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Silence is not golden – a warning

Palo Alto Ltd v Alnor Estates Ltd [2018] UKUT 0231 (TCC)

The recent decision in Palo Alto Ltd v Alnor Estates Ltd must have been a huge relief to the landlord involved, which effectively gave away its freehold interest in a storage unit by accident.

Background

Where a lease is perpetually renewable, section 145 of and schedule 15 to the Law of Property Act 1925 have the effect of “converting” the lease to a lease for a 2000 year term. A party (or parties) can ask the court to rectify a contract in various circumstances. Rectification is an equitable remedy that may be granted where a party can show that a written agreement does not reflect the party’s / parties’ intentions. It is possible to apply for rectification on the basis that both parties made a mistake in the drafting, or that only one of them did.

The facts

The premises concerned were an industrial unit, which were to be used for storage. The landlord’s agent had told the tenant that the landlord’s practice was to issue short term leases, so the tenant could take a one year lease with an option to renew, but if the tenant required a term of more than 3 years then the landlord would instruct solicitors to prepare a suitable lease. The parties agreed that the property was to be let for 1 year, with the option to renew at the end of the term. The landlord issued a short, simple form of lease and did not take legal advice on the document. The draft lease contained the following provision: “The tenancy is granted for a period of one year with an option to renew at the end of the term.” The tenant then added to the clause so that it read: “The tenancy granted for a period of one year with an option to renew at the end of the term/or a further one year on the same provisos and agreements as are herein contained including the option to renew such tenancy for a term of one year at the end thereof.” The landlord agreed to the amendment. Following the grant of the lease, the tenant applied to HM Land Registry for its lease to be registered as a 2000 year lease, on the basis that the lease was perpetually renewable and therefore converted to a 2000 year term by virtue of section 145 of and schedule 15 to the Law of Property Act 1925. The landlord objected to the registration, and the matter was referred to the First-Tier Tribunal. The landlord then applied for rectification of the lease so that, if it was found to be perpetually renewable, it would be rectified instead to only allow for 2 renewals.

The FTT decision

The FTT determined that the lease, as granted, was perpetually renewable and was therefore converted to a 2000 year lease by virtue of the Act.

The FTT then looked at the landlord’s application for rectification. The FTT concluded that the tenant was aware of the effect of the drafting of the option to renew, and so there was no mutual mistake.

However, the FTT then considered whether an order for rectification ought to be made on the basis of the landlord’s unilateral mistake. The FTT concluded that it was appropriate to rectify the lease in order for it to run for no more than 3 years. The FTT also stated that there was no requirement for it to find any sharp practice on the part of the tenant, or any misrepresentation by the tenant as to the effect of its amendments to the option to renew in the lease. The tenant appealed. The tenant asked the court to consider whether dishonesty was a necessary part of an application for rectification and, if so, whether the landlord’s case was sufficient to allege dishonesty, and whether the FTT’s original judgment amounted to a finding of dishonesty by the tenant.

The Appeal Decision

The Upper Tribunal considered various authorities on rectification on the ground of unilateral mistake and concluded that “dishonesty and sharp practice are not an ingredient of this cause of action”, and accordingly dismissed the tenant’s appeal. The UT went on to say that “if dishonesty is a necessary ingredient, [the UT] would have dismissed the appeal on the ground that dishonesty had been established on the facts found by [the FTT].” Accordingly, the landlord’s claim for the lease to be rectified so as to run for no more than 3 years succeeded.

Practical Considerations

The landlord in this case did not appreciate the effect that the tenant’s amendments to the renewal option in the lease would have, as he did not instruct solicitors to advise on or draft the lease. However, the case also serves as a warning that a party to a lease – or, by implication, any contract – cannot keep quiet in relation to drafting that benefits it and expect the other party to be bound by it, where the benefiting party knows that the other does not understand the effect of the drafting.


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