Scottish Widows Fund v BGC International


The Message

The Court will not readily correct documents drafted by experienced and skilled solicitors.

The Case

The Court of Appeal has overturned a Judgment which allowed a sub-lease to be re-written to give effect to what the Judge thought the parties really intended In 1996, Scottish Widows underlet premises at One America Square in the City of London to BGC. The premises were substantially over-rented and, after substantial negotiations, a sub-letting to BGC was agreed for a term expiring on 23 September 2016.

At the time of the sub-letting, the rent payable by Scottish Widows was £1,285,424 per annum but the market rent was only £752,765. The parties had discussed a reverse premium of £10 million to be payable to BGC to cover the rent difference but, instead, Scottish Widows agreed to subsidise the rent difference until 18 December 2010 and it was their case that it was intended that BGC should then be liable to pay the same rent as Scottish Widows had to pay under its lease for the remainder of the sub-lease.

Unfortunately, however, the documentation as drafted led to a shortfall of some £140,000 per annum in the rent payable by BGC from December 2010. This was because rents had continued to fall and, whereas the rent payable by Scottish Widows had risen to £1,426,533 per annum on review in 2001, the sub-lease only provided for BGC to pay the higher of £1,285,424 per annum or the actual market rent as at the 2006 review, being only £1,001,930.

Scottish Widows claimed it was apparent from the negotiations between the parties and supplemental documentation that something had gone wrong with the drafting of the Lease and that it should be construed or rectified so that the annual rent of £1,426,533 was payable instead. The Judge at first instance agreed and held that the sub-lease should be interpreted so that the higher 2001 rent review figure under the Scottish Widow lease was to apply notwithstanding the sub-lease made clear that the 2006 open market rent was intended to apply instead.

The Court of Appeal, however, adopted a far more restrictive approach then the Judge who they thought had incorrectly re-written the sub-lease to achieve a fair result. It made it clear that, when seeking to interpret any document, it was not permissible to have regard to the prior negotiations of the parties but just the relevant factual background at the time. In addition, it stressed that, before the Court could impose its own interpretation, it had to be clear that the parties had not only made a mistake in the language used but also as to what that mistake was and what the parties intended to agree?

Since the sub-lease wording was plain and unambiguous in providing for the 2006 market rent to apply, the Court of Appeal was not prepared to construe the sub-lease by reference to the 2001 rent as Scottish Widows wished. It therefore turned its attention as to whether there were grounds to rectify the wording on the basis of common mistake so that there would be no shortfall from December 2010.

In order to succeed with a claim for rectification, a party has to establish that both parties had a common clearly expressed intention at the relevant time but, by mistake, the document does not reflect what the parties intended. It is more difficult to prove a mistake has been made where the document is very detailed and has been prepared with the benefit of expert legal advice. However, where rectification is sought, the Court can look at all the parties negotiations and previous dealings to establish whether a mistake has been made.

Unfortunately for Scottish Widows, whilst there was clear reference during the negotiations to the rent subsidy only lasting till December 2010, and this would have been the position if rents had risen rather than fallen, there were no Heads of Terms or any other clear document evidencing any agreement to this effect and there was no obligation on either party to achieve this result if the market fell. The sub-lease was simply the result of an agreement being achieved by the parties and their solicitors through the drafting process and there was therefore nothing actually agreed until the finalisation of the document.

As Jonathan Seitler Q.C., Leading Counsel for BGC on the Appeal made clear, not only was there never any consensus that the rent differential would be eliminated in 2010 but Scottish Widows did not even raise this as an issue until some 12 years after the sub- lease was completed and this was quite inconsistent with there ever having been such an agreed intention to begin with.

So the sub-lease remains as drafted and Scottish Widows will have to meet the shortfall for another 4 years or so.