Scottish Widows Fund and Life Assurance Society v BGC International [2012] EWCA Civ 607

Case No A3/2011/1574[2012] EWCA Civ 607
IN THE COURT OF APPEAL (CIVIL DIVISION)
[2011] EWHC 729 (Ch)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(CHANCERY DIVISION)
NORRIS J
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 09/05/2012
Before
THE PRESIDENT OF THE QUEEN'S BENCH DIVISIONLADY JUSTICE ARDENLORD JUSTICE DAVIS
Between
SCOTTISH WIDOWS FUND AND LIFE ASSURANCE SOCIETYRespondentBGC INTERNATIONAL (FORMERLY CANTOR FITZGERALD INTERNATIONAL)Appellant
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company165 Fleet Street, London EC4A 2DYTel No: 020 7404 1400, Fax No: 020 7404 1424Official Shorthand Writers to the Court)
Mr Jonathan Seitler QC (instructed by Norton Rose LLP) for AppellantMr John McGhee QC (instructed by Dundas & Wilson LLP) for RespondentHearing Hearing date : 27 March 2012
Judgment
[1]This appeal concerns the terms as to rent contained in clause 2(c) of a sub-sub-underlease whereby the respondent (“SW”) agreed to sublet premises at One America Square, London EC4 (“1AS”) to the appellant (“BGC”). The sub-sub-underlease was entered into by SW with a view to terminating its own obligations to its own sub-underlessor.[2]The background is complex. SW is the sub-underlessee of the fourth floor and ground floor level at 1AS. The sub-underlessor is ING Baring Securities Ltd; the term is 20 years with five yearly rent reviews commencing in 1996. The rent (which I will call “rent A”) at the inception of the lease (“the Barings lease”) was £1,285,424. That amount exceeded the market rent, that is, the rent that would be paid in the open market (“rent B”) and so the premises were, as the expression goes, “over-rented”.[3]In 1996, SW wanted to find a sub-sub-underlessee of 1AS as it did not require those premises for its own use. It is well-known that, where premises are over-rented, the sub-lessee or assignee will be able to obtain some compensating incentive as the price of taking on the burden of paying the onerous rent. There is no fixed formula for these transactions. The parties can agree what they want and the amount of the subsidy depends on the extent to which each party is keen to do the deal. In this case, the monetary amount of the subsidy was £10m, though this amount is nowhere stated in the relevant contractual documentation.[4]BGC was identified as a potential tenant and detailed negotiations took place which I shall consider below. Following those negotiations, on 27 September 1996 BGC agreed to enter into a sub-sub-underlease (“the Relevant lease”) with SW. The terms mirrored those of the Barings lease save that clause 2 contained certain incentives in the way of reduced rent. I shall have to set out the actual terms of clause 2 below after I have outlined the problem.[5]Under clause 2, the rent payable was a peppercorn rent from the signing of the lease until 22 April 1997 (clause 2(a)). Between 23 April 1997 and 18 December 2010, the rent was rent B supplemented by the excess of the market rent over rent A as at rent review dates in 2001 and 2006 (clause 2(b)). After 18 December 2010, clause 2(c) of the Relevant lease provided that the agreed rent was then to be the higher of rent A and the market rent “on the immediately preceding Review Date”, which I will call rent C. It is this phrase that has given rise to difficulty in this case. Clause 2(c) (in the form that it appears in the Relevant lease) would have achieved parity with the rent that SW was paying under the Barings lease in a rising rental market. However, in this case it did not, due to a “double dip” of increasing severity in the market rent on the 2001 and 2006 review dates.[6]SW’s case is that a mistake must have been made in clause 2(c) of the Relevant lease and that the reference to market rent for the purposes of rent C means the higher of the market rents on the review dates in 2006 and 2001. It will then be possible, in the events that have happened, for the rents payable under the Barings lease and the Relevant lease to be aligned, as the parties intended.[7]The same pattern of sub-underleases and sub-sub-underleases between the same parties was repeated in relation to the other floors at 1AS. However, it is common ground that the conclusions which apply to the Relevant lease will apply to the other sub-sub-underleases.[8]An upwards only rent review provision is one which provides for rent to be reviewed at specified intervals and that the rent will become the higher of the rent on the review date on the specified basis (usually market rent) and the rent that was already being paid at the review date. Rent C was an upwards only rent review provision in the sense that it provided by implication (and this is common ground) for the rent to be the higher of rent A and the market rent (“rent D”) as at the 2006 review date. In the events that had happened, however, rent D did not match the rent then being paid under the Barings lease. It could only do so if clause 2(c) was an upwards only rent review provision in a second sense, namely where rent D was itself the higher of market rent at the 2006 review date and the rent being paid at the review date under the Barings lease. That would be achieved by the interpretation for which SW contends.[9]The present value at the date of the Relevant lease of the reductions in rent in the periods before clause 2(c) took effect was negotiated at £10m. SW and BGC agreed in a separate supplemental agreement that it was their intention that the rent payable under the Barings lease and the Relevant lease should be the same, and machinery was provided for the assignment of the Relevant lease to BGC when the rents were the same. I shall set out the relevant clauses of the supplemental agreement below.[10]Norris J held that something had undoubtedly gone wrong with clause 2(c) and that it “looked as though BGC bargained to receive £10m as compensation for all the over-renting risk in return for taking” over the Barings lease (judgment, paragraph 32(7)). He interpreted the reference in clause 2(c) to the open market rent on the “immediately preceding review date” as a reference to such rent on any preceding Review Date. This was in preference for SW’s interpretation. That would simply have inserted words providing for the substitution of the rent agreed or determined to be the market rent at the 2001 review date. SW accepts the judge’s interpretation.[11]The exact terms of certain of the relevant provisions of the Relevant lease and supplemental agreement are important. The Relevant lease provides for the demise of the relevant floors of 1AS by SW to BGC. The Principal Rent is defined as that first reserved by Clause 2. The rent first payable under clause 2 included varying elements of subsidy down to 18 December 2010:
“PAYING during the Term FIRST (a) until 22 April 1997 the yearly rent of a peppercorn and (b) from and including 23 April 1997 and until 18 December 2010 (the Initial Rent Period) the yearly rent of £752,765 plus (i) (with effect from the Review Date on 29 September 2001) the excess (if any) of the Open Market Rent on that Review Date over the sum of £1,285,424 (the Subsequent Rent) or (ii) (with effect from the Review Date on 29 September 2006) the excess (if any) of the Open Market Rent on that Review Date over the Subsequent Rent and (c) thereafter the Subsequent Rent or such other sum as shall be agreed or determined to be the Open Market Rent on the immediately preceding Review Date and subject to further review in accordance with the provisions of the Third Schedule . . . . PROVIDED THAT the Subsequent Rent shall become payable from such earlier date and in the circumstances set out in the Sixth Schedule . . . .”
(emphasis added)

FIRST

[12]So the Principal Rent during the period of the Relevant lease is divided into three parts. Nothing turns on the meaning of Open Market Rent which was apparently defined only in the third schedule, which did not apply until the 2011 review date. At the end of the clause 2 process, the third schedule applied. This is important because the third schedule contained an upwards only rent review clause mirroring that in the Barings lease (third schedule, paragraph 2). Had there been an upwards only rent review provision applying to the Open Market Rent at the 2006 review date for the purposes of the first part of clause 2(c), the present problem would never have arisen. For a reason which no-one has explained, this paragraph is expressed to be “subject to clause 2”. This is indicative of the paramountcy of clause 2, a point to which I shall return.[13]The sixth schedule to the Relevant lease enabled BGC to require SW to pay for certain fitting out works. Clause 2(c) was then accelerated. It might even be accelerated to before the 2006 review date. If that happened, the rent payable under the Relevant lease might achieve parity with that payable under the Barings lease before 18 December 2010. The sixth schedule is important as it is the reason put forward by SW for the fact that the provision for assignment, to which I next refer, stipulates no date.[14]The supplemental agreement was executed contemporaneously with the Relevant lease. In clause 6 of this agreement the parties agreed that, when the Principal Rent was the same under both the sub-underleases and the sub-sub-underleases (together “the leases”), the Barings lease should be assigned to BGC. No date was specified for this. Assignment was to take place, subject to the relevant consents being obtained:
“on the date on which the Principal Rent reserved by the [Relevant lease] . . . equals the Principal Rent reserved by the Barings lease relating to that part of the Property . . . .”
[15]In aid of this provision for assignment, clause 3.3 of the supplemental agreement contained a further provision stating that it was the parties’ intention that the Principal Rent under the Barings lease and the Relevant lease at the 1996, 2001 and 2006 review dates should be the same and agreeing on co-operation between them. The precise terms of this clause is important:
“Without prejudice to clause 2 of and the Sixth Schedule to [the Relevant lease] the parties agree that their intention is that the Principal Rent agreed or determined at the review dates on 29 September 1996 29 September 2001 and 29 September 2006 under [the Barings lease] and … the [Relevant Lease] should be the same and to the extent that they have capacity to do so [SW] and [BGC] agree not to settle any such review without the consent of the other . . . and to take all steps necessary or desirable to give effect to that intention.”
[16]Next the general principles of law. The principles for the interpretation of a document are set out in the well-known passage from the speech of Lord Hoffmann in ICS Ltd v West Bromwich BS [1998] 1 WLR 896. Under those principles, the provisions of clause 2(c) of the Relevant lease have to be interpreted by reference to the remainder of that document and against the admissible background. That of course includes the supplemental agreement. It does not, however, in general include the pre-contractual negotiations between the parties. Those negotiations are relevant only to rectification. For the purposes of interpretation, the court is confined to objective facts which both parties knew or which was reasonably discoverable to them. Pre-contractual negotiations can only be looked at for the purpose of establishing objective facts (for example, the parties’ state of knowledge): see the later speech of Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101 at paragraph 42.)[17]The parties knew about the terms of the Barings lease. They also knew that the rent payable by SW under that lease was above the market rent, which amounted to £752,765 as at the commencement of the Relevant lease. In fact, clause 2(b) had been constructed so as to allow BGC a reverse premium of £10m. I will assume in SW’s favour that this sum could have been ascertained from the figures and dates given in clause 2(c) even though no indication of the interest rates used has been given.[18]Mr Jonathan Seitler QC, who represents BGC on this appeal, submits that the reference in clause 2(c) to the 2006 review date, being “the immediately preceding Review Date”, and that date alone, was clear. In those circumstances, the judge should have interpreted those words according to their obvious meaning. It was reasonable to suppose that the parties had agreed that BGC should be liable only for rent reviews for the purpose of determining the rent for the period to which clause 2(c) applies. The reference in clause 2(c) to a single specific review date was consistent with clause 2(b). Therefore the judge should not have speculated that the bargain was that BGC should “receive £10m in return for taking a lease under which it would eventually pay the rent due to Barings”. The provisions of clause 2 of the Relevant lease and clauses 3.3 and 6.2 of the supplemental agreement were “bespoke clauses” drafted by experienced and skilled solicitors and it should not be taken that they made a mistake in the language they used.[19]Mr John McGhee QC, who appears for SW on this appeal, seeks to uphold the reasoning of the judge. He submits that it is clear from the admissible background that BGC had agreed to take on the onerous Barings lease for £10m. He emphasises that the court can correct linguistic errors through the process of interpretation without resort to rectification. He prays in aid what he submits was agreement at an early stage of the pre-contractual negotiations that BGC should take over the Barings lease as evidence that this was the aim of the transaction. This, together with the supplemental agreement, showed that something must have gone wrong with the drafting as the rent payable under the Relevant lease would, if BGC was right, never reach parity with the rent payable under the Barings lease. The opening words of clause 3.3 (“without prejudice to clause 2”) merely have the effect that the operation of clause 3 does not prejudice the discounts in clause 2. Those words could just as well have been omitted.[20]In my judgment, Mr Seitler’s construction is correct. This case potentially falls within a category of cases that has emerged more clearly since the landmark decision of the House of Lords in ICS, that is, the category of “something must have gone wrong with the language” cases. In general, the meaning of a document is what the parties using the words which they used against the relevant background could reasonably be expected to mean. The judge reminded himself of what Lord Hoffmann stated in the fifth of his now well-known principles of interpretation set out in that case. That reads:
“The 'rule' that words should be given their 'natural and ordinary meaning' reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios[1984] 3 All ER 229 at 233, [1985] AC 191 at 201: ‘… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.’” ‘… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense.’”
[21]Accordingly, there are circumstances in which the court may, if it finds from the face of the document interpreted with the admissible background, that the parties have mistakenly included, or omitted, words in a document, interpret the document so that it has the meaning which, according to the document read with the admissible background, the parties clearly intended. As the subsequent case of Chartbrook makes clear, however, there are limitations. In particular: i) It must be clear from the document interpreted with the admissible background that the parties have made a mistake and what that mistake is; ii) It must be clear, from the rest of the agreement interpreted with the admissible background what the parties intended to agree, iii) The mistake must be one of language or syntax.[22]It follows that it is not enough that the parties have mistakenly failed to provide for a particular circumstance. For the court to correct that error would be to rewrite the parties’ contract and to step beyond the permissible limits of interpretation.[23]In ICS and Chartbrook, the effect of the literal construction of the mistaken language of the parties was to produce interpretations that made the instruments ineffective in law, or irrational and arbitrary. That is evidence in itself that “something must have gone wrong with the language”. Equally, however, in my judgment, it must, consistently with principle, be possible to reach this conclusion in other ways. In this case, it could be said that “something must have gone wrong with the language” if the provision in question is inconsistent with some other provision which it is clear must have precedence.[24]When these principles are applied, it is clear that the judge must be wrong. The terms of the Relevant lease, taken on their own, are clear. The question of ambiguity only arises if it is shown that the aim of the transaction was that the rent payable from 18 December 2010, or such other date as clause 2(c) should come into operation, should be the same as that then payable under the Barings lease, so that the court can correct the mistake of the parties. The high point of SW’s argument thus rests on clause 3.3 of the supplemental agreement.[25]Under clause 3.3 of the supplemental agreement, the parties confirm their intention that there should be alignment of the rents payable under the leases at (inter alia) the 2006 review date. SW’s case is that, therefore, clause 2(c) of the Relevant lease must refer, as the alternative to rent A, to the higher of the market rent at the 2006 review date and the 2001 review date. Mr McGhee supports this argument by reference to the application of clause 3.3 to the 2001 review date. He submits that that shows that the market rent on that date was also relevant. That could only be the case if the reference in clause 2(c) to the “immediately preceding Review Date” includes a reference to the review date which preceded that date.[26]It was never explained to us why the parties entered into a supplemental agreement in addition to the Relevant lease rather than incorporating all the agreed terms into one document. Moreover, it is unusual for a clause in an agreement to contain a passage which does no more than set out the parties’ intention. These points may suggest that the supplemental agreement contains provisions which were the subject of close haggling and commercial negotiation. But the point to be stressed is that clause 3.3 is (in the material part) only a statement of common intention that the rent under (among other leases) the Barings lease and the Relevant lease should be aligned. The parties did not enter into an obligation to produce this result. They, therefore, recognised that there was a risk that rent alignment would not happen. BGC did not accept responsibility for its not happening.[27]The arguments of counsel did not descend to explaining in detail how clause 3.3 would operate. However, it is clear that the Principal Rent payable under the Relevant lease and the Barings lease could never be the same as at the 1996 or 2001 dates as clause 2(a) and (b) of the Relevant lease applied on those dates. There is no suggestion that the fitting out costs could under the sixth schedule have accelerated clause 2(c) of the Relevant lease to either of these review dates. That means that it is difficult to apply clause 3.3 as it stands even as a statement of intention. It is possible that the reference to “Principal Rent” should have been to Open Market Rent. It is possible that clause 3.3 of the supplemental agreement includes not only actual Principal Rent but also, in the case of the SW lease, notional Principal Rent. By notional Principal Rent, I mean the Principal Rent which would be payable but for the provisions of clause 2 of the Relevant lease. No-one, however, has suggested either of these interpretations.[28]However that may be, the important point is that the statement of intention in clause 3.3 was itself qualified because that clause is prefaced by a statement that clause 3.3 is to be “without prejudice to” clause 2 of the Relevant lease. Those words are not said to be in error. This means that clause 2 is to be accorded precedence over clause 3.3. So clause 3.3 must take effect subject to whatever clause 2 means. Clause 2 is the paramount provision. On this basis, clause 3.3 cannot adversely impact on the parties’ obligations under clause 2 of the Relevant lease. Accordingly, when it comes to deducing the aim of the transaction contained in the Relevant lease, read with a supplemental agreement, it cannot, consistently with the terms of the supplemental agreement be said that the aim of the transaction was rent alignment, and assignment of the Barings lease to BGC forthwith on clause 2(c) coming into effect. The fact is that the parties evidently agreed that clause 2 represented the deal between them, and that everything else was subsidiary to that deal. The inclusion of the words "subject to clause 2” in paragraph 2 of the third schedule is consistent with this conclusion.[29]In contrast to clause 3.3 of the supplemental agreement, the language of clause 2(c) of the Relevant lease is clear and unambiguous. The reference to a specific rent review date is consistent with the structure of clause 2(b). Moreover the third schedule, which provides for upwards only rent reviews, does not apply to the first period mentioned in clause 2(c) but only to the period following the 2011 review date. Clause 2(c) is coherent and workable in its immediate context. The only problem is that it assumes (as indeed the parties may have assumed) that rental values would increase in a linear fashion from 1996 and that there would be no second "crash". In that the parties were disappointed.[30]Furthermore, the precise extent of any mistake is not clear. SW put forward its proposed interpretation to deal with the double dip in rental values, namely the addition of a reference to the 2001 market rent, if higher. That no doubt sufficed for its purposes. The judge, however, preferred an interpretation that addressed a potential triple dip in rental values. Logically the judge was right: if the parties made a mistake in failing to draft against the possibility of a double dip they would also have made a mistake in failing to use language which took account of the possibility of a triple dip.[31]SW is content to accept the judge’s interpretation, as well as still standing by its own. But the two interpretations could result in different amounts of rent being payable in the period from 18 December 2010 to the 2011 review date. Furthermore, it did not occur to SW that there had been a mistake until the double dip occurred. When it occurred, SW opted for a construction which was different from that found by the judge and takes no account of a triple dip. All these points tend to undermine SW’s case that there was obviously a mistake made and that there was obviously a different set of wording which clause 2(c) should have used.[32]Mr McGhee relies on the parties’ pre-contractual negotiations as evidence establishing that the common object of the transaction was that SW should give BGC the equivalent of a reverse premium of £10m and that BGC should then take over the Barings lease. I accept that the objective fact of the common aim of the parties in entering into the Relevant lease and the supplemental agreement would be part of the background admissible on interpretation. Mr McGhee submits that part of the aim of the transaction between the parties in this case was that the responsibility under the Barings lease would be transferred to BGC at the end of the initial period (that is, the clause 2(b) period) at the latest. This would be achieved by the alignment of the rents payable under the Barings lease and the Relevant lease at the end of the initial period, which would trigger the obligation to take an assignment of the Relevant lease under clause 6 of the supplemental agreement. Mr McGhee submits that pre-contractual negotiations can be prayed in aid of the objective fact of the aim of a transaction.[33]This is a difficult area: see generally, for instance, my judgment in Square Mile Partnership v Fitzmaurice McCall Ltd [2007] 2 BCLC 23 at paragraphs 59 to 63. The judge rightly held that negotiations could not be used to support detailed points of interpretation (judgment, paragraph 17(vii)). Pre-contractual negotiations rarely descend into detail on every point; the negotiations are unlikely to throw any light on the detailed points of interpretation that generally arise after execution.[34]However this does not necessarily mean that the pre-contractual negotiations should be accepted as evidence even as to the general object of the transaction. Statements made in the course of negotiations are often no more than statements of a negotiating stance at that point in time, thus shedding more heat than light on issues as to interpretation of the final deal. The reaction of one of the witnesses in this case to a statement made in the course of negotiating the sub-sub-underlease vividly illustrates this point. At being shown a statement that SW would not agree to any outlay beyond £10m, he said that he did not know whether SW meant that. He added:
“They would say that, wouldn’t they?”
[35]These factors mean that judges should exercise considerable caution before treating as admissible communications in the course of pre-contractual negotiations relied on as evidencing the parties’ objective aim in completing the transaction. Parties could agree in the course of negotiations that, come what may, the aim of their transaction will be to do X, but in that situation their communications are likely to be enforceable as a collateral contract.[36]I shall have to set out the communications on which Mr McGhee relies below. In my judgment, these communications do not in any event support the conclusion that the objective aim of the transaction was for BGC to take over the Barings lease after it had received the benefit of the £10m, from SW in any event. BGC agreed to do so only on the terms of the Relevant lease as finally agreed.[37]Before leaving the question of interpretation, I would add a number of points arising from the judge’s judgment and the parties’ submissions on this appeal.[38]First, the judge fell into the error in paragraph 32(7) of his judgment in holding that the correction of a mistake was justified where “it looked as though” BGC was to receive £10m and in return take over the rent payable under the Barings lease. As explained in Chartbrook, it had to be clear from the Relevant lease and the admissible background both that there was a mistake and how it ought to be corrected before the court could proceed to interpret the contract as he did. In any event, the judge’s construction is inconsistent with the Relevant lease when read with the supplemental agreement.[39]Secondly, I reject Mr Seitler’s submission that the court should only consider the effect of the background facts once it is satisfied as to an ambiguity. The process of the interpretation of a document is a single, unitary one in which the words are examined against the background of facts. Mr Seitler relies on the judgment of Saville LJ in National Bank of Sharjah v Dellbourg [1997] Court of Appeal Transcript No 1320. Saville LJ there expressed concern that the admission of background facts to alter the plain meaning of a document would be unfair to assignees. However, Lord Hoffmann in Chartbrook at paragraph 40 rejected that as a ground for not admitting background facts. Lord Hoffmann considered that the assignee should investigate any background facts or (if he did not) take the chance that there was admissible background which might affect its meaning.[40]Thirdly, Mr McGhee submits that the explanation for the lack of a date in clause 6.2 of the supplemental agreement dealing with assignment was that the sixth schedule to the Relevant lease (dealing with fitting out works) might cause clause 2(c) to come into effect prior 18 December 2010. This was not an inevitability. The more natural way for the parties to express their agreement in that event was to say that clause 6.2 would take effect at the latest on 18 December 2010, rather than leave the clause silent as to date.[41]For all these reasons I would allow the appeal on the interpretation of clause 2(c). In those circumstances I need to consider the cross-appeal against the judge’s refusal to rectify the Relevant lease.

Alternative claim: rectification of clause 2(c) of the Relevant lease

(c) of the Relevant lease

[42]The judge rejected the claim for SW’s alternative claim for rectification. He considered that the parties were in negotiation about the form of the transaction and all of its detailed terms until the very end. He considered that there was no prior accord in the documents. SW appeals.[43]The requirements for rectification are set out by Peter Gibson LJ in Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71, 74, para 33 and approved by Lord Hoffmann in Chartbrook (at [48]: “The party seeking rectification must show that:(1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;(2) there was an outward expression of accord;(3) the intention continued at the time of the execution of the instrument sought to be rectified;(4) by mistake, the instrument did not reflect that common intention."[44]The burden of proving that the requirements for rectification have been fulfilled lies on the party seeking rectification. It is for obvious reasons more difficult to discharge the onus where the instrument is detailed and has been drafted, as in this case, with the benefit of expert legal advice (see Snell’s Equity, 32nd ed at paragraph 16-022.)[45]The main focus of the rectification claim in this case is on the first requirement set out by Peter Gibson LJ. That primarily involves looking at the negotiations between Freshfields and Norton Rose, solicitors for SW and BGC respectively. The proposal evolved over several months as a result of the parties’ solicitors searching for the most tax efficient structure from both parties’ point of view. As Mr Seitler puts it in his submissions, the question is whether the parties’ consensus on this transaction was ever “granular” enough to amount to agreement on the particular matter at issue, namely whether BGC agreed to become liable to pay the full rent payable under the Barings lease as soon as it had received the reverse premium of £10m implicit in the arrangements for reduced rent.[46]Mr McGhee accepts, following the recent decision of this court in Daventry DC v Daventry Direct Housing Ltd [2012] 1P&CR 5, that the court has to apply an objective test to the parties’ communications and ask whether a reasonable observer would have concluded that the parties had a common continuing intention that BGC should become liable for rent in an amount equal to the onerous rent payable under the Barings lease as soon as the rent reduction period came to an end. By objective interpretation, I take him to mean an interpretation in accordance with the principles laid down by Lord Hoffmann in ICS, apart from the exclusion of pre-contractual negotiations. That approach is not fully objective as the meaning of any words is taken to be that which the meaning would convey to a reasonable person having all the background knowledge which would have been available to the parties in the situation in which the parties were at the time of their agreement (see principle (1) in ICS at page 912).[47]The judge set out the negotiations step by step. The negotiations started in late 1995. The parties agreed that BGC should receive a reverse premium and should take over the Barings lease. There was negotiation over the amount of the reverse premium.[48]In May 1996, Freshfields (acting for SW) proposed the grant of a sub-sub-underlease to BGC, a two year rent free period, a put and call option which if exercised would result in the transfer of the Barings lease to BGC and in that event SW would have the right to surrender its sub-underlease to BGC. So under the transaction structured on this basis, SW would be able to compel BGC to take over the Barings lease but it would not happen automatically.[49]In June 1996, the proposal was changed to one for the grant by SW of a new sub-sub-underlease to a special purpose vehicle formed by SW which would be sold to BGC for a nominal sum. This foundered on company law grounds. The next proposal, this time made by Norton Rose acting for BGC, was for the payment of a reverse premium on BGC taking a sub-sub-underlease. BGC sought to be indemnified against the adverse VAT implications of this.[50]Freshfields promptly replied on 2 August 1996 stating that SW is “not prepared to enter into a deal which goes beyond the capital outlay of £10m”. Mr McGhee complains that the judge did not refer to this letter, which he submits is of key importance as supporting his argument that there was a common continuing intention that BGC should become liable for rent in the full amount of the onerous rent payable under the Barings lease. It is, however, clear that this reply is merely a step in the evolution of the negotiations. There was no specific acceptance of SW’s point about the £10m, and it cannot therefore be taken to have represented the parties’ final agreement. BGC’s acceptance that the reverse premium was that sum does not by itself imply that the parties were not prepared to negotiate about some other benefit.[51]On 8 August 1996, Norton Rose responded with what it called a “plain vanilla” proposal:
“1. SW would grant sub-sub-underleases to a CF entity at a market rent (with the rent-free periods) for a period. And thereafter at the onerous rent. That period would be one which would result in the current NPV of the onerous/market rent difference being £10 million, but the rent would increase to the onerous rent on earlier final repayment of the loan in paragraph 2 below…. 5. Once the onerous rent becomes payable, CF will take over SW’s leases. 6. The effect of these arrangements is that CF will always pay SW enough to enable it to cover its onerous rent obligations to Shimitsu. CF’s payment to SW will be comprised of a combination of market rent, interest on the loan and repayment of principal.”
[52]BGC also demanded a loan of £10m at a commercial rate of interest. This was in the event granted, and this shows that the negotiations were ongoing. BGC accepted that it should take over the Barings lease when it became liable to pay the onerous rent following the “rent-free” periods. SW no doubt accepted that element of the transaction, but the deal was still not agreed.[53]However, on 29 August 1996 the principals met and agreed the deal in principle. There is no evidence as to what was said or agreed on this occasion. Two of the principals engaged in this matter for BGC lost their lives in 9/11 and that may account for the lack of evidence from BGC on this point. However, Freshfields told Norton Rose that an agreement had been made as to rent. There would be a change in the identity of the tenant but “the only other change to the leases will be a reduced rent period which applies after the expiry of the rent free periods you know about, subject to curtailment (and acceleration of the full rent equal to that currently being paid by Barings) to the extent [SW] carries out fitting out works. I will let you see the drafting as soon as we have it ready.”[54]That was consistent with BGC taking over the onerous rent at the end of the “rent-free” period as in the proposal of 8 August 1996, but the proposal was not fully explicated. It was to be subject to elucidation in the drafting. The drafting process then began. On 9 September 1996, Mr Boon, from Boon Godbold, BGC’s property agent, wrote to (inter alios) Norton Rose and Jones Lang Wootton, SW’s agents, informing them that the amount of the discounted rent to be paid for the various floors at 1AS had been agreed. This agreement presumably superseded any prior agreement between the parties on the amount of the rent. No-one suggests that Mr Boon did not accurately record what had been agreed at that time.[55]In his memorandum, Mr Boon stated that if, at the September 2001 review date, the market rent exceeded the rents payable under the Barings lease, the agreed rents would be increased by that amount and that a similar increase would apply at the September 2006 review date. In addition, Mr Boon stated that the rent would:
“in any event revert to the full amount settled at the September 2006 review by December 2010 so that the 2011 rent review [would] be on a normal basis.”
[56]Before I turn to the words “full amount settled at the September 2006 review”, it may be noted that the concluding words (which follow those words) simply identify the machinery for rent review rather than the amount of rent. That machinery subsequently became the third schedule of the Relevant lease.[57]It appears that the judge may have taken the view that the preceding words, “the full amount settled at the September 2006 review date”, referred to the rent payable at the 2006 review date under the Barings lease (see words in brackets in his judgment at paragraph 51). In that case the rent would be the higher of the rent previously agreed and the market rent at the 2006 review date. However, that may not be the natural reading of the memorandum since the immediately prior references in it to review dates appear to be references to review dates under the proposed lease to BGC. Under that new lease, “the full rent settled at the September review” would be the amount settled at that date without reference to the rent settled at any earlier date.[58]If, therefore, Mr Boon’s memorandum of 9 September 1996 represents the state of the parties’ agreement on the rent following 18 December 2010, it was not unambiguous and can be read as supporting BGC’s case. His reference to the full amount settled at the 2006 review is on any basis explicable as founded on an assumption (which would be consistent with his reference to the 2001 and 2006 market rents) that rent would simply increase from 1996 in a linear fashion. SW’s response to this memorandum could have made the position clear but we do not have any response to it. In this material respect, the parties’ common intention lacked clarity, or, as Mr Seitler puts it, a sufficient degree of granularity to prove SW’s case.[59]Thus it cannot be said, as SW seeks to say, that there was consensus on the point that, when BGC had had the benefit of a reverse premium of £10m, it would become liable for rent in the full amount payable under the Barings lease or that BGC had accepted the risk of a fall in rental values between 2001 and 2006.[60]Mr McGhee submits that the parties had agreed at the outset the shape of the transaction, namely a reverse premium of £10m in return for BGC taking over the Barings lease. SW says that this point never changed. The remainder of their negotiations involved agreement as to the mechanics. If right, this submission would enable SW to overcome my last conclusion on Mr Boon’s memorandum.[61]However, it is apparent from my analysis of the negotiations set out above that it is not the case that the basic shape of the transaction remained agreed from an early stage. There were moreover doubts expressed in the documentation up to early August as to whether the parties would be able to agree a deal at all. The parties only regarded themselves as having an agreement on 29 August 1996, and that was an agreement in principle only. The shape of the transaction thus remained fluid until a late stage. BGC was able to negotiate for further benefits, with success in the case of the £10m loan. There was, moreover, no clear consensus that SW’s “line in the sand”, that it should not be exposed to the rent payable under the Barings lease after it had granted the reductions in rent of £10m, was agreed to be an essential element of any deal.[62]Mr McGhee raises a further point. He submits that the parties should be taken to have maintained their position that BGC should take over the onerous rent as soon as the reverse premium was received because neither party made clear that it was resiling from a position which had been agreed: see Daventry above, per Lord Neuberger MR at paragraph 207. The answer to that submission is that there was no obligation to do that because a clear consensus on the question whether BGC should take over the Barings lease on receipt of the £10m had not crystallised.[63]As Mr Seitler points out, SW did not discover that the Relevant lease did not reflect what, on its case, had been agreed until some twelve years later (shortly before issuing these proceedings). SW did not point out this particular alleged error when others were corrected by consent in 1999. That reinforces the point that the parties had no relevant common continuing intention on the particular point which SW needs to establish.[64]My final point is a procedural one. The judge heard two days of oral evidence. His judgment contains no reference to any of it: he obviously found it of no assistance. While neither party has taken a point on this, the judge ought to have explained in his judgment what oral evidence he had heard and briefly why none of it assisted him.[65]In conclusion, in my judgment, the judge was right to dismiss the alternative claim in rectification.[66]For the reasons given above, I would allow the appeal and dismiss the cross-appeal.[67]It is clear that in one respect something has gone wrong with clause 2(c) of the Relevant lease, as is common ground. The words “whichever is the greater of” need to be added after the word “thereafter” to make any sense of it: and it is again common ground that that must be considered to be so as a matter of interpretation. But once those necessary words are added clause 2(c) is, as I see it, on its face plain and unambiguous.[68]It is not too strong to say that the judge’s conclusion involves re-writing the sub-clause. His interpretation involves, among other alterations, replacing the words “the immediately preceding Review Date” in the sub-clause by the words “any preceding Review Date” (in wording, it may also be noted, different from that actually suggested at trial by SW itself).[69]There may be cases where, in order to achieve objective commercial sense, the courts are prepared in effect to give words as contained in a commercial contract a meaning that at first sight they do not seem to bear: see, for example, Charter Reinsurance Co. Limited v Fagan [1997] AC 313. But in the present case there is, objectively speaking, no lack of commercial sense, on the face of it, in giving the words of clause 2(c) the precise meaning they ostensibly and explicitly convey.[70]To rebut this Mr McGhee QC, on behalf of SW, was constrained to delve – impermissibly, as I see it – into the pre-contractual negotiations with a view to establishing a commercial objective which could re-fashion the wording of clause 2(c) away from its ostensibly plain meaning. One can readily accept as admissible background evidence of genesis and objective of the transaction that (as mutually known) the premises were over-rented, on upwards only review terms, and that a reverse premium or subsidy, in some form or another, would be likely to be required to induce BGC to take on the obligations of the Barings lease. But one cannot, in my opinion, move from this to advance as the commercial objective of the transaction that the transaction was designed to yield to BGC the amount of £10 million if BGC were ultimately to take on liability for the full rents payable under the Barings lease. (Indeed, as I see it while the passing rent payable under the Barings’ lease (£1,285,424) was an objective fact known by both parties what was the open market rent of the premises at the date of the transaction was not itself an objective fact: it would have been a matter of valuation opinion and potential dispute, even if the parties were in the event prepared to accept a figure on that of £752,765.) In my view, overall, the subsidy was a matter – in effect, a matter of “price” – which formed one aspect of the detailed bargaining and negotiating process designed to lead to fulfilment of the overall commercial objective of passing on the sub-underlease liability by a sub-sub-underletting on terms to be agreed.[71]As to the supplemental agreement that is properly admissible for the purposes of interpreting the Relevant lease. But there is nothing in that supplemental agreement, any more than there is in the Relevant lease, which identifies, explicitly or implicitly, the sum of £10 million as the notional premium payable to BGC before the rents are to align. Clause 3.3 of that Agreement is not enough, in my view, for Mr McGhee’s purposes. First, it relates to all the rent review dates and provides for mutual consultation in that regard; second, it states (in the first part) that the parties are agreed as to their intention that the Principal Rent should align (without expressing any obligation in that regard); third, clause 3.3 is in terms stated to be without prejudice to clause 2 and the sixth schedule of the Relevant lease, which do convey obligations. Further, while I understand Mr McGhee’s point about the fitting out costs, to my mind it remains very striking that the supplemental agreement does not even designate the 18th December 2010 as a long-stop date by which the alignment of rents must occur.[72]The judge was plainly concerned to reach what he perceived to be a commercially just result. But, with respect, he achieved that result, in my view, by inadvertently trespassing (on the issue of interpretation) into consideration of the commercial negotiations and then by wrongly promoting the negotiated “subsidy” of £10 million as being, in effect, the commercial objective of the transaction whereby BGC was to take on the obligations in the Barings lease; and then rewriting the Relevant lease accordingly.[73]Of course, all the negotiations are indeed properly admissible on the issue of rectification: and the supplemental agreement also continues to have force in that context. But for this purpose there had to be established an outward expression, objectively viewed, of a continuing common intention in this particular regard, which was not reflected in clause 2(c) of the Relevant lease. Mr McGhee’s arguments, by reference to the negotiations and documents, were powerful and I had an amount of sympathy with them. But ultimately, in agreement with Arden LJ, I do not think there was such an expression of a continuing common intention on this point. As Mr Seitler QC, on behalf of BGC, put it it is all left to inference and inkling.[74]It may well be that had the parties applied their minds to the possibility of rent decline (as in the event happened) they may have agreed on terms of the kind now argued for by SW. But that is not enough. I note, in fact, that at the later stages of the negotiations – when the structure of the transaction was entering its final form – no structure document or informal Heads of Agreement of the kind being exchanged at the earlier stages of the negotiations seems to have been produced. The matter was in this respect being left to agreement through the drafting process.[75]As the judge, in rejecting SW’s case on rectification, crisply put it:
“the meeting of the minds was in the engrossed document”
. I agree with that. In my view, notwithstanding his views on interpretation the judge was, on the evidence, rightly and honourably being loyal to accepted principles of rectification in his assessment of the position.[76]I accordingly agree with Arden LJ that the appeal should be allowed and the cross-appeal dismissed.[77]I agree with both judgments.

Cited in 13 later judgments

and 4 more of the most senior