Contractual interpretation: had something gone wrong with the language?

In Scottish Widows Fund and Life Assurance Society v BGC International ([2012] EWCA Civ 607, CA(Eng)) there was a dispute as to the construction of the complex rent review clause in a sub-lease. There was some indication that the parties had intended the review clause to have the effect that the sub-lessee would pay less than the rent payable under the head-lease until it had received a reverse premium of GBP 10 million and that at that stage it would pay the rent due under the head-lease. Rentals had fallen but the head-lease contained an upwards only review clause. There was a suggestion that the sub-lessee would take over the rental payments in the head-lease once it had received the GBP 10 million reverse premium. The alleged intention to cap the reverse premium at GBP 10 million was not clearly given effect to in the sub-lease rent review clause. The landlord argued that the literal words of the review clause should be construed in the light of this general intention. This failed.

Arden LJ said that the question was whether this was the sort of case alluded to by Lord Hoffman in Investors Compensation Scheme where ‘something must have gone wrong with the language.’ In every case, not only where there is ambiguity, a court should have regard to the terms of the document as a whole and to the admissible background when interpreting a clause. It cannot, however, look at pre-contractual negotiations (these are relevant to the question of rectification); this is true even where the statement is one of general intention. The wording of the clause and of the lease as a whole supported the tenant’s proposed construction, not that of the landlord. Here it could not be said that something must have gone wrong with the wording.

Davis LJ suggested that the admissible background included the fact that the rent payable under the head-lease was above market rent (because there was an upwards only review clause and market rentals had dropped) so that the sub-tenant would look for an agreement that would protect it from paying the excess of the head-lease rent over the market rent. It did not extend further to include the idea that GBP 10 million was the appropriate reverse premium.

The landlord’s rectification claim also failed. There was no sufficiently clear outward expression of a common intention as to the precise reverse premium figure (see Chartbrook Ltd v Persimmon Homes Ltd.

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