Neutral Citation Number: [2006] EWHC 3644 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand
London WC2A 2LL

Date: Friday, 10 October 2006

BEFORE:

THE CHANCELLOR

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BETWEEN:

W G MITCHELL (GLENEAGLES) LTD & ANOR
Claimant
- and -

JEMSTOCK ONE LTD
Defendant

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MR DRISCOLL QC (instructed by Eversheds) appeared on behalf of the Claimant

MR COLE (instructed by Olswang) appeared on behalf of the Defendant

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Judgment

1.	THE CHANCELLOR:  This is the trial of a Part 8 claim issued by the purchaser of the reversion to a lease for rectification of an agreement for that purchase dated 19 May 2004.  The agreement in question was made between the defendant Jemstock One Limited and the claimants W G Mitchell (Derry) Limited and W G Mitchell (Gleneagles) Limited as the buyer and the surety respectively.  The claim for rectification is put forward on the ground of a mutual mistake.  The claim is not opposed and there has been no cross examination of any of those who have made witness statements.  Such a claim could of course be effected by a Deed of Rectification but due to a change in the law effected by the Finance Act 2005, to do so would create a liability to stamp duty land tax of some £2.4 million which was never envisaged and would never have been incurred if the document had been in a proper form in the first place.  

2.	The facts are as follows.  On 30 October 2003, a lease of some 35 years duration was granted by Jemstock Limited to Stakis Limited for the building of a hotel, then in course of construction at South Quay, in the London docklands, for a term of some 35 years.  The lease is complicated but the following summary will suffice to explain what later occurred.  The lease was rent free until the effective date as defined by clause 16.3, which, for present purposes, was ten days after the date of practical completion of the hotel building.  On the effective date four rents became payable.  First, there was a basic rent of £2,750,000 per annum increasing by £250,000 a year for the second and third years, and thereafter in accordance with an index prescribed by the schedule to the lease.  Second, there was an ‘on account rent’ equal to 22.5 per cent of the anticipated turnover of the hotel in the then current accounting period.  Third, there was an ‘additional rent’ colloquially known as a ‘froth rent’ equal to 30 per cent of the turnover of the tenant, carrying on the business of the hotel, in the immediately past accounting period after crediting the basic and the on account rents for that accounting period.  Fourth, in the first two years after the effective date, and provided that the tenant made a sufficient profit as defined for that period, there was to be a ‘further rent’ to bring up the aggregate of the basic, on account and additional rents to the figure of £3,250,000 in the first year and that sum increased by indexation in the second.  The point to note is that the payment of the further rent was dependent on the profits of the tenant, it was not assured in any event.  

3.	On 29 January 2004, Mr Steven Lewis of Lewis and Partners, as agents for Jemstock, emailed Mr Philip Chatterton, as agent for Mitchells, following discussions between them, on the bare bones of the scheme by which Mitchells would invest in a reversion on the Stakis lease then held by Jemstock Properties Limited.  The possible shortfall in the first two years, if the tenant did not make a sufficient profit so that the rent of all descriptions was £3,250,000, was an impediment to investment worth apparently no less than £9 million.  Accordingly, Mr Lewis proposed, somewhat obliquely, and I quote from bundle 2 page 90:  

“Minimum guarantee £3.25 million subject to 2.5 per cent increases throughout.  Top up rent calculated as 30 per cent of turnover.  It was done this way (as opposed to relating to profit) because they would be far cuter in reducing the actual profit.  Turnover is far easier to monitor.  The actual guarantee starts at a lower figure for the first two years and is topped up by a priority payment.”  

	And then this follows, which are the important words:  
“If necessary, we can top up the guarantee for the first two years which is only drawable if the priority payment does not cover.”  

4.	On 30 January 2004, Mr Bruce Patrick, also of Savills, to whom the former email had been copied, replied affirmatively, and stated amongst other things, as follows in the same bundle at page 92.  Under paragraph 3, “Initial rent”, he said:  

“The rental under the lease agreement for the first two years is £2.75 million per annum and £3 million per annum but we understand that the vendor will top this up to £3.25 million per annum for the first two years and thereafter the rent will increase on an annual basis by 2.5 per cent.”  

	Later on, he stated:  

“… I can advise that our client is considering this opportunity at a level that reflects a price of about £56.5 million which shows a net interest yield of about 5.65 per cent based on nil stamp duty cost as the property appears to have assisted area status.  This level of bid would be on the basis that my client would receive the benefit of all capital allowances relating to the project.”  

	There the matter rested for the moment because there was another bidder with whom the negotiations were then continued but that came to nothing.  

5.    On 26 March 2004 there was a telephone conversation between Mr Lewis and Mr Chatterton which is described by Mr Chatterton in his witness statement in the following terms, and I quote from bundle 1, page 47:  

“On or around 26 March 2004, Steven telephoned me and asked whether the claimants would still be interested in the acquisition as the negotiations with the third party had gone off.  Steven discussed with me the terms of the deal that the vendor was prepared to offer.  Basically, the vendor was proposing to proceed by way of a sale of the base rent only with the vendor retaining the froth rent at a purchase price of £60.5 million.  Like before, the Agreed Guarantee was offered by the vendor as a term of the deal.  Simply put, there was absolutely no way that the vendor could have expected a deal to have been agreed at this price (or anywhere close to it) if the Agreed Guarantee was not on offer.”  

6.	Three days later on 29 March 2004 in consequence of that conversation, heads of terms were submitted by Mr Lewis to Mr Chatterton.  The price was £60.5 million for a leasehold reversion and the nature of the lease was then set out in bundle 2 at page 96 in these terms:  

“… a 35-year full repairing and insuring lease with tenant breaks at years 20 and 30, with the initial rent for the first two years being £2.75 million and £3 million per annum.  In addition there will be a priority payment of half a million in year 1 and £250,000 in year 2.  The rent is then increased annually in line with RPI subject to a cap of 5 per cent with a starting base of £3.25 million year 1.”  

7.	It will be noted that those heads of terms contain nothing by reference to the vendor’s guarantee of the further rent.  Accordingly, on the same day, Mr Lewis sought confirmation that the purchaser would get a guaranteed rent of £3.25 million for the first two years and he got it.  This occurred by means of an exchange of emails on 29 March and that from Mr Lewis is timed 5.17pm and states:  

“Further to our telephone conversation our clients have just asked us to confirm that the purchasers will receive a guaranteed income of £3.25 million for the first two years in respect of the above and the Heads of Terms set out in our email today.”  

	To which the answer sent by Mr Chatteron at 5.40pm was:  

“See below, this confirms £3.25 million day one.”  

8.	Thereafter other terms were debated and concluded but not so as to alter in any way the nature and effect of the guarantee of the minimum rent to be provided by the vendor to the purchaser.  In the event the deal was structured as a sale of an under lease for 199 years by Jemstock One, rather than a sale of the freehold by Jemstock Properties Limited but nothing turns on this, coupled with a number of other complicated documents such as two agreements for a lease, a put and call option, two intervening leases and a deposit guarantee.  

9.	On 19 May 2004 the documents as drafted by the solicitors, including the agreement for an under lease, were executed.  Neither the agreement for an under lease nor any other of the documents included the agreed guarantee.  This was because the solicitors responsible for the drafting had not been instructed to that effect.  It so happened that the location of the property was in a disadvantaged area and so the deeds effecting the sale would be entitled to relief from stamp duty land tax under section 57 of the Finance Act 2003 and Schedule 6(4).  

10.	On 17 March 2005 that disadvantaged area relief was withdrawn by section 96 of the Finance Act 2005 implementing Schedule 9 paragraphs 4(2)(b) and 4(3).  This preserved the relief where the transfer was executed after 17 March 2005 pursuant to a contract made before 17 March 2005 if, but only if, that contract was not varied after that date.  

11.	On 27 September 2005 the solicitors for Mitchells sought confirmation from Her Majesty’s Revenue and Customs that no stamp duty land tax would be payable on the completion of the under lease if the agreement were rectified by court order.  No confirmation from the Revenue having been obtained, leading counsel’s opinion was sought.  That opinion was favourable and it was sent to the Revenue on 11 January 2006.  The Revenue were asked to confirm that in the event of the court ordering rectification the exemption from stamp duty land tax would be preserved.  

12.	The response from the Inland Revenue came on 26 January 2006, in terms which I find difficult to understand, and to which I shall refer later.  It is not material to anything I have to decide but I am concerned, as I will explain later, lest it represent a considered view of the Inland Revenue.  On 8 June 2006 the relevant under lease was granted and £60 million was paid on the basis of the written confirmation of the solicitors for both parties that, and I quote from page 293, bundle 2:  

“The purpose of this letter is to record that it is, and was at the time the Agreement for Underlease was entered into, the mutual intention of the parties to give to WGMG the right to receive and retain, in each of the first and second years of the term of the draft Underlease (which was annexed to the Agreement for Underlease), a minimum sum of £3.25 million (increased by indexation in the second year in accordance with the Stakis lease), by way of payment of rent to WGMG by the tenant under the Stakis lease (“the Stakis Tenant”) and that, in the event of any shortfall between the minimum sum and the rent payable by the Stakis Tenant to WGMG as Basic Rent and Further Rent, the shortfall would be made good by JOL, with the intention that WGMG should be guaranteed to be entitled to receive and retain in each of those two years of the term the minimum sum referred to.”  

	Then later they added:  

“It is acknowledged by all parties to the Agreement for Underlease that by mutual mistake, the Agreement for Underlease does not give effect to the mutual intention of the parties.”  

13.	The Part 8 claim now before me was issued on 16 June 2006.  The particulars of claim in fact served under it set out the facts, as I have related them, contend that the omission of the relevant guarantee was a mutual mistake and seek an order in a form which would correct the mistake that was made.  The form is complicated and is in the nature of a draft agreement which the draftsman of all the original documents says, in his evidence, he would have provided had he been instructed properly, and would have been annexed to the agreement for the under lease and would be executed at the same time as the execution of the under lease.  The form which is now put before me is one which would have been the form properly completed in the light of the events which have occurred, had the original draft been annexed to the original agreement and had that draft been completed and executed at the time of the execution of the under lease.  

14.	The evidence of Mr Taylor, the draftsman of the original documentation, indicated that the documents to which I have referred would have been those that he would have used had he been properly instructed.   At my request he has confirmed, by a further witness statement produced this morning, that the document now proffered is one which would correct the mistake but do no more.  The evidence before me consists of a number of witness statements on which there has been no cross-examination.  The salient parts of them are as follows.  First, Mr Dennis of Capital and Provident Management Limited, the advisors of Jemstock, states in paragraph 17 and following of his witness statement dated 23 June 2006, and I quote from bundle 1 at page 56:  

“I am now aware that the Agreed Guarantee was not incorporated into the draft documentation.  I believe this was by mistake.  I was not aware that the Agreed Guarantee had not been incorporated into the documentation when the Agreement for Lease was entered into on 19 May 2004.
It was always my intention, as a director of C & P and as acting agent on behalf of the Defendant, and the Defendant’s intention down to the time of entering into the Agreement, that the Defendant would pay the Agreed Guarantee to the Second Claimant.  I believe that the Agreement failed to give effect to this intention by mistake.”  

15.	That passage effectively confirms the evidence to the like effect given by three witnesses for the claimant.  The first is Mr Hegarty, the Managing Director of the claimant who states in paragraph 25 of his witness statement, and I quote from bundle 1 page 30:  

“When the Agreement for Underlease was entered into on 19 May 2004, I believed that it did include a provision which gave effect to the Agreed Guarantee.  As I have said, it was an essential term of any deal which my company was to enter into with Jemstock, I had not been informed by anyone that it would not be included in the relevant contract, and I assumed that the lawyers had provided for it.”  

16.	To the same effect is the evidence of Mr Philip Chatterton in paragraphs 38 to 41 of his witness statement which are in the following terms, and I quote from page 50 of bundle 1:  

“38.  During the negotiations leading up to the correspondence on 22 and 23 April 2004, and during the negotiations that continued after 23 April 2004 up to the transaction completing on 19 May 2004, nothing was ever said and/or written to suggest that the Defendant’s agreement to pay the Agreed Guarantee was withdrawn and/or no longer subsisted.  
39.  The negotiations, and the further terms agreed, were always based on the fact that the fundamental premise upon which the purchase price was agreed at £60.5 million, and subsequently chipped to £60 million, was that the Defendant would provide the Agreed Guarantee.  
40.  For the reasons set out in this Statement and in Bruce’s Statement, the Agreed Guarantee was a critical term of the deal because of the impact that it had on the purchase price achievable for the investment.  As Bruce has explained, if the Agreed Guarantee had been withdrawn, the purchase price achievable would have been around some £9 million less than the price at which the investment was sold to the Claimants.  Accordingly, if the Defendant wished to achieve the purchase price of £60 million (or £60.5 million as it was originally), the Agreed Guarantee had to be provided by the Defendant.
41.  In the light of the above, it is simply inconceivable that the Defendant would have withdrawn its offer to provide the Agreed Guarantee because it would not have been able to attain the purchase price it did.”  

17.	Mr Patrick in paragraphs 31 to 33 of his witness statement, in bundle 1 at page 40, said this:  

“During the negotiations in April/May 2004, nothing was ever said and/or written by the Defendant, the Defendant’s agent and/or any of the Defendant’s other representatives to suggest that the Defendant’s agreement to pay the Agreed Guarantee was withdrawn and/or no longer subsisted.  
32.  The negotiations and the further terms agreed were always based on the fundamental premise, upon which the purchase price was agreed at £60.5 million and subsequently reduced to £60 million, that the Defendant would provide the Agreed Guarantee.  If the Defendant had withdrawn this then the deal would have collapsed.  This is because, without the Agreed Guarantee, the deal was not commercially viable at a purchase price of £60 million or £60.5 million and would only have been commercially viable for the Claimants (and probably any debt backed investor) at a purchase price of around £51.5 million, some £9 million less.
33. It is inconceivable that the Defendant would have withdrawn its offer to provide the Agreed Guarantee because of the significant detrimental impact that this would have had on the purchase price that the Defendant could have secured from the Claimants (and indeed, probably any investor).  This is particularly so given that the financial cost to the Defendant of providing the Agreed Guarantee was almost certainly likely to be minimal given the priority rent provision in the Hilton Lease.  
34.  The claimants instructed Dickson Minto Solicitors to act for them in this transaction.  Their point of contact was Ewan Sherriff who was then a partner with Shepherd & Wedderburn but due to become a partner in Dickson Minto.  I spoke to Ewan on the telephone on or around 26 March 2004 and explained to him the terms of the deal including the Agreed Guarantee.  I do not know why the Agreed Guarantee did not appear as a provision anywhere in the documents as finally drafted and executed on 19 May 2004.  As I have explained, there was never any mention so far as I am aware of the Agreed Guarantee not being a term of the deal and it was a fundamental term without which there would have been no deal.”  

18.	The relevant law is helpfully set out in the judgment of Lord Justice Peter Gibson in Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 SGLR 71 at page 74.  

“33.  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.
34.  I would add the following points derived from the authorities:
(1)The standard of proof required if the court is to order rectification is the ordinary standard of the balance of probabilities. 
"But as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties' intention displayed by the instrument itself": Thomas Bates and Sons Ltd v Wyndham's (Lingerie) Ltd [1981] 1 WLR 505 at page 521 per Brightman LJ. 
(2)Whilst it must be shown what was the common intention, the exact form of words in which the common intention is to be expressed is immaterial if in substance and in detail the common intention can be ascertained: Cooperative Insurance Society Ltd v Centremoor Ltd [1983] 2 EGLR 52 at page 54, per Dillon LJ, with whom Kerr and Eveleigh LJJ agreed. 
(3)The fact that a party intends a particular form of words in the mistaken belief that it is achieving his intention does not prevent the court giving effect to the true common intention: see Centremoor at page 55 A-B and Re Butlin's Settlement Trusts [1976] Ch 251 at page 260 per Brightman J.”  

19.	On the facts as I have related them and supported by the evidence from which I have quoted, I conclude that each of the matters to which Lord Justice Peter Gibson referred has been established to my satisfaction.  The same case also shows that it is no bar to an order for rectification that the mistake could be put right in more ways than one, nor that there was no specific agreement for the inclusion of the words by which the common intention is to be given effect now, see paragraphs 38 and 43.  On the other hand, it is a bar to rectification if the parties agreed on the words used but did not appreciate that they would not have the effect for tax purposes that they had hoped, see for example Whiteside v Whiteside [1950] Ch 65 and Lake v Lake [1989] STC 865.  

20.	In that connection, Mr Justice Vinelott in Racal Group Services Ltd v Ashmore [1995] STC 1155, said this:  

“In my judgment, the principle established by these cases is that the court will make an order for the rectification of a document if satisfied that it does not give effect to the true agreement or arrangement between the parties, or to the true intention of a grantor or covenantor and if satisfied that there is an issue, capable of being contested, between the parties or between a covenantor or a grantor and the person he intended to benefit, it being irrelevant first that the rectification of the document is sought or consented to by them all, and second that rectification is desired because it has beneficial fiscal consequences.  On the other hand, the court will not order rectification of a document as between the parties or as between a grantor or covenantor and an intended beneficiary, if their rights will be unaffected and if the only effect of the order will be to secure a fiscal benefit.”  

21.	I applied that dictum in two recent cases, Noon v Harnal [2006] EWHC 173 on 20 January 2006, that is the second one, the first one is Price & Ors v Williams‑Wynn [2006] EWHC 788 on 13 January 2006.  In that case at paragraph 43, I said this:  

“Although an order for rectification should not be made for the purpose of conferring on the claimants or their beneficiaries a fiscal advantage which the negligence of their solicitors had denied them, although that would be its effect, but should be made so as to confer on the beneficiaries the full interest to which it was evidently intended that they should be initially and immediately entitled.  This case falls within the second category.”  

22.	So in my judgment, does this.  The mistake by the omission of the agreed guarantee is one which denied to the parties the effect of the transaction as it was originally intended.  If that mistake were now rectified by the parties through a correcting deed which they could do, it would mean that the stamp duty land tax relief which they were entitled to when the document was first executed, would be denied to them because the original agreement for an under lease would have been varied by mutual consent after the date when that relief was withdrawn.  It seems to me to be entirely proper to grant rectification so that the parties may achieve the full benefit of that which they in fact agreed at the time when they agreed it, and should not have to suffer the withdrawal of the relief to which they would otherwise be entitled.  For all these reasons I will make the order for rectification sought in the form in which it is put forward.  

23.	  I referred in passing to the letter from a gentleman in the Inland Revenue dated 24 January 2006.  The letter proclaims that he is a member of the Complex Transactions Unit.  In it he wrote, and I quote from page 292 of bundle 2:  

“I have carefully considered counsel’s opinion but am not fully persuaded by his reasoning.
I am pleased to say, however, that on reconsideration I can accept that a rectification of documents pursuant to a court order in circumstances such that section 2(4) of the Law of Property (Miscellaneous Provisions) Act 1989 applies is not the variation of a contract.
The reason is that, as section 2(4) makes clear, a contract does not come into being until the rectification takes place, because the court order proves that the original writing did not, as required by section 2(1), incorporate all the expressly agreed terms and so did not amount to a contract.  Thus there is no contract to vary.  It follows that, provided the time mentioned in section 2(4) is on or before 16 March 2005, the contract as rectified is within the scope of the transitional provisions.
The SGLT Manual will be amended in due course to reflect this.”  

24.	This passage seems to suggest that if a written contract, properly executed by all relevant parties, does not contain all the agreed terms so as to be susceptible to rectification, it is not a contract at all because of the provisions of section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 but, by contrast, will only become contractually effective when the court makes the order for rectification later.  Counsel for the parties did not seek to justify this proposition and it was not argued before me.  I am concerned that it may represent the considered view of the Inland Revenue particularly in the light of the suggestion at the end of the letter that the SGLT manual will be amended in due course to reflect the view set out in the letter.  If it does then I would not wish anything I say or do not say in this case, to be used as any support for what appears to me to be an entirely erroneous opinion as to the effect of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.  I repeat, the matter was not argued before me and is not relevant to my decision but I do think that it should be corrected.

25.	For all the reasons I gave earlier I will make the order for rectification sought.