The Only Way Is Up?

Scottish Widows Fund and Life Assurance Society v BGC International (Formerly Cantor Fitzgerald International) [2012] EWCA Civ 607

Summary

The Court of Appeal considered the construction of a complex rent review clause where the parties had not foreseen a fall in open market rental value.

Facts

Scottish Widows took a sub-underlease of premises at One America Square in the City of London for 20 years with an upwards only rent review at five yearly intervals commencing in 1996. Scottish Widows proceeded to grant a sub-sub-underlease to BGC International. At the time of granting the sub-sub-underlease, the rent payable by Scottish Widows under the sub-underlease was well above market value (passing rent was £1,283,424, market rent was £752,765). BGC refused to pay the equivalent of the rent which was passing under Scottish Widows' own lease.

Scottish Widows originally offered a reverse premium of £10 million, to incentivise BGC to take the premises at the passing rent. However, it was agreed that BGC would pay rent which was less than that paid by Scottish Widows, based on the £10 milllion incentive. The rent payable by BGC International was as follows:

During the period until 18 December 2010, BGC was to pay:

From 18 December 2010 until the end of the term, the tenant was to pay whichever was the greater of £1,285,424 or such other sum as shall be agreed or determined to be the Open Market Rent on the immediately preceding Review Date (i.e. 29 September 2006).

As at the 2001 rent review date the market value of the premises had increased quite substantially from £752,765 to £1,426,353 per annum. The rent was therefore reviewed under Scottish Widows' own lease to £1,426,353. Since this was higher than £1,285,424, BGC had to pay the difference (£140,929) to Scottish Widows, on top of its basic rent of £752,765. By the time of the 2006 review however, the market had dipped again. The market value of the premises was now only £1,001,930. Scottish Widows' lease had normal upwards-only rent review provisions, so it continued to pay rent at the higher level of £1,426,353 to its landlord.

The dispute in the case arose in relation to the period after 18 December 2010. Applying the clause in the sub-sub-underlease which governed the period after 18 December 2010, at face value it appeared that the sum payable by BGC should be either £1,285,424 or the market rent of £1,001,930 (whichever was the greater). Both of those figures were less than the amount which Scottish Widows was paying under its own lease.

However, the parties had entered into a supplemental agreement in which the parties agreed that it was their intention that the rent payable by Scottish Widows under the sub underlease and the rent payable by BGC under the sub-subunderlease would be the same and that when the rents aligned, the sub-underlease would be assigned to BGC. Scottish Widows made a claim for rectification on the basis of common mistake and an alternative claim that the lease should be construed so that the annual rent of £1,426,533 was payable from 18 December 2010.

The court at first instance rejected the claim for rectification but found that clearly something had gone wrong with the drafting of the lease. As a matter of interpretation the court at first instance held that the clause should be interpreted so that BGC were to pay the higher of £1,285,424 or the Open Market Rent on any preceding Review Date.

BGC appealed the decision.

Decision

In considering how the rent review clause should be interpreted, the Court of Appeal found that the terms of the rent review clause, taken on their own, were clear. It was held that the judge at first instance had gone too far as the Court could only intervene where it could be shown that the aim of the transaction was that the rent should be the same as under the sub-underlease to Scottish Widows. The supplemental agreement merely confirmed the parties common intention, they had not entered into any obligation to ensure that the rents would be the same. Further, the terms of the supplemental agreement were stated to be without prejudice to the terms of the lease.

The Court of Appeal then went on to consider the claim for rectification made by Scottish Widows. The claim was rejected. It was found that a claim for rectification could only succeed where there was a continuing common intention but that by mistake, the document did not reflect the parties intention. It was noted that, in considering the claim for rectification, the Court could have regard to all pre contractual negotiations. Scottish Widows were able to make reference to statements alluding to the fact that the rent subsidy would only last until December 2010. However there were no heads of terms or other documents evidencing this and the Court of Appeal found that there was no consensus that the rent subsidy would end in December 2010.

Comments

The decision highlights a number of issues:

• If the open market rent had risen rather than fallen, the rent subsidy would only have lasted until December 2010. The case illustrates the importance of having regard to the fact that market rents may fall when agreeing incentives with sub tenants taking on over rented premises.
• Parties should consider recording what are often complicated and bespoke incentives in Heads of Terms before proceeding straight to drafting.
• Parties should take care when relying on supplemental agreements and consider whether important terms of the lease should in fact be consigned to a supplemental agreement.
• Finally, parties should avoid the use of the phrase "without prejudice" where there is no intention that one provision will prevail over the other and should be aware that the use of such a phrase will dilute the effect of the provision.

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