Campbell v Daejan Properties Ltd [2012] EWCA Civ 1503

Case No A3/2011/3136[2012] EWCA Civ 1503
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
MR JUSTICE ROTH
HC10C01982
Venue Royal Courts of JusticeDate 20/11/2012
Strand. London. WC2A 2LL
Before
LORD JUSTICE LAWSLORD JUSTICE LLOYDLORD JUSTICE JACKSON
Between
LUCIE MARIE-ANTOINETTE CAMPBELLAppellantDAEJAN PROPERTIES LIMITEDRespondent
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company165 Fleet Street, London EC4A 2DYTel No: 020 7404 1400, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr. John Male QC (instructed by Dewar Hogan Solicitors) for AppellantMr. Gary Cowen (instructed by Hammond Bale) for RespondentHearing Hearing date: 15th October 2012
Judgment
[1]This judgment is in seven parts, namely; Part 1. Introduction, Part 2. The Facts, Part 3. The Present Proceedings, Part 4. The Appeal to the Court of Appeal, Part 5. The Law, Part 6. The Construction Issue, Part 7. Conclusion.

Part 1. Introduction

[2]The issue in this appeal is whether one clause of a lease contains an obvious error, which the court should correct as a matter of construction. The lessor contends that it does. Mr. Justice Roth (“the judge”) accepted that contention and granted a declaration to that effect. The lessee now appeals against that decision.[3]The lessor is Daejan Properties Limited, to whom I shall refer as “Daejan”. Daejan was claimant in the court below and is respondent in this appeal. The lessee is Mrs. Lucie Marie-Antoinette Campbell, to whom I shall refer as “Mrs. Campbell”. Mrs. Campbell was defendant in the court below and is the appellant in this court. The clause which is in issue governs the extent of the lessor’s repairing obligation and the extent of the lessee’s obligation to contribute to the cost of those repairs.[4]I shall refer to the Landlord and Tenant Act 1987 as “the 1987 Act”. Section 35 of the 1987 Act enables any party to a long lease of a flat to apply for an order varying the terms of the lease. One possible ground of such an application is that the lease fails to make proper provision for the computation of a service charge: see section 35 (2) (f).[5]I shall refer to the Leasehold Reform, Housing and Urban Development Act 1993 as “the 1993 Act”. The 1993 Act enables the tenant of a flat under a long lease to acquire a new lease. Section 57 of the 1993 Act makes provision in respect of the terms of that new lease. Section 57 (6) provides:
“Subsections (1) to (5) shall have effect subject to any agreement between the landlord and tenant as to the terms of the new lease or any agreement collateral thereto; and either of them may require that for the purposes of the new lease any term of the existing lease shall be excluded or modified in so far as— (a) it is necessary to do so in order to remedy a defect in the existing lease;”
[6]After these introductory remarks, I must now turn to the facts.

Part 2. The Facts

[7]The house which stands at 2 Upper Wimpole Street, London, W1 was built in the late eighteenth century in traditional Georgian style. It forms part of the Howard de Walden Estate. The house comprises a basement, a ground floor and four upper floors. Over the years the property has been extended to the rear at basement and ground floor levels. There are three separate flat roofs over these extensions. Above the main part of the property there is a pitched roof. The water tanks which serve the property as a whole sit within the pitched roof.[8]On 16th April 1934 Baron Howard de Walden and General Real Estates Investment and Trust Limited granted a 999 year lease of the property to Mr. Lionel Colledge. I shall refer to this lease as “the head lease”.[9]Clause II (2) of the head lease provided:
“That the said Lessee will from time to time during the said term when and as often as need shall require well and substantially cleanse repair support and uphold and from time to time when necessary rebuild to the satisfaction of the Lessor all present and future buildings upon the said premises and all pavements sinks sewers drains pipes pumps party and other walls and vaults and all erections and improvements erected or made or to be erected or made upon the said premises ...”
[10]London W1 is an area where numerous medical practitioners have their consulting rooms. Thus many buildings there, which were formerly private houses, are now in multiple occupation. Such is the case with 2 Upper Wimpole Street. The ground and first floors of that property were converted into doctors’ waiting rooms with attendant facilities. The second floor was converted into a flat. The third and fourth floors were converted into a maisonette. Unfortunately the basement became derelict and uninhabited.[11]By 1958 the leasehold interest under the head lease was vested in Mr. George Isidor Stem. On 7th November 1958 Mr. Stem granted a lease of the third and fourth floor maisonette to Mr and Mrs. Herman Hardenberg for a term of 65 years commencing on 29th September 1958. I shall refer to this lease as “the 1958 lease” or “the lease”.[12]The 1958 lease included the following terms: “2. The Lessees HEREBY jointly and severally COVENANT with the Lessor as follows: (iii) To pay and discharge all rates taxes duties assessments charges and outgoings whatsoever whether parliamentary parochial or of any other description which now are or during the term hereby granted shall be imposed or charged on the premises or the Lessor or the Lessees or occupier in respect thereof except as aforesaid PROVIDED ALWAYS that until such time as the premises shall be separately assessed for general and water rates the Lessees shall pay to the Lessor by way of further rent Five-sixteenths of the amount of general and water rates payable in respect of the house such amount to be paid with the rent for the quarter immediately following the receipt by the Lessor or the demand for the said general water rates PROVIDED that the Lessor shall if the Lessees so require exercise any option given by the Rating authorities of paying the said rates half yearly or quarterly unless by so doing discount would be lost (iv) From time to time during the said term to pay all charges and expenses incurred by the Lessor in abating any nuisance emanating exclusively from the premises and a rateable or due proportion of any charges and expenses of abating any nuisance emanating partly from the premises and partly from the rest of the house and all such works which may be necessary for abating such nuisance in obedience to any notice served by any competent authority (vii) To bear and pay and indemnify the Lessor against all the costs and expenses which he in respect of being the owner or head-lessee of the premises or any part thereof during the continuance of the said term ought or would be liable to bear pay or contribute in or about every or any reparation pulling down rebuilding or raising of every or any party wall party fence wall timber partition or party arch or incidental thereto or in or about any drainage or sewerage or otherwise by virtue of any Act or Acts of Parliament already made or hereafter to be made or of any direction or requirement by any local or public authority in pursuance of any such Act or Acts (viii) At all times during the said term to pay and contribute a rateable or due proportion of the expense of making repairing maintaining painting supporting rebuilding and cleansing of all sewers drains pipes watercourses water pipes cisterns gutters party walls party structures easements and appurtenances belonging to or used or capable of being used by the Lessees in common with the Lessor or the tenants or occupiers of the flat and the rest of the house such proportion in the case of any difference to be settled by a single arbitrator to be nominated by the President for the time being of the Royal Institute of British Architects (xx) To pay to the Lessor every year on demand a sum equal to two fifths of every annual premium paid by the Lessor for a comprehensive insurance of the house to the full value thereof (xxi) To pay to the Lessor every year on demand a sum equal to eight-nineteenths of the annual cost of centrally heating the house and of providing hot water such cost to be made up of the cost of fuel and the cost of maintenance and repairs to the central heating system and the hot water system (xxii) To pay to the Lessor every year on demand the sum of Three pounds fifteen shillings being one-third of the annual rental of the electric bell and door-opening system payable by the Lessor to General Telephone Systems Limited (xxv) To pay to the Lessor on demand two-fifths of the expense at all times and from time to time incurred by the Lessor in performing the covenant contained in Clause 3 (iii) hereof. 3. THE Lessor HEREBY COVENANTS with the Lessees that so long as the Lessees shall pay the rents hereinbefore reserved and observe and perform all the covenants conditions and agreements hereinbefore contained (ii) To keep the house insured against comprehensive risks to the full value thereof in some insurance office of repute and to pay all premiums when the same shall become due and produce to the Lessees on demand the policy of such insurance or a duplicate thereof and the receipt for every premium (iii) To keep the roof and outside walls of the premises in good repair and condition and to paint the exterior of the premises once in every seven years and except in cases of emergency the Lessor shall before carrying out any work under this sub-clause obtain not less than two competitive estimates from substantial and reputable firms of contractors and shall submit them to the Lessees for approval and the Lessees shall be deemed to approve the cheaper or cheapest of the said estimates unless the Lessees shall within one calendar month of the receipt of the said estimates produce and forward to the Lessor an estimate from a substantial and reputable firm of contractors cheaper than the cheaper or cheapest estimate obtained by the Lessor and in such case the Lessor shall accept the estimate procured by the Lessees”. (iii) To pay and discharge all rates taxes duties assessments charges and outgoings whatsoever whether parliamentary parochial or of any other description which now are or during the term hereby granted shall be imposed or charged on the premises or the Lessor or the Lessees or occupier in respect thereof except as aforesaid PROVIDED ALWAYS that until such time as the premises shall be separately assessed for general and water rates the Lessees shall pay to the Lessor by way of further rent Five-sixteenths of the amount of general and water rates payable in respect of the house such amount to be paid with the rent for the quarter immediately following the receipt by the Lessor or the demand for the said general water rates PROVIDED that the Lessor shall if the Lessees so require exercise any option given by the Rating authorities of paying the said rates half yearly or quarterly unless by so doing discount would be lost (iv) From time to time during the said term to pay all charges and expenses incurred by the Lessor in abating any nuisance emanating exclusively from the premises and a rateable or due proportion of any charges and expenses of abating any nuisance emanating partly from the premises and partly from the rest of the house and all such works which may be necessary for abating such nuisance in obedience to any notice served by any competent authority (vii) To bear and pay and indemnify the Lessor against all the costs and expenses which he in respect of being the owner or head-lessee of the premises or any part thereof during the continuance of the said term ought or would be liable to bear pay or contribute in or about every or any reparation pulling down rebuilding or raising of every or any party wall party fence wall timber partition or party arch or incidental thereto or in or about any drainage or sewerage or otherwise by virtue of any Act or Acts of Parliament already made or hereafter to be made or of any direction or requirement by any local or public authority in pursuance of any such Act or Acts (viii) At all times during the said term to pay and contribute a rateable or due proportion of the expense of making repairing maintaining painting supporting rebuilding and cleansing of all sewers drains pipes watercourses water pipes cisterns gutters party walls party structures easements and appurtenances belonging to or used or capable of being used by the Lessees in common with the Lessor or the tenants or occupiers of the flat and the rest of the house such proportion in the case of any difference to be settled by a single arbitrator to be nominated by the President for the time being of the Royal Institute of British Architects (xx) To pay to the Lessor every year on demand a sum equal to two fifths of every annual premium paid by the Lessor for a comprehensive insurance of the house to the full value thereof (xxi) To pay to the Lessor every year on demand a sum equal to eight-nineteenths of the annual cost of centrally heating the house and of providing hot water such cost to be made up of the cost of fuel and the cost of maintenance and repairs to the central heating system and the hot water system (xxii) To pay to the Lessor every year on demand the sum of Three pounds fifteen shillings being one-third of the annual rental of the electric bell and door-opening system payable by the Lessor to General Telephone Systems Limited (xxv) To pay to the Lessor on demand two-fifths of the expense at all times and from time to time incurred by the Lessor in performing the covenant contained in Clause 3 (iii) hereof. (ii) To keep the house insured against comprehensive risks to the full value thereof in some insurance office of repute and to pay all premiums when the same shall become due and produce to the Lessees on demand the policy of such insurance or a duplicate thereof and the receipt for every premium (iii) To keep the roof and outside walls of the premises in good repair and condition and to paint the exterior of the premises once in every seven years and except in cases of emergency the Lessor shall before carrying out any work under this sub-clause obtain not less than two competitive estimates from substantial and reputable firms of contractors and shall submit them to the Lessees for approval and the Lessees shall be deemed to approve the cheaper or cheapest of the said estimates unless the Lessees shall within one calendar month of the receipt of the said estimates produce and forward to the Lessor an estimate from a substantial and reputable firm of contractors cheaper than the cheaper or cheapest estimate obtained by the Lessor and in such case the Lessor shall accept the estimate procured by the Lessees”.[13]On 29th January 1974 Daejan acquired the leasehold interest under the head lease. Thus Daejan became substituted as the lessor under the 1958 lease. On 21st April1988 Mrs. Campbell acquired the leasehold interest under the 1958 lease. Accordingly, ever since 1988 Daejan has been Mrs. Campbell’s landlord.[14]At an early stage Mrs. Campbell became concerned about the effect of clause 2 (xx) of her lease. This clause required her to pay 40% of the insurance premium for the entire house. Mrs. Campbell’s maisonette accounted for only 29.2% of the floor area of the house or 26% of the rateable value of the house. Mrs. Campbell therefore maintained that clause 2 (xx) was unduly harsh.[15]Mrs. Campbell was entitled to apply under section 35 of the 1987 Act for clause 2 (xx) to be modified. In the event, however, this issue was resolved by a sensible agreement between the parties. Mrs. Campbell’s contribution to the annual insurance premium was reduced from 40% to 33 1/3 %.[16]During 1992 some substantial works of repair to the house were carried out. There was a lively debate in correspondence as to how much Mrs. Campbell was obliged to contribute to the cost of those works. The upshot of this debate was that Mrs. Campbell paid the sum of £11,810.41. That sum was calculated in accordance with the provisions of clauses 2 (viii), 2 (xxv) and 3 (iii) of the lease. In particular, it can be seen from the correspondence that the parties proceeded on the basis that Mrs. Campbell’s liability under clause 2 (xxv) was to pay 40% of the repair costs attributable to the main roof and the external walls of the maisonette. She was not liable to contribute to the costs of repairing any other part of the house, for example the external walls below third floor level.[17]On 17th February 1998 Mrs. Campbell gave notice to Daejan of her intention to exercise her right under the 1993 Act to acquire a new lease of the maisonette. On 15th April 1998 Daejan served a counter-notice setting out its proposals in respect of the new lease. Daejan did not propose any amendment to clause 2 (xxv) or clause 3 (iii) of the 1958 lease.[18]On 8th July 1999 Daejan granted a new lease of the maisonette to Mrs. Campbell for a term of 164 years commencing on 29th September 1958. I shall refer to that new lease as “the 1999 lease”. The price which Mrs. Campbell paid for the 1999 lease was £110,000.[19]The 1999 lease was on the same terms as the 1958 lease, subject to a number of specific modifications which are not material to this appeal.[20]In 2005 and 2006 Daejan carried out substantial works of repair and maintenance to the house. There was a dispute in correspondence concerning the level of contribution which Mrs. Campbell was required to make in respect of the cost of those works. In the course of this dispute Daejan argued that the word “premises” in lines one and two of clause 3 (iii) of the lease was a slip. Clearly the word should have been “house”. Accordingly the clause should be construed as if the word “house” were substituted for “premises”. The effect of this contention was that under clause 2 (xxv) of the lease Mrs. Campbell would become liable to pay 40% of the repair costs of the entire house. Thus Mrs. Campbell would have to pay 40% of the costs of repairing the flat roofs over the basement and ground floor extensions as well as the external walls below the third floor level.[21]Mrs. Campbell rejected Daejan’s contention concerning clause 3 (iii) in robust terms. On this issue there was no prospect of the parties reaching any agreement. In those circumstances Daejan commenced the present proceedings.

Part 3. The Present Proceedings

[22]By a claim form issued in the Chancery Division of the High Court on 15th June 2010 Daejan applied for a declaration that clause 3 (iii) of the 1958 lease, which was incorporated into the 1999 lease, should be construed as if the word “premises” in lines one and two had read “house”. Mrs. Campbell resisted that claim. She served a defence contending that clause 3 (iii) meant what it said and that it had always been so construed in the past.[23]Both parties served evidence concerning the past history of the house and how the costs of repair works had been dealt with previously. On the 14th October 2011 Mrs. Campbell’s son, Mr. Richard Campbell, made a witness statement to the effect that his mother suffered from short term memory loss. In those circumstances he adopted his mother’s witness statement. He confirmed the contents of that statement and stood ready to give evidence in place of his mother.[24]The action came on for trial before Mr. Justice Roth on 1st November 2011. The judge gave a fluent ex tempore judgment in which he allowed Daejan’s claim and granted the declaration sought.[25]In his judgment the judge identified the House of Lords’ decision in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 as the governing authority in relation to the issue before him. He also cited the judgment of Mr. Justice Rattee in Billson v Tristrem [2000] L&TR 220. The judge then turned to the provisions of the 1958 lease. He identified five reasons why the word “premises” in clause 3 (iii) was a slip and the clause should be construed as if the word “house” were substituted. Those reasons are set out as follows in paragraphs 22 to 31 of his judgment:
“22. I consider that the following factors are particularly relevant. First, as regards the landlord’s obligation to insure the house at clause 3(2), the tenant’s share is specified at 40 per cent at clause 2(20). Similarly, as regards heating the house and the provision of hot water, the share as at 1958 was specified at eight-nineteenths, which amounts to 42.1 per cent. 23. Those factors suggest that if the tenant were indeed required to pay only 40 per cent of the costs of repairing and painting the exterior walls of the maisonette and nothing at all for the lower three floors or the basement, that would be proportionately a far lower contribution than the parties considered appropriate for the contributions clearly specified as applicable to expenses attributable to the house as a whole such as insurance and heating. I do not think that point is in any way weakened by the fact that the maisonette accounts for only 29.2 per cent of the floor area and, at least as at 1958, 26 per cent of the rateable value of the whole house. 24. Secondly, the main roof of the building is clearly that over the maisonette. It makes no sense that if the tenant has to pay only 40 per cent of the cost of maintaining and painting the exterior walls of the maisonette (that is the second and third floors of the building) and nothing at all for repair or painting of the other floors, nonetheless, it would have the burden of paying 40 per cent of repairs to the main roof. 25. Thirdly, if the tenant’s construction is correct, the tenant would not have the benefit of a covenant from the landlord to keep the building as a whole in good repair. I consider that would be a serious deficiency in a lease and to the manifest disadvantage of the tenant since disrepair of parts of the lower floors would clearly affect the amenity and potentially even the structural integrity of the maisonette. The fact that the demise in the lease includes the right of support to the premises is not an effective answer to this. 26. Fourthly, it is inconceivable that the landlord, having a long lease, would not provide for the costs of painting and repairs which it had to carry out to be covered by the aggregate contribution from the tenants. Mr Murch realistically accepted that that must be the case but on the tenant’s construction here, it is unclear where the balance of 60 per cent of the costs of the repair of the roof and the exterior walls of the maisonette would come from. 27. Mr Murch suggested that the other tenants, especially the professional tenants on the lower floors, could have an obligation in their leases to pay 100 per cent of the repair and painting of the discrete parts of the house leased to them and, in addition, to pay 60 per cent of the costs of repair of repair and painting the exterior of the second and third floors and the main roof. Although Mr Murch urged that the court should not speculate on what might be contained in the other leases which were not in evidence, that would be an utterly bizarre and unorthodox form of covenant, all the more so when one bears in mind that the ground floor is in dual occupation under two leases. 28. I note that in the Billson case, as I indicated, the Court of Appeal was prepared to proceed on a reasonable assumption on what was likely to be in the other leases, although they apparently were not in evidence before the court, and I feel it is entirely appropriate to dismiss as utterly implausible the suggestion that such a form of covenant would be contained in the other leases here. 29. Fifthly, there is the question of the estimates for repair work required by clause 3(3) which the landlord must provide for repairs within the scope of the covenant before it can charge for that work. The premises are defined to include not just the maisonette on the third and fourth floors but also the stairs leading up to them from the second floor of which the staircase abuts part of the external wall. 30. If the tenant were correct, then when structural repair was required to the second floor including the wall on the staircase side, a separate estimate for that part of the external wall which abuts the staircase would be required so that it could be provided to the tenant of the maisonette. Mr Murch submitted that this is not really such a practical problem as the landlord could obtain estimates for the whole work and then ask the builder or quantity surveyor to itemise this part of the wall separately. 31. However, under the clause, the tenant could serve a counter-estimate, obviously only for that part of that structural wall abutting the staircase comprising the premises, and that estimate may be cheaper. Under the clause, the landlord would then be obliged to accept the tenant’s estimate for that part of the wall even if the other builder’s quotation for the work to the whole of the wall was cheaper. This demonstrates the air of unreliability which is created by the tenant’s construction.”
[26]In the last sentence of paragraph 31 it seems likely that the word “unreliability” is an error made by the transcriber. The judge probably said “unreality” as recorded in counsel’s note.[27]Mrs. Campbell was aggrieved by the judge’s decision. Accordingly she has appealed to the Court of Appeal.

Part 4. The Appeal to the Court of Appeal

[28]By an appellant’s notice filed on 6th December 2011 Mrs. Campbell appealed to the Court of Appeal on the grounds that the judge had erred in his approach to construction and, in effect, re-written part of the 1958 lease.[29]The grounds of appeal have subsequently been amended and expanded. The amended grounds include a new contention, namely that as a result of the new lease granted in 1999, the alleged mistake in clause 3 (iii) cannot now be corrected.[30]Having changed solicitors and counsel, Mrs. Campbell also asks the court to receive further evidence which was not before the judge. That fresh evidence comprises, first, the head lease and, secondly, some correspondence passing between the parties in the 1990s. Daejan consents to this court receiving the head lease in evidence but objects to the additional correspondence being considered by the court.[31]It is convenient to deal with the fresh evidence application at this stage. Under rule 52.11 (2) (b) of the Civil Procedure Rules (“CPR”) the Court of Appeal may, in its discretion, receive evidence which was not before the lower court. This power, like all powers conferred by the CPR, must be exercised in a manner which will give effect to the overriding objective set out in Part 1 of the CPR. Rule 52.11 does not identify any specific factors to be taken into account. It is generally accepted, however, that the factors of principal relevance are those stated by Denning LJ in Ladd v Marshall [1954] 1 WLR 1489 at 1491. These are:(1) whether the evidence could have been obtained with reasonable diligence for use at trial;(2) whether the evidence would probably have an important influence on the result of the case;(3) whether the evidence is such as is presumably to be believed, even though it need not be incontrovertible.[32]Mr. John Male QC, who appears for Mrs. Campbell in this court (but did not appear below), submits that the claimant should succeed by reference to all three of the factors identified in Ladd v Marshall. Furthermore the admission of the proposed fresh evidence on appeal will promote the overriding objective.[33]Mr. Gary Cowen, who appears for Daejan in this court as he did below, opposes the application to put in evidence the clip of correspondence from the 1990s. He submits that this evidence could have been obtained with reasonable diligence for use in the trial before the judge. Furthermore that clip of correspondence adds nothing of value and so it will not have an important influence, or indeed any influence, on the outcome of the case. In fairness to Mr. Cowen, I should add that he does not press his objection to the fresh evidence “with great strength”.[34]In my view the proper course is to admit that fresh evidence. As to the first Ladd v Marshall factor, Mrs. Campbell is now a lady in her mid-seventies. She suffers short term memory loss and English is not her first language. It appears that in the past there were difficulties in obtaining from her all documents that were relevant. As to the second factor, the new correspondence when read in conjunction with the correspondence in the main bundle shows very clearly how both parties interpreted and applied clause 3 (iii) in the 1990s. As such that correspondence could have an important influence on the outcome of the case, for example in relation to the estoppel issues which have been argued. As to the third factor identified in Ladd v Marshall, there is no dispute about the authenticity of the various letters, except that one appears to be a draft letter which was not sent.[35]In the circumstances the court has decided to receive in evidence all of the proposed fresh evidence except for the draft letter dated 10th January 1992, which was not sent.[36]Having dealt with that preliminary matter, I must now turn to the legal principles which are relevant to this appeal.

Part 5. The Law

[37]In construing a written contract, the governing principle is that the parties mean what they say. The court must give effect to the express terms of the contract and must resist the temptation to re-draft or improve upon those terms. If by mischance the contract does not say what both parties intended, the normal remedy for the aggrieved party is an action for rectification.[38]There are exceptions to that governing principle. In particular, if there is an obvious clerical error or grammatical mistake, the court will correct it as a matter of construction. In recent years the courts have slightly broadened the scope of this exception, but still have confined it within clear limits.[39]In East v Pantiles (Plant Hire) Ltd [1982] 2 EGLR 111 Brightman LJ (with whom Lawton and Oliver LJJ agreed) formulated the principle in this way at 112: “It is clear on the authorities that a mistake in a written instrument can, in certain limited circumstances, be corrected as a matter of construction without obtaining a decree in an action for rectification. Two conditions must be satisfied: first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction”.[40]In KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363, [2007] Bus LR 1336 Carnwath LJ expressed agreement with this formulation subject to two qualifications. First, the correction of mistakes by construction is an aspect of interpretation, not a separate branch of the law. Secondly, in deciding whether there is a “clear mistake” the court can look beyond the document itself. The court can have regard to the background or context.[41]In Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, 2009 1 AC 1101 the court was called upon to construe a contract relating to the development of a building site in Wandsworth. The issue between the parties was the amount of a balancing payment which was owed by the developer to the landowner under schedule 6 to the contract. In construing the clause which defined this balancing payment, the House of Lords (reversing the majority decision of the Court of Appeal) departed from the literal interpretation of that clause.[42]Lord Hoffmann formulated the correct approach at paragraph 14 of his speech as follows:
“There is no dispute that the principles on which a contract (or any other instrument or utterance) should be interpreted are those summarised by the House of Lords in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913. They are well known and need not be repeated. It is agreed that 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. The House emphasised that “we do not easily accept that people have made linguistic mistakes, particularly in formal documents” ... but said that in some cases the context and background drove a court to the conclusion that “something must have gone wrong with the language”
. In such a case, the law did not require a court to attribute to the parties an intention which a reasonable person would not have understood them to have had.”[43]At paragraphs 22 to 24 Lord Hoffmann went on to approve the passage from East quoted above, subject to Carnwath LJ’s two qualifications in KPMG. Hoffmann LJ then concluded at paragraph 25:
“What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied.”
[44]In Pink Floyd Music Ltd v EMI Records Ltd [2010] EWCA Civ 1429 Lord Neuberger MR reviewed a number of authorities in this field. At paragraph 22 he referred to City Alliance Ltd v Oxford Forecasting Services Ltd [2001] 1 All ER Com 233. He endorsed the observation of Chadwick LJ that the court cannot introduce words into a contract unless “satisfied(i) that the words actually used produce a result which is so commercially nonsensical that the parties could not have intended it and(ii) that they did intend some other commercial purpose which can be identified with confidence”.[45]It seems to me that the approach set out by Lord Hoffmann in Chartbrook and the approach set out by Lord Neuberger in Pink Floyd are similar in their effect, although differently worded. This is the approach which I must adopt in addressing the construction issue in the present case.

Part 6. The Construction Issue

[46]According to the wording of clause 3 (iii) in its present form the lessor is obliged to repair and maintain the outside walls and the roof of the maisonette. That clause does not impose upon the lessor any repairing obligation in respect of the other roofs of the house or the external walls below third floor level. Clause 2 (xxv) obliges the lessee to pay 40% of the costs incurred by the lessor in carrying out the works required by clause 3 (iii).[47]The two questions which I must address are:(i) whether it is clear that something has gone wrong with the language of clause 3 (iii);(ii) if so, whether it is clear that reasonable persons would have understood clause 3(iii) to be referring to all of the roofs and all of the external walls of the house.[48]At first sight, it is difficult to give an affirmative answer to either question. The service charge provisions in clause 2 of this lease impose a profusion of different obligations on the lessee. The lessee must pay five-sixteenths of the rates and water rates until there is a separate assessment; the full cost of any repairs required by an Act of Parliament; a rateable proportion of the costs of repairing the common parts; two-fifths of the insurance premium for the house (later reduced to one third); eight- nineteenths of the costs of central heating (up to 1976); one third of the annual rental of the bell and door opening system; two-fifths of the lessor’s repair costs under clause 3 (iii).[49]There is no obvious pattern in the various service charge provisions which leads to the conclusion that the parties must have intended the lessee to pay 40% of the repair costs of all roofs and all outside walls. Indeed such an obligation would be surprisingly onerous since the floor area of the maisonette represents only 29.2% of the total floor area of the house. Furthermore the lessee of the maisonette derives no benefit from the flat roofs above the basement and the ground floor extensions.[50]Let me now turn to the five reasons set out by the judge for concluding that something has gone wrong with the language of clause 3 (iii) and that the parties used the word “premises” when they meant “house”.[51]As to the first reason, the proportions which the lessee was required to contribute varied substantially from one clause to another. It is not possible to conclude from clauses 2 (xx) and 2 (xxi) that the parties must have intended the lessee to pay 40% of the repair costs relating to all of the outside walls and roofs. Furthermore the lessee’s contribution to the insurance premium was substantially reduced soon after Mrs. Campbell took over the lease.[52]Turning to the judge’s second reason, the requirement that the lessee should pay 40 % of the repair costs of the main roof does make sense. That roof is of immediate benefit to the maisonette. Furthermore the lessee is not being required to make any contribution to the repair costs of the three flat roofs. It may be unusual for a tenant’s liability to be confined to the walls and roofs specifically enclosing the demised maisonette, but such a provision is far from absurd. There is some logic to what was agreed.[53]As to the third reason, it is correct that the lessee of the maisonette does not have the benefit of a covenant to keep the building as a whole in good repair. On the other hand the lessor was under such an obligation from other sources. Clause II (2) of the head lease imposed such an obligation. Mrs. Campbell has the benefit of that covenant under clause 1 (e) of the 1958 lease. No doubt also the leases of the first and second floors imposed such an obligation on the lessor, even though those leases cannot at the moment be found. Furthermore 2 Upper Wimpole Street is a listed property and therefore subject to controls regarding its repair and condition.[54]Mr. Cowen, who valiantly supported all of the judge’s five reasons, submitted that clause 3 (iii) was unduly favourable to both the lessor and the lessee. It was too favourable to the lessor, because it only required him to keep part of the house in good repair. It was too favourable to the lessee because it did not require her to pay sufficient contribution to the repair costs.[55]This is an unusual argument to deploy. In all the reported cases, the complaint is that a linguistic error has been made to the benefit of one party and to the detriment of the other. The suggestion that both parties have got off too lightly is unlikely to be a proper basis for the court to re-write the contract. If the parties wish to impose tougher terms on both sides, the proper course is for them to re-negotiate.[56]I turn now to the judge’s fourth reason. It is not always the case that the landlord of a property with multiple tenants on historic leases recovers 100% of his expenditure through service charges. Obviously this is what the landlord desires, but there are many possible reasons why he may not achieve that. There is no presumption in construing a lease that the service charge provisions will enable the landlord to recover all of his expenditure: see Rapid Results College Ltd v Angel [1986] 1 EGLR 53 at 55, column 1.[57]As to the judge’s fifth reason, I agree that there could be practical difficulties in the operation of the procedure for estimates set out in clause 3 (iii). In the course of oral argument a number of scenarios were canvassed in which that machinery would produce some bizarre results. I accept Mr. Male’s submission that to date this procedure has caused no problems, even though substantial repair works were done in the 1990s and the 2000s. But this is not a complete answer to Mr. Cowen’s point. If the lessor provides an estimate from one contractor for works to the whole house and the lessee serves a counter-estimate from a different contractor in respect of her part of the structure, there could be difficulties.[58]On the other hand it is not unusual for procedures for sharing remedial costs between different parties to give rise to problems. The difficulties which the latter part of clause 3 (iii) could in theory cause, but have not in practice caused, do not drive me to the conclusion that something has gone wrong with the language used by the parties.[59]Let me now stand back from the individual factors relied upon by the judge. I am quite unable to say that in using the word “premises” rather than “house” the parties have made a clear mistake. Nor do I accept that the clause in its present form is commercially nonsensical.[60]If I were counsel advising on the drafting of the 1958 lease, I would not recommend clause 3 (iii) in its present form. I would be inclined to advise the parties that the word “premises” should be changed to “house” and the contribution figure should be reduced from 40% to about 30%. However, I am not counsel advising the parties about what the lease should say. My task is to construe clause 3 (iii) judicially. In my view this is not a case of clear mistake, where the court can step in and construe the contract as if it said something different. Clause 3 (iii) should be construed as meaning what it says. The word “house” should not be substituted for “premises”.[61]I am fortified in this conclusion by the fact that when remedial works were carried out in 1992 the amount which Mrs. Campbell should contribute was specifically discussed in correspondence. It was agreed that this should be calculated in accordance with the express words of clause 3 (iii).[62]In 1998 there were discussions between the parties concerning the terms of the new lease to be granted. This was a golden opportunity for the lessor to propose any modifications to the terms of the 1958 lease which were appropriate. Yet when Daejan served its counter-notice under the 1993 Act it proposed no amendment to the wording of clause 3 (iii). Against this background it is unreal to suggest that clause 3 (iii) contained a clear mistake and that it did not say what the parties intended.[63]On 8th July 1999 the parties entered into a new lease, which now governs the relationship between them. That new lease incorporates the terms of the 1958 lease, subject to a number of modifications set out in the schedule to the 1999 lease. It is striking that no modification was made to clause 3 (iii). This was only a few years after remedial works had been carried out and clause 3 (iii) had been applied on the basis that the word “premises” meant “premises”.[64]Let me now draw the threads together. I must approach the construction issue in the manner set out by Lord Hoffmann in Chartbrook and by Lord Neuberger MR in Pink Floyd. It is far from clear that the parties made a mistake in the drafting of clause 3 (iii). The wording of that clause is certainly capable of improvement, but it does not produce a result which is commercially nonsensical. In the result, therefore, clause 3 (iii) must be construed in accordance with its actual wording without substituting the word “house” for “premises”.

Part 7. Conclusion

[65]Having decided the construction point in favour of Mrs. Campbell, I do not need to go on to consider whether the parties’ conduct gives rise to an estoppel.[66]Whilst acknowledging that these questions are never easy, I disagree with the judge’s construction of clause 3 (iii). If my Lords concur, this appeal will be allowed and the declaration granted by the judge will be set aside. It will then be clear that clause 3 (iii) means what it says.[67]I agree that the appeal should be allowed on the basis that the substitution of “house” for “premises” where the latter word appears in clause 3(iii) of the Lease does not satisfy the exigent requirements of the law in that regard, as set out by Lord Justice Jackson by reference to previous authority.[68]It is true that, in combination, the definition of the lessor’s obligation in clause 3(iii) by reference to the “premises” and the quantification of the leaseholder’s obligation in clause 2(xxv) at 40% of the cost to the lessor of complying with its obligation in clause 3 (iii) seems odd. It raises a question as to whether the clauses are as they were intended to be. There could be no question of rectification, the original parties to the Lease having long since parted with their respective interests. By the time when the issue seems first to have arisen, in about 1990 soon after Mrs Campbell acquired the term created by the Lease, the question was purely one of the true construction of the Lease. Nor would it have been permissible to have regard to any other surrounding circumstances as at 1958 than those which could readily have been discovered objectively in 1990 or later, above all the nature and arrangement of the premises.[69]As Lord Justice Jackson has pointed out, the Lease contains a somewhat bewildering variety of provisions defining the leaseholder’s obligation to contribute to expenditure incurred by the lessor. Not all of them are still in force as originally entered into, for one reason or another, but they all form part of the original Lease and they are all, therefore, relevant on the issue of construction. Five sixteenths (31.25%) of the rates (until the various separate hereditaments were separately rated) was due under clause 2(iii). That may have been a rough estimate, but according to floor area the premises were 29.2% of the whole, and when separately rated it seems that their rateable value turned out to be 26% of the whole. As to the lessor’s insurance expenditure, the leaseholder was obliged to contribute 40% under clause 2(xx). In relation to the cost of central heating, eight nineteenths (42.1%) was due under clause 2(xxi). Forty per cent was also due under clause 2(xxv), the critical clause for present purposes. In other respects the obligation was more generally defined, by reference to “a rateable or due proportion”, for example of the cost of abating a nuisance emanating from the premises and other parts of the house, under clause 2(iv), or of the expense of repair or maintenance of sewers drains and so on which serve the premises and other parts of the house, under clause 2(viii).[70]Mr Cowen submitted that the match of 40% under clause 2(xx) and clause 2(xxv) was of significance, and that the disparity between forty per cent of expenditure on part of the house under clause 2(xxv) on the one hand, and of expenditure in relation to the whole house under clause 2(xx) was indicative of an error.[71]Of course, the respondent’s case is that the error lies not in clause 2(xxv) but in clause 3(iii). The context of that obligation under the lease shows what appears to be, at any rate in other respects, a careful differentiation, according to the context, in the use of defined words referring to the whole or part of the building. Thus, clause 3(i) - the covenant for quiet enjoyment - refers correctly to the premises, while clause 3(ii) - the covenant to insure - applies to the whole house. Clause 3 (iii) is the provision in point, which Lord Justice Jackson has set out, and its use of “premises” is what the lessor says is mistaken. Clause 3(iv) refers to the entrance hall of the house and the staircase leading to the premises, while clause 3(v) refers to radiators in the premises, and clause 3(vi) is a covenant to reinstate after destruction of or damage to the flat (i.e. the second floor) or the premises by fire. The latter does not apply to damage to or destruction of the lower parts of the building. That provision may also seem a little odd: why does the obligation extend to damage to the flat, and why does it not apply to damage to the lower parts of the building? Nevertheless, the references to the premises and the flat must be deliberate.[72]Thus the provisions of the lease do pose some puzzles for the reader. One may well wonder whether everything in the lease is as it was intended to be, or search for an explanation of some of the odder features. However, I agree with Lord Justice Jackson that it is not possible to be sufficiently sure that “premises” in clause 3(iii) is a mistake for “house”, and in that respect I therefore disagree, respectfully, with Mr Justice Roth, for the reasons given by Lord Justice Jackson.[73]It is therefore unnecessary to deal with the other aspect of the case, which would have posed some interesting questions as to the effect of a party’s failure to seek a modification of what, on its argument, is plainly a defective clause in a lease at a time when an extension lease is sought and granted under the 1993 Act. Given that the dispute as to the reading of clause 3(iii) has a significant impact on the leaseholder’s financial obligation under the lease, it may well have been relevant to the price payable for the extension lease to know what form the clause was to take.[74]The issue had been debated between the parties over some time from 1990 at latest. That is apparent from the documents which were before the judge, and the position is more fully told if the documents now sought to be admitted by way of additional evidence can be considered. I agree with Lord Justice Jackson that these documents should be admitted, not least because they complete or at least amplify the picture in evidence by showing letters both before and after some which were in evidence before the judge. They are not, of course, relevant to the construction of the 1958 Lease, but they would be relevant to the other ground of appeal, based on the conduct of the parties before and in relation to the grant of the extension lease.[75]The correspondence indicates that the agreement to which Lord Justice Jackson has referred at paragraph 15 about the level of the leaseholder’s contribution to the cost of insurance came about by way of compromise of proceedings brought by the appellant under which she sought a modification of her service charge obligation on the basis that, if she paid 40% of the insurance costs, the lessor would recover more than the whole of its expenditure in this respect. That is a ground on which she could apply to have the service charge provision varied under the Landlord and Tenant Act 1987: see section 35(4)(c). No doubt that was the basis of her proceedings.[76]Her letters also indicate that she questioned whether the covenant as to contribution to the cost of repairs was such that the lessor would recover more than the whole cost of that aspect of its expenditure. In this respect, however, she did not press the point, and no change was made to the terms or operation of the lease. This does indicate, at least, that the terms and effect of clause 2(xxv) and clause 3(iii) were the subject of attention from the parties at that time.[77]However, as I say, it is not necessary to go into the issue of the effect of the parties’ conduct, by reference to principles of estoppel, since the point can be decided in favour of the appellant as a matter of construction alone. That is the ground on which I would allow the appeal.

Lord Justice Laws:

[78]I agree with both judgments.

Cited in 5 later judgments