms Smith by e-mail dated 26th July 2007 which, by adding a provision relating to turnover rents, constituted a counter-offer; Mr Tindale's agreement to the proposal relating to turnover rents by e-mail dated 30th July 2007 which constituted acceptance of that counter-offer; and a minor variation of the resulting contract in respect of the rent for unit A5, proposed by Ms Smith by e-mail dated 27th February 2008 which was accepted by Mr Clark on behalf of Crest by e-mail dated 10th March 2008. I will hereafter refer to these communications as ‘the Documents’. [48] It is Akaria's case that there was no such agreement because the letter of 21st June 2007 could not be construed as an offer capable of acceptance by Crest and thus the chain of offer and acceptance required for the making of a contract does not exist. In the alternative it was submitted that if that defence failed, on the evidence, either or both of Mr Tindale and Ms Smith, when engaged in the correspondence comprising the Documents, did not intend to make a contract, in other words they did not intend to create a legal contractual relationship between them.”

[17]The judge accepted the analysis in the first of those paragraphs. His reasoning may, I think, fairly be summarised as follows: (1) The approach to the question whether the letter of 21 June 2007 could be treated as an offer capable of acceptance was that indicated by Lord Hoffmann in Chartbrook Ltd and another v Persimmon Homes Ltd and another

[2009] UKHL 38

;

[2009] 1 AC 1101

“. . . the question is what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean.” (2) He accepted that the letter of 21 June 2007 must be construed in the context of the development agreement itself; and with particular reference to the provisions of clause 19.8.1. He accepted that the letter must be construed with regard to the common knowledge of both the writer and the addressee; with regard to the time when it was written (and, in particular, in the context that it was written nine months before the date to which the amount to be paid by Akaria to Crest under clause 19.8 was to be calculated); and in “a commercially sensible way”

. He accepted that the proper context for construing the letter must also include the meeting between Mr Tindale and Ms Smith on 8 June 2007. (3) The judge noted that it was common ground that there was no discussion at the meeting on 8 June 2007 as to the effect of clause 19.8.1 of the development agreement. He observed that: The only evidence that the buy-out provisions of clause 19 were mentioned at all at the meeting was at paragraph 25(1) of Mr Tindale's first witness statement, where he says in relation to the development account and capital costs that it was discussed how that would be dealt with for the purposes of profit payment and at paragraph 7 of Ms Smith's first witness statement, where she says that ‘one of the purposes of the meeting was to agree a new target rent for unit B7… and to agree how the rent for the ATM would be treated at buy-out.’ (4) He rejected the submission, made on behalf of Akaria, that the purpose of the letter of 21 June 2007 (as appeared from an analysis of its terms) was “to record what had already been agreed”; rather than to invite the addressee to agree to a proposal not already agreed. He explained (at paragraph [53] of his judgment) that:

“[53] . . . The first two paragraphs of the letter reveal that it was designed to fulfil at least four purposes. The first, ‘to set down the approach that we have agreed for further leasing in the time remaining under the Agreement’(the increase in the incentives to be offered to potential tenants); the second, the way that those increases ‘will be treated in terms of the Development Agreement’(i.e. for capitalisation purposes under clause 19); the third, ‘to confirm the position in terms of overage’ and the fourth, to confirm plans for ‘the potential letting of an ATM within unit B7.’” (5) He went on to examine each of those purposes in turn. He accepted that the first purpose “was indeed to record what was agreed at the meeting of 8th June”

. He observed that there was no evidence that the second purpose – which, as he said, was to explain the effect of the additional costs incurred in enlarging the incentives on the calculation of the profit payment under clause 19.5 of the Development Agreement – had been the subject of discussion at that meeting. He pointed out that Crest’s view as to the operation of clause 19.5.1 was potentially controversial; and that confirmation that Aberdeen accepted that view was sought in the final paragraph of the letter. (6) The judge held that the third purpose of the letter – to record Mr Tindale’s understanding of the agreed position in relation to the treatment of overage - had not been the subject of discussion at the meeting on 8 June meeting. As the judge thought, Mr Tindale, was seeking confirmation, again in the final paragraph of the letter of 21 June 2007, that his understanding as to how overage was to be treated for the purposes of the calculation of the final profit payment was correct. (7) The judge accepted that the letting of an ATM to be carved out of Unit B7 had been discussed at the meeting on 8 June 2007. He referred to Ms Smith’s evidence that she had understood the purpose of that meeting to have been “to agree the instructions to be given to the letting agents, to agree the new target rent for unit B7, as its floor area was reduced due to the letting of part to an ATM which was to be leased to Nationwide, and to agree how the rent for the ATM would be treated at buy-out”. He accepted that, in the penultimate paragraph of the letter of 21 June 2007, Mr Tindale was seeking confirmation that the income from the letting of the ATM should be treated, for the purposes of the final profit payment, as subject to capitalisation at the highest multiplier of 14.59; and that the target rent on the balance of Unit B7 would remain at the figure (£101,000) shown in the Funding Rent Schedule which was annexed as Schedule 4 to the development agreement (notwithstanding the reduction in floor area). (8) The judge went on to say this, so far as material (at paragraphs [58] and [59] of his judgment):

“[58] At paragraph 30 of their written submissions Akaria's counsel comment on this aspect of the case as follows:- ’30 . . . Mr Tindale accepted that the letter was not perfectly drafted in this respect. Once again the ATM and the effect it would have on the Target Rent for B7 had been discussed and agreed at the 8th June 2007 [meeting]. . . . Mr Tindale . . . accepted that it had been in their evidence. Mr Tindale was not therefore asking Ms Smith to agree something new.’ [59] Whereas . . . Mr Tindale accepted that this part of the letter was not perfectly drafted, I do not accept that that failure of drafting related to the matter of the ATM – unit B7 aspect. The acceptance was in relation to the very much more important issue, namely whether the letter of 21st June properly drew to the attention of the reader that Aberdeen was being asked to agree that, for the purposes of the calculation of the final profit payment under clause 19.8.1, market rents in that clause meant the schedule of target rents in the Development Agreement repeated in the schedule to the 21st June letter. In any event I do not accept that by this part of the letter ‘Mr Tindale was not . . . asking Ms Smith to agree something new.’ He was asking for clarification of the effect of their discussions at the 8th June meeting directed to how the ATM and unit B7 were to be treated.” ’30 . . . Mr Tindale accepted that the letter was not perfectly drafted in this respect. Once again the ATM and the effect it would have on the Target Rent for B7 had been discussed and agreed at the 8th June 2007 [meeting]. . . . Mr Tindale . . . accepted that it had been in their evidence. Mr Tindale was not therefore asking Ms Smith to agree something new.’ (9) The judge then addressed the submission, made on behalf of Crest, that the letter of 21 June 2007 had an additional, and fifth, purpose. This was “to obtain confirmation that, for the purpose of calculating the final profit payment, the target rents shown in the Development Agreement were to be treated as market rents for the purposes of ‘a’ in the formula set out in clause 19.8.1”. (10) He acknowledged that there was force in the submission made on behalf of Akaria: that, to establish this fifth purpose, Crest must rely on that part of the penultimate paragraph of the letter which follows the words “I attach an updated Target Rent Schedule, which reflects this change. . .”

That is to say, Crest must rely on the words:

“. . . and which also shows the open market rents for the remaining un-let units, which would be capitalised at the 12.5 multiplier under clause 19.8 of the Agreement in the event that they remain un-let at 13th March next Year.” (11) The judge agreed with Mr Tindale’s concession, made in cross-examination, that the fifth purpose for which Crest contended would have been clearer had it appeared from a separate paragraph differently headed. But he went on: “However, the words used refer to clause 19.8 and to the applicable multiplier being 12.5. The preceding lines of this paragraph show that Crest was contending that the appropriate multiplier for the receipts from the ATM was 14.59 (and thus the applicable clause in the Development Agreement was clause 19.5). A reasonable familiarity with the provisions of the Development Agreement would have shown the reader that the references there to a multiplier of 12.5 and clause 19.8 meant that the final three lines of this paragraph were not intended to apply to any issues involving the ATM or unit B7.” (12) The judge acknowledged, also, that there was force in the submission made on behalf of Akaria that the rents appearing in the schedule accompanying the letter were listed under the heading ‘Target Rents’: there is no reference to ‘market rents’ in that schedule. Accordingly, there was “a dysfunction between the text of the letter and its schedule”

. But, as the judge pointed out, the list of Target Rents was the only list of rents in the schedule to which the final three lines of the paragraph could refer. (13) He acknowledged, further, that there was force in the submission made on behalf of Akaria that the letter of 21 June 2007 was written some nine months before the final profit payment was due to be made; and at a time of pressure on rental levels for units such as were available to let at the Riverside Development. He noted that it had been submitted that it was counter-intuitive to suppose that, at that time, the parties to the development agreement should be prepared to agree to equate target rents with the market rent: any assessment of the market rent must include a deduction from the ‘headline rent’ ultimately achieved in any letting in respect of the cost of incentives given to the tenant to enter into a lease: at the date of the letter such incentives extended to offering tenants a rent-free period of eighteen months, and the parties were contemplating that period being enlarged to two years. But the judge was not persuaded by that submission. He said this (at paragraph [64] of his judgment):

“[64] . . . One has to bear in mind that the letter of 21st June was written at a time when the parties had been and were continuing to discuss what the level of the final profit payment was going to be at Buy-out. Paragraph 19.8.1 required agreement between the parties ‘prior to such date or in default being determined by the rental expert. . . .’ With hindsight we know that rental levels dropped substantially in late 2007 and early 2008 – see Mr Amey's e-mail of 26th March 2008. It does not follow that the parties knew this in July and that they excluded the possibility that rental levels might stabilise or even increase. A fixing of the market rent applicable to unlet units as at June/July 2007 might have been in the interest of either party. Though not to be treated as part of the ‘matrix of fact’ existing as at 21st June, it is, in my view, telling that nobody on Aberdeen's side surfaced in the succeeding months to point out that the equation between the target rents shown in the schedule to the letter, which had been fixed for the purposes of the Development Agreement in 2004, with market rents in June 2007 was a commercial nonsense until March 2008.”

The judge concluded (at paragraphs [65] and [66] of his judgment):

“[65] In my judgment, confronted with the letter of 21st June, anyone of Ms Smith’s . . . experience and knowledge both of the property market and of the Riverside Development and the Development Agreement would have realised, even on skim reading, that the letter of 21st June was an important letter which required an answer. The final paragraph of the letter makes this abundantly clear. The letter was an offer to agree, for the purpose of the calculation of the final profit payment, certain points which were not part of any agreement flowing from the meeting between Ms Smith and Mr Tindale on 8th June 2007 and also seeking confirmation of what had been agreed at that meeting. In my judgment, a reader of Ms Smith's experience and knowledge would have detected what I have described as the fifth purpose of the letter and realised that it was seeking confirmation that, for the purposes of the calculation of the final profit payment, the schedule of rents under the heading ‘Target Rents’ which accompanied the letter were to be equated with the market rents required by the calculation under clause 19.8.1. [66] It follows that, subject to the ‘alternative approach’ set out between paragraphs 39 and 41 of Akaria's counsel's written submissions, in my judgment the Documents constitute a contract which had the effect, inter alia, of fixing the level for market rents in respect of unlet units for the purposes of the calculation of the final profit payment under clause 19.8.1.”

[19]The alternative approach to which the judge referred in paragraph [66] of his judgment was that earlier identified when, at paragraph [48], he had set out the case advanced before him by Akaria: that, on the evidence, either or both of Mr Tindale and Ms Smith, when engaged in the correspondence to which he had referred, did not intend to make a contract, in other words they did not intend to create a legal contractual relationship between them. He rejected that submission “for all the reasons already set out in this judgment for rejecting Akaria’s submissions on the effect of the letter of 21st June”. As he said, at paragraph [68] of his judgment:

“[68] In my judgment it is plain that Mr Tindale and Ms Smith intended to fix the level of market rents by making the agreement in advance of 13th March 2008 contemplated by clause 19.8.1, thereby avoiding the cost and expense of a reference to the ‘rental expert’ contemplated by that clause, so that ‘we can have a clear basis to work from when we come to sort out the Development Account and Profit Payments’.”

The grounds of appeal

[20]Akaria appeals on the ground that the judge was wrong to hold that the letter of 21 June 2007 included an offer made by or on behalf of Crest to agree that, for the purpose of the function “a” in clause 19.8.1 of the development agreement, rents shown as Target Rents in the schedule to that letter should be treated as the open market rents of units which remained unlet as at 13 May 2008. In oral and written submissions, that ground was developed under number of heads; but, in essence, Akaria relies on the following points:(1) In considering whether the letter of 21 June 2007 contained an offer by Crest to agree that the rents shown as Target rents in the schedule should be treated as the open market rents in respect of unlet units for the purposes of clause 19.8.1 of the development agreement, the judge applied the wrong test in law. It is said that the judge confused the approach to be adopted to the construction of a contract – recently re-affirmed in Chartbrook v Persimmon – with that to be adopted in a case where the question is not “what did the parties intend by the words used in the agreement which they made” but rather “was there an offer capable of being accepted by the offeree”. It is said that the correct approach, in the latter case, is to ask whether the offeree, acting reasonably, would understand that the offeror was making a proposal to which he intended to be bound in the event of an unequivocal acceptance. Reliance was placed on Harvey and another v Facey and others

[1983] AC 552

and Schuldenfrei v Hilton (Inspector of Taxes)

[1998] STC 404

(2) On a proper reading of the letter of 21 June 2007 the statement in the penultimate paragraph that the updated Target Rent schedule “. . . shows the open market rent for the remaining un-let units . . .” is no more than a statement by Mr Tindale as to what he thought the legal or factual position was under the existing development agreement. On a true analysis his understanding was incorrect: Target Rents were not equated with open market rent under the development agreement and there had, in fact, been no subsequent agreement (prior to the letter of 21 June 2007) that they should be. A statement by a party to an already existing contract which (incorrectly) purports to set out the legal effect or factual position under that contract is not, without more, to be taken as an offer to be bound by the position as stated. The request for confirmation, in the final paragraph of the letter, that “the above correctly reflects the agreed position”, does not (when read in the context of the letter as a whole) invite agreement to a statement in relation to a matter which has not been previously agreed (or even discussed) and which (as an interpretation of the underlying agreement) is incorrect.

(3) Whether the letter of 21 June 2007 contained an offer by Crest to agree that the Target Rents shown in the schedule should be treated as the open market rents of properties which remained unlet as at 13 March 2008 was to be determined by reference to the letter itself, construed in the light of facts then known to the parties, and not by reference to their subsequent conduct.

The correct approach

[21]Some support for the proposition that the correct approach, in determining whether a statement by A to B amounts to an offer capable of being accepted by B, is to ask whether a person to whom that statement was made, acting reasonably, would understand that A was making a proposal to which he intended to be bound in the event of an unequivocal acceptance is to be found in the decision of the Privy Council in Harvey v Facey

[1893] AC 552

. The facts are set out, succinctly, in the headnote to the report:

“Whereas the appellants telegraphed, ‘Will you sell us B.H.P? Telegraph lowest cash price’ and the respondent telegraphed in reply ‘Lowest cash price for B.H.P. £900’ and then the appellants telegraphed ‘We agree to buy B.H.P for £900 asked by you. Please send us your title-deed in order that we may get early possession’ but received no reply. . . .”

The Privy Council held that there was no contract. The final telegram was not the acceptance of an offer to sell, for none had been made. In delivering the judgment of the Board, Lord Morris pointed out that the first telegram had posed two distinct questions. The appellants had to contend that the second telegram should be read as if it contained an affirmative answer to the first of those questions. But there was nothing to support that contention. As he said (ibid, 565-6):

“L.M Facey’s telegram gives a precise answer to a precise question, viz, the price. The contract must appear by the telegrams, whereas the appellants are obliged to contend that an acceptance of the first question is to be implied. Their Lordships are of opinion that the mere statement of the lowest price at which the vendor would sell contains no implied contract to sell at that price to persons making the inquiry.”

[22]We were taken, also, to the decision of Mr Justice Neuberger in Schuldenfrei v Hilton Inspector of Taxes)

[1998] STC 404

. In the present context, the relevant question was whether an amended notice of assessment issued by the Revenue contained an offer which was capable of acceptance by the taxpayer for the purposes of section 54 of the Taxes Management Act 1970. Mr Justice Neuberger held that it did not. He said this (ibid,421h–422a):

“The . . . question to which I now turn . . . is whether the second notice was, effectively, an offer. On the one hand, it can be said . . . that, if it is not an offer whose acceptance could lead to an agreement which satisfies s 54, it is hard to see what purpose it had at all. An ‘amended notice of assessment’, once an appeal has been lodged against a notice of assessment, has no actual or potential legal effect unless it represents an offer whose acceptance can result in a s 54(1) agreement. However I have reached the conclusion, with no little hesitation, that the wording of the second notice is not really apt so as to enable it to be accepted. It records something as having happened within the Revenue’s own records. The crucial first line is this: ‘This statement shows the adjustments which have been made to the assessment’. It does not seek agreement; it does not refer to any dispute or to the appeal. On any view it is an odd document in the light of the statutory provisions; indeed it is a little hard to understand why the Revenue produced this document. None the less, on a fair reading, I do not think it represents an offer capable of acceptance which can lead of itself without further ado to a s 54 agreement. To use lawyers’ language, it may be an invitation to treat.”

[23]In the Court of Appeal,

[1999] STC 821

, Mr Justice Jonathan Parker (who gave the lead judgment) agreed with that view. He said this (ibid, 831 a-e):

“44 To my mind, the notion of parties having ‘come to’ an agreement plainly implies not merely that they are of the same mind in relation to some particular matter, but also that their minds have met so as to form a mutual consensus; and that that meeting of minds, that mutual consensus, has resulted from a process in which each party has to some extent participated. On that footing it is, in my judgment, both legitimate and helpful (as both sides have accepted) to approach the question whether the Revenue and the taxpayer have made a s 54 agreement in the instant case by applying common law principles of offer and acceptance. 45 Adopting that approach, the first question which arises is whether the May 1993 notice contained an offer capable of acceptance by the taxpayer. I agree [with counsel for the taxpayer] that the mere fact that the adjustments to the original assessment referred to in the May 1993 notice had never validly been made does not directly affect that question, and that it is necessary to look at the May 1993 notice in order to see what, on its face, it said. 46 As I read the May 1993 notice, it purported to do no more and no less than notify the taxpayer that the revenue had adjusted the original assessment by reducing it to nil. It did not invite any response from the taxpayer, still less did it look to any ‘acceptance’ from him. Moreover, it came out of the blue, in the sense that it was not the product of any earlier discussion, still less negotiation, between the Revenue and the taxpayer. There had, of course, been lengthy negotiations as to the amount of the taxpayer’s capital gains tax liability for the relevant year, but at no stage in those negotiations had the taxpayer suggested that his liability was nil. So the May 1993 notice cannot be set in the context of any earlier dealings between the Revenue and the taxpayer. In my judgment, to construe the May 1993 notice in these circumstances as containing an offer or proposal by the Revenue which, to become effective, invited or required ‘acceptance’ by the taxpayer would be to turn the May 1993 notice into something which, on its face, it manifestly was not. 47 In agreement with the judge, therefore, I conclude that the May 1993 notice did not contain any offer capable of acceptance by the taxpayer so as to result in a s 54 agreement.”

Lord Justice Schiemann (ibid, 832b) agreed with Mr Justice Jonathan Parker. Lord Justice Evans (ibid, 833h) was content to assume, without deciding the issue, that the amended notice of assessment was an implied offer capable of acceptance: but held that, in the absence of acceptance communicated by the taxpayer, there was no agreement.

[24]We were taken, also, to Chitty on Contracts (Thirteenth Edition, volume 1). At paragraph 2-003 an offer is defined as “an expression of willingness to contract on specified terms made with the intention (actual or apparent) that it is to become binding as soon as it is accepted by the person to whom it is addressed”. It is enough that the intention to be bound appears from the words used: “the alleged offeror (A) may be bound if his words or conduct are such as to induce a reasonable person to believe he intends to be bound, even though in fact he has no such intention”.

[25]In my view the appellant is correct to draw a distinction between the court’s task when seeking to ascertain the parties’ intention under the terms of a contract which both accept has been made and the court’s task when seeking to determine whether or not a contract has been made at all. In the former case the question is “what did the parties intend by the words used in the agreement which they made”: in the latter, the questions are(i) “was there an proposal (or “offer”) made by one party which was capable of being accepted by the other” and, if so,

(ii) “was that proposal accepted by the party to whom it was made”. In determining the first of those questions – was there a proposal made by one party (A) which was capable of being accepted by the other (B) – the correct approach is to ask whether a person in the position of B (having the knowledge of the relevant circumstances which B had), acting reasonably, would understand that A was making a proposal to which he intended to be bound in the event of an unequivocal acceptance.

Identifying the relevant “offer” in the present case

[26]As the judge explained, at paragraph [47] of his judgment, the submission advanced on behalf of Crest was that the letter of 21 June 2007 contained an offer by Mr Tindale (on behalf of Crest) to treat the Target Rents shown in the schedule in respect of units then unlet as the market rents of those units (if remaining unlet on 13 March 2008) for the purposes of clause 19.8.1 of the development agreement. But it was not submitted that that offer was the subject of an unequivocal acceptance by Ms Smith (on behalf of Aberdeen) in her e-mail dated 26 July 2006. Rather, it was said (ibid) that “the response of Ms Smith by e-mail dated 26th July 2007 . . . , by adding a provision relating to turnover rents, constituted a counter-offer”. On Crest’s analysis the contract was formed by “Mr Tindale’s agreement to the proposal relating to turnover rents by e-mail dated 30th July 2007 which constituted acceptance of that counter-offer”. The judge must, I think, be taken to have accepted that analysis. His conclusion, at paragraph [66] of his judgment, was that “the Documents constitute a contract which had the effect, inter alia, of fixing the market rents in respect of unlet units for the purposes of the calculation of final profit payment under clause 19.8.1”. In that context “the Documents” has the meaning which he had given to that expression at paragraph [47]: it meant the letter of 21 June 2007 and the two e-mails of 26 and 30 July 2007.

[27]If that analysis were correct, then the relevant offer would not be found in Mr Tindale’s letter of 21 June 2007; but, rather, in Ms Smith’s e-mail of 26 July 2007. It is necessary, therefore, to examine the terms of that e-mail. So far as material Ms Smith wrote:

“The proposals set out in your letter [of 21 June 2007] are all acceptable. For completeness can I make a proposal . . . if a turnover deal were to be agreed. . . .”

It is, I think, clear that, at the least, that e-mail contains an offer by Ms Smith to be bound by an unequivocal acceptance of her proposal in respect of the treatment (for the purposes of clauses 19.5 or 19.7) of rents determined by reference to turnover. And it is clear that that offer was accepted by Mr Tindale by his e-mail of 30 July 2007, in which he wrote:

“In addition, I confirm that we agree the approach to the calculation of turnover rents you suggest in your email of 26 July”

But it is, as it seems to me, far from clear that Ms Smith’s e-mail of 26 July 2007 contained any other proposal to which she invited acceptance: in particular, it is far from clear that her e-mail contained a counter-proposal to the effect that she would agree the proposals in Mr Tindale’s letter of 21 June 2007 if, but only if, he agreed her proposal in respect of the treatment of turnover rents. There is nothing in the e-mail of 26 July 2007 which suggests that her agreement (in the first sentence of that e-mail) to the proposals in Mr Tindale’s letter is conditional on his agreement to her proposal (in the second sentence of that e-mail) as to turnover rents. And it is plain that Mr Tindale did not understand her e-mail in that sense. The first sentence of his e-mail of 30 July 2007 acknowledged Ms Smith’s “confirmation on these development issues” – that is to say, acknowledged her agreement to the proposals in his letter of the 21 June 2007. The second sentence (which I have just set out) begins with the words “In addition . . .”.

[28]It seems to me, therefore, that the analysis of offer, counter-offer and acceptance – in relation to the treatment of Target Rents as market rents of unlet units for the purposes of clause 19.8.1 of the development agreement - is incorrect. The correct analysis is that Ms Smith’s e-mail of 26 June 2007 contained an unequivocal acceptance of “the proposals set out” in Mr Tindale’s letter of 21 June 2007. The relevant question is whether that letter contained a proposal – in respect of which Ms Smith’s acceptance was invited and required – in relation to the treatment of Target Rents as market rents. Did the letter of 21 June 2007 contain an “offer” in relation to the treatment of Target Rents as market rents of unlet units for the purposes of clause 19.8.1 of the development agreement?

[29]In my view, the answer to that question is “No”. I am led to that conclusion for the following reasons.

[30]The final paragraph of the letter of 21 June 2007 invites confirmation that “the above correctly reflects the agreed position”. That final paragraph must, of course, be read in the context of the letter as a whole. But, unless and to the extent that the context requires some different meaning to be given to the words used in that paragraph, they seek confirmation that what has gone before reflects, or records, matters which have already been agreed: they do not invite agreement de novo to matters which have not already been agreed.

[31]In particular, the invitation in the final paragraph must be read in conjunction with the first paragraph of the letter, which explains its purpose. The purpose is(i) “to set down the approach that we have agreed for further leasing in the time remaining under the Agreement down to the second anniversary of the Final Practical Completion Date i.e.13 March 2008” ;

(ii) “[to set down] . . . the way that this [further leasing down to 13 March 2008] will be treated in terms of the Development Agreement”;

(iii) “to confirm the position in terms of Overage”; and

(iv) [to confirm the position in terms of] . . . the potential letting of an ATM within Unit B7”. The treatment of Target Rents as market rents of unlet units for the purposes of clause 19.8.1 falls within none of those four purposes.

[32]Each of the four specified purposes is developed in a separate section under an appropriate heading. Those headings are:

“Leasing”; “This means that in terms of the Development Agreement”; “Overage”; and ATM-Unit B7”

. There is nothing in the those headings to suggest that any of the four sections is intended to introduce a further purpose in addition to the four which have been identified in the first paragraph.

[33]The first section (“Leasing”) contains two paragraphs. The first of those paragraphs records the instructions which – it is said in terms - have already been agreed should be given to letting agents in respect of units then unlet: in particular, that the units should be marketed with “incentive packages ranging up to two years rental equivalent”. The effect of extending the incentive to be offered to lessees from the nine months rental free equivalent anticipated in schedule 4 to the development agreement (the original Funding Rent Schedule) – a cost which, under the development agreement would be borne by Crest - was that agreement was required as to which of Crest and Akaria would bear the additional cost. Agreement on that point is recorded in the second paragraph of the first section. The judge made no express finding that that point had been agreed at the meeting on 8 June 2007; but appears to have accepted (in the second sentence of paragraph [54] of his judgment) that it had been.

[34]The second section of the letter of 21 June 2007 (“This means that in terms of the Development Agreement”) explains how effect will be given to the agreement that Akaria will bear the additional cost of a extended incentive package (recorded in the first section) in applying the capitalisation provisions in clauses 19.5.1 and 19.7. The judge found (at paragraph [54] of his judgment) that there was no evidence of any discussion, at the meeting on 8 June 2007, as to how effect would be given, in applying those capitalisation provisions, to the agreement that Akaria would bear the cost of an additional equivalent rental period; but, as it seems to me, discussion on that matter was unnecessary. If Akaria was to bear that cost, it would follow, necessarily, that the additional equivalent rental period would have to be disregarded in the calculation of factor “d” in clause 19.5.1 and its equivalent, factor “c”, in clause 19.7. The judge thought that the explanation in the second section of the letter “could be controversial”. I think he was wrong to take that view: it seems to me to be an explanation of the obvious. If Akaria was to bear the cost of an additional equivalent rental period, then it was plainly necessary to exclude that additional period from the expenditure which was to be taken into account in calculating profit shares. That is the effect of disregarding the additional equivalent rental period in the calculation of factor “d” in clause 19.5.1 and in the calculation of factor “c” in clause 19.7. It follows that, in inviting Ms Smith to confirm agreement with the second section of his letter, Mr Tindale was doing no more than seeking her acknowledgement as to the necessary consequence, in the context of applying the capitalisation provisions in clauses 19.5.1 and 19.7, of the agreement recorded in the first section.

[35]The expressed purpose of the third section of the letter of 21 June 2007 (“Overage”) is “to properly record what I understand to be the agreed position between us as to the treatment of Overage . . .”. The judge noted that it was common ground that the treatment of Overage had not been discussed at the meeting on 8 June 2007; but it had been the subject of an earlier exchange of e-mails between Mr Ian White (of Crest) and Mr Tim Turnbull (of Aberdeen). As the judge observed (at paragraph [56] of his judgment), Mr Tindale’s letter seeks confirmation from Ms Smith “that his understanding of the past agreement of the parties as to how overage is to be treated for the purposes of the final profit payment is correct”. There is nothing in the third section of the letter to suggest that Mr Tindale was inviting Ms Smith to agree something that had not already been agreed.

[36]The expressed purpose of the fourth section of the letter of 21 June 2007 (“ATM – Unit B7”) is to address a matter on which agreement is needed in respect of the proposed letting of an ATM Unit which is to be carved out of Unit B7. It records that – as is common ground – the proposed letting at a rent of £12,000 per annum had been “previously discussed” – and that, as previously discussed, “for this deal to progress we need confirmation that this income is to be capitalised at the full 14.59 multiplier and that the Target Rent on the balance of Unit B7 remains at £101,000.” An “updated Target Rent schedule” is attached, which it is said, correctly, “reflects this change”. Thus far, it is plain that Ms Smith is invited in the fourth section of the letter to confirm that, in relation to a matter already discussed, the income from the letting of the ATM is to be capitalised at the rate applicable under clauses 19.5.1 and 19.5.7; and that there is to be no corresponding diminution in the Target Rent which had appeared (in the schedule 4 to the development agreement) in respect of Unit B7.

[37]There follows, in the third sentence of the fourth section of the letter of 21 June 2007, the statement on which Crest relies:

“[I attach an updated Target Rent schedule] . . . which also shows the open market rents for the remaining un-let units, which would be capitalised at the 12.5 multiplier under clause 19.8 of the Agreement in the event that they remain un-let at 13th March next year.”

A statement that the open market rents, as at 13 March 2008, ascertained or agreed in respect of units which remained unlet as at that date would be capitalised by applying a multiplier of 12.5 under the provisions of clause 19.8.1 of the development agreement is, again, a statement of the obvious: that is what clause 19.8.1 provides. A statement that the updated Target Rent schedule “shows the market rents for the remaining un-let units” is plainly incorrect. The schedule attached to the letter does not show market rents: it shows Target Rents (as had already been recognised in the immediately preceding passage of the letter in respect of Unit B7). “Target Rents” and “open market rents” are distinct concepts: each carefully defined in the development agreement. They are not interchangeable descriptions of the same concept.

[38]How, then, should the statement that the updated Target Rent schedule shows the open market rents for the remaining unlet units be understood by a person in the position of Ms Smith? Such a person must be taken to know(i) the relevant provisions of the development agreement and

(ii) that there has been no previous agreement (other than that, as required by clause 19.8.1, they should be determined by the Rental Expert in default of agreement), or even discussion, as to what the open market rents for the units remaining unlet as at 13 March 2008 should be. It seems to me that the only answer to that question that can be given with any confidence is that the properly informed reader would appreciate that the statement was incorrect. It was incorrect (i) because the updated Target Rent schedule showed Target Rents not open market rents; (ii) because the concepts were not interchangeable;

(iii) because (absent agreement) Target Rents were irrelevant for the purposes of the capitalisation required under clause 19.8.1 and

(iv) because there had been no agreement (as contemplated by clause 19.8.1) as to what the open market rents as at 13 March 2008 should be. The properly informed reader, acting reasonably, would appreciate that Mr Tindale had made a mistake: although he, or she, could not be confident which, out of a number of possible, misapprehensions had led to that mistake.

[39]The answer which Crest submits the Court should give to the question just posed - how should the statement that the updated Target Rent schedule shows the open market rents for the remaining unlet units be understood by a person in the position of Ms Smith – is that it should be understood to be an invitation to agree to a proposal, advanced for the first time and in the absence of any prior discussion, that the Target Rents shown in the schedule should be taken as the open market rents for the purposes of clause 19.8.1. I am satisfied that, when the statement is set in the context of the letter of 21 June 2007, read as a whole, and the discussions which had preceded that letter, that submission must be rejected. I think that the judge was wrong to reach a contrary view.

[40]Subject, therefore, to the point raised by Crest in its respondent’s notice, I would allow this appeal.

The respondent’s notice

[41]Crest seeks to uphold the judge’s conclusion on a basis which formed no part of its pleaded case and which the judge did not address. It is said that, even if the Court were to conclude that, judged objectively, the letter of 21 June 2007 would not have been understood by an informed reader to include an invitation to agree to a proposal that the Target Rents shown in the schedule should be taken as the open market rents for the purposes of clause 19.8.1, that was how the letter was, in fact, understood by Ms Smith; and that her subjective understanding, taken with Mr Tindale’s subjective intention, was a sufficient basis upon which to conclude that there was a contract.

[42]It is unnecessary to express a view, on this appeal, on the question whether mutuality of subjective intention and understanding – not communicated between the parties – could form the basis of a contract. I should not be taken to accept that it could do so. The question does not arise on this appeal because there is no sufficient evidential basis for a submission that Ms Smith did, in fact, understand that she was being invited to agree to a proposal that Target Rents should be treated as open market rents.

[43]Ms Smith’s evidence – at paragraph 32 of her second witness statement, which the judge set out at paragraph [26] of his judgment - was that she did not appreciate at the relevant time that profit payment for unlet units was based upon open market values. Without that appreciation it would have been impossible for her to reach an understanding that the letter of 21 June 2007 was inviting her to agree to a proposal, advanced for the first time and in the absence of any prior discussion, that the Target Rents shown in the schedule should be taken as the open market rents for the purposes of clause 19.8.1.

[44]Although the judge was critical of Ms Smith’s evidence in a number of respects (at paragraphs [75] and [86] of his judgment) he did not reject that statement. It is true that, at paragraph [86] he found that “[Ms Smith] would have appreciated the significance of the [21 June 2007] letter’s penultimate paragraph that Crest was asking them to agree that the target rent schedule attached to the letter of 21st June was to be treated as showing market rents for the purpose of the application of clause 19.8.1 of the Development Agreement in the calculation of the final profit payment to Crest”. But that finding must be set in the context of the judge’s earlier finding at paragraph [66] of his judgment (which, for the reasons I have set out, I would not uphold) that that was what the letter would have conveyed to a reasonably informed reader in the position of Ms Smith. If the earlier finding is flawed, the later cannot be seen as an independent finding as to her subjective understanding of the position.

Conclusion

[45]I would allow this appeal. Lord Justice Longmore

[46]I agree. 47. I also agree.