In the fourth part of our series on contract management pitfalls, we look at the risks arising out of varying the terms of construction contracts.
The facts of the case
The parties to the lease in question at the time of the dispute were Daejan (holding a leasehold interest itself but landlord for these purposes) and Mrs Campbell. The property was a maisonette situated within a converted house. The lease included various service charge provisions.
In 1992 some substantial repair works were carried out to the house and the parties agreed after exchange of correspondence, that Mrs Campbell was obliged to contribute 40% of the repair costs attributable to the main roof and external walls of the maisonette and she was not liable to contribute to the costs of repairing any other part of the house.
In 1998 Mrs Campbell gave notice to Daejan of her intention to exercise her right to acquire a new lease of the maisonette. Daejan served a counter notice setting out its proposals in respect of the new lease: these did not include any amendment to the service charge provisions. A new lease was granted which was on the same terms as the previous lease subject to certain modifications which are immaterial to this case.
In 2005 and 2006 Daejan carried out further substantial works of repair and maintenance to the house and again there was a dispute in correspondence concerning the level of Mrs Campbell’s contribution. As the parties could not reach an agreement, Daejan applied for a declaration that clause 3(iii), one of the service charge provisions, should be construed as if the word “premises” had read “house” and that the word “premises” (i.e. just the maisonette) was a mistake. The claim was resisted by Mrs Campbell who said that clause 3(iii) meant what it said and that it had always been construed as such in the past.
The decision by the Court of Appeal
The Court must give effect to the express terms of a contract and must resist temptation to re-draft or improve its terms. However, there are exceptions to that principle if there is an obvious clerical error or grammatical mistake when the Court can correct it as a matter of construction.
Previous case law set out two conditions which must be satisfied:
- There must be a clear mistake on the face of the document and that the clause is therefore commercially nonsensical. In deciding this, the Court can look beyond the document itself and have regard to the background or context; and
- It must be clear what a reasonable person would have understood the parties to have meant.
The Court of Appeal found that no mistake had been made and that “premises” should not be replaced with “house” at clause 3(iii). In reaching its decision, the Court took into account the following:
- When works were carried out in 1992 the amount Mrs Campbell should contribute was specifically discussed in correspondence and it was agreed between the parties that it should be calculated in accordance with the express words of clause 3(iii);
- In 1998 Daejan did not propose any amendments to the wording of clause 3(iii), which was a golden opportunity if the intention was “house” as opposed to “premises”; and
- The new lease was entered into in 1999 with no modifications to clause 3(iii). This was only a few years after remedial works had been carried out and clause 3(iii) had been applied on the basis that the word “premises” meant just that.
To conclude, although the Court found that the clause was capable of improvement, it did not produce a result which is commercially nonsensical and, therefore the clause must be construed in accordance with its actual wording without substituting the word “house” for “premises”. This meant Daejan could not recover its full costs through the service charges.
Lessons to be learnt
It is imperative that leases are carefully drafted from the outset. The above case shows that one should never assume that a mistake was made when the lease was drafted. It also highlights the importance of correspondence and the assertions made in that correspondence: decisions you make now, perhaps to avoid disputes, may detrimentally affect your organisation’s ability to recover costs at a later date.
If problems arise as to the meaning and interpretation of a clause following the grant of a lease then a landlord may consider an application to the LVT under the Landlord and Tenant Act 1985 to vary the lease terms.
For more information
For any queries in relation to this case or leases/service charges generally, please contact Emma Duke on 0121 214 3617 or firstname.lastname@example.org.
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