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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Scottish Widows Fund and Life Assurance Society v BGC International [2011] EWHC 729 (Ch) (31 March 2011) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2011/729.html Cite as: [2011] EWHC 729 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		31/03/2011

Mr Justice Norris :

1. In November 1994 Barings Securities Ltd ("Barings") took four separate underleases in materially the same form of separate floors at One America Square, London for the term of 25 years commencing on 25 September 1991 with five yearly upward only rent reviews (the first review being on 29 September 2001). The issues arising at trial have been argued by reference to one of those underleases, that of the lower ground and fourth floor ("the Barings Lease"). It is common ground that the conclusions reached in relation to the Barings Lease will hold good for the other three underleases.
2. In order to persuade Barings to take accommodation at one of its own developments at London Wall the Scottish Widows Fund and Life Assurance Society ("Scottish Widows") agreed to take from Barings a sub-underlease of the premises at One America Square carved out of the Barings Lease ("the SW Sub-underlease"). This was for the term of the Barings Lease (less three days) and upon the same terms as to rent and rent reviews.
3. The commercial effect of the transaction was that Scottish Widows had now let its own development at London Wall, but was left with accommodation at One America Square which it did not want. The rent passing under the Barings Lease (and so under the SW Sub-underlease) was much higher than the market rent (an "onerous" rent). Because the rent review provisions were upwards only Scottish Widows was locked into paying the onerous rent until such time as the market improved. If Scottish Widows was to find an occupier for the premises comprised in the Barings Lease it would therefore probably have either (a) to pay a reverse premium (to induce a tenant either to take an assignment or to enter into a sub-sub-underlease at the onerous rent) or (b) to bear the difference between the onerous rent and the market rent until the latter equalled the former.
4. Scottish Widows found such an occupier in Cantor Fitzgerald International (latterly BGC International) ("BGC"). On 27 September 1996 a sub-sub-underlease was entered into between Scottish Widows and BGC for a term expiring on 23 September 2016 (three days less than the SW Sub-underlease). It is with that lease ("the Relevant Lease") that this construction and rectification action is concerned.
5. The Relevant Lease provided for a rent free period for fitting out. This was straight forward. Scottish Widows paid the rent due under the SW Sub-underlease and collected nothing from BGC under the Relevant Lease. But thereafter it was necessary to work out the relationship between what Scottish Widows was paying under the SW Sub-underlease and what BGC was to pay under the Relevant Lease: and then further necessary to work out how that relationship was to be preserved or altered if the rent payable by Scottish Widows was reviewed under the SW Sub-underlease.
6. Clause 2 of the Relevant Lease provided that BGC should take the premises:-

"PAYING during the Term

FIRST

(a) Until 22 April 1997 the yearly rent of a peppercorn and

(b) From and after 23 April 1997 and until 18 December 2010 (the Initial Rent Period) the yearly rent of £752,765 plus (i) (with effect from the Review Date on 29 September 2001) the excess (if any) of the Open Market Rent on that Review Date over the sum of £1,285,424 (the Subsequent Rent) or (ii) (with effect from the Review Date on the 29 September 2006) the excess (if any) of the Open Market Rent on that Review Date over the Subsequent Rent and

(c) Thereafter the Subsequent Rent or such other sum as shall be agreed or determined to be the Open Market Rent on the immediately preceding Review Date and subject to further review in accordance with the provisions of the Third Schedule…

PROVIDED THAT the Subsequent Rent shall become payable from such earlier date and in the circumstances set out in the Sixth Schedule…"

7. That provision utilises a number of definitions and it deploys them in relation to two periods, until 18 December 2010 and after 18 December 2010.
8. There is no dispute as to how this date came to be chosen. The approximate market rent for the premises in September 1996 was £752,765. The rent actually payable for the premises under the SW Sub-underlease was £1,285,424. So the premises were "over rented" by £532,659 per year. If (a) Scottish Widows had assigned or let the premises to BGC at the onerous rent and (b) Scottish Widows had paid a reverse premium of £10 million to BGC to induce BGC to take the premises on those terms and (c) it was assumed that the £10 million represented the net present value of the over rented element of the rental payment then that fund would notionally have been exhausted on 18 December 2010.
9. In fact, instead of paying the capital sum Scottish Widows subsidised the rent for the equivalent period. So during period (b) BGC had the benefit of a discount of £532,659 on the rent that Scottish Widows would otherwise have sought to charge in the Relevant Lease. This discount of £532,659 had to be maintained until 18 December 2010, in order to give the discounted cash equivalent of a notional reverse premium £10 million. (In fact, Scottish Widows and BGC were so anxious to replicate the effect of paying a £10 million reverse premium that, in order to compensate for the fact that had a £10 million reverse premium actually been paid then BGC would had had the use of the gradually reducing balance until 18 December 2010, Scottish Widows made a loan of £10 million to BGC at the same rate of interest as had been used in amortising the £10 million notional reverse premium, repayable by equal instalments over the period until 18 December 2010).
10. The period until 18 December 2010 included two review dates (on 29 September 2001 and 29 September 2006) so provision would have to be made to preserve the discount even after review.
11. The first main period that the rent provisions dealt with was "the Initial Rent Period" (from 23 April 1997 until 18 December 2010). Within that period three different rents might be payable:-

(a) From 23 April 1997 until 29 September 2001 the initial rent was £752,765 (which was the open market rent for the premises in September 1996).

(b) Then with effect from 29 September 2001 the rent was £752,765 plus the excess (if any) of the Open Market Rent (as defined in the Third Schedule in conventional terms) over £1,285,424. The figure of £1,285,424 was defined as "the Subsequent Rent": it is not a very apposite term but both sides were agreed as to its meaning. So only if the Open Market Rent was greater than £1,285,424 would the rent payable by BGC rise, and it would then only rise by the amount of the excess of the market value over the initial rent payable under the Barings Lease.

(c) Then with effect from 29 September 2006 the rent payable was £752,765 plus any amount by which the then Open Market Rent was greater than the Subsequent Rent (i.e. £1,285,424).

12. I pause to note that if the Open Market Rent steadily rose this structure causes no problem. But (depending on how the Relevant Lease is read) there is a potential problem if the Open Market Rent exceeded the Subsequent Rent on 29 September 2001 (so that the rent payable became £752,765 plus x) but then fell back again on 29 September 2006 so that as of that date the Open Market Rent was less than £1,285,424. Would the rent remain at £752,765 plus x, or would "x" cease to be payable?
13. The dispute between Scottish Widows and BGC arises in relation to the second main period i.e. the period from and after 18 December 2010. As actually drawn Clause 2(c) provides an alternative, but does not provide any means of deciding which alternative applies. Sensibly, it is agreed that Clause 2(c) of the Relevant Lease should be read as if it provided:-

"…thereafter whichever is the greater of the Subsequent Rent or…the Open Market Rent on the immediately preceding Review Date…"

This solves one problem but leaves another.

14. To ascertain the rent payable after 18 December 2010 and until 20 September 2011 Clause 2(c) of the Relevant Lease requires a comparison to be made between:-

(a) "The Subsequent Rent" (which it is agreed is the fixed sum of £1,285,424): and

(b) "The Open Market Rent on the immediately preceding Review Date" (i.e. the market rent on 29 September 2006).

The relevant comparison is made as at 29 September 2006 and appears to take no account of what has gone before. So, as I noted in relation to the period covered by Clause 2(b)(ii) there is a potential problem with volatile market rents. The Barings Lease and the SW Sub-underlease provide for upward only rent reviews: so the rent payable under each of them takes account not only of the position at the review date but also of the position obtaining immediately before the review date. The Relevant Lease takes a snapshot at the review date alone. There is thus the potential from and after 18 December 2010 (on the bare wording of Clause 2(c) of the Relevant Lease) for BGC to be paying Scottish Widows rent which is lower than the rent which Scottish Widows has to pay Barings under the SW Sub-underlease: a continuing subsidy, but this time of unspecified amount.

15. The consequence of reading Clause 2(c) in that way can be illustrated using actual figures. From the end of the rent free period until the 2001 review Scottish Widows had to pay £1,285,424 rent under the SW Sub-underlease, and BGC had to pay £752,765 to Scottish Widows under the Relevant Lease. As at the 2001 review the market value of the premises was £1,426,353: and that was the rent that Scottish Widows had to pay under the SW Sub-underlease. Under the Relevant Lease BGC had to pay Scottish Widows £893,694 (which was £752,765 plus (£1,426,353 minus £1,285,424). But by the time of the 2006 review the market value of the demised premises had declined to £1,001,930. This reduction in market value did not affect the rent payable by Scottish Widows under the SW Sub-underlease (because it had an upwards only rent review provision). But what effect does it have under Relevant Lease? If you say that under Clause 2(c) the rent payable is whichever is the greater of £1,285,424 (the Subsequent Rent) and £1,001,930 (the Open Market Rent on the immediately preceding Review Date) then each of those is lower than the £1,426,353 which Scottish Widows is having to pay.
16. Scottish Widows says that it is not the way the Relevant Lease was meant to work, so it has to be read in some other way: and if "the problem" cannot be solved by construing the document then the Relevant Lease must be rectified. Scottish Widows says the Relevant Lease is to be read as if clause 2(c) said that after 18 December 2010 the rent payable was:

"whichever is the great[est] of the Subsequent Rent or such other sum as shall be agreed or determined to be the Open Market Rent on the immediately preceding Review Date or such other sum as shall be agreed or determined to be the Open Market Rent on 29 September 2001 …."

BGC say that there is no "problem" in relation to the Relevant Lease, which records precisely what the parties intended in words that can be given their ordinary meaning without writing in any additional words and that the only "problem" is that the market did not move in the way the parties might have anticipated at the time when they made their agreement.

17. The principles of construction are familiar and of late oft-repeated. But I should record (without conscious novelty) the approach that I have adopted in this case.

i) There is but a single task of interpreting the document in its context in order to get as close as possible to the meaning which the parties intended.

ii) That meaning is found by asking the question: what would a reasonable person (having all of the background knowledge available to the parties in the situation in which they were at the time of the transaction) have understood them to be using the language of the document to mean?

iii) In carrying through that approach the court will incline to apply to the words used their ordinary meaning, because the drafters of formal documents think about their terms and use language with care. But there may be a detectable error; or the context and background may drive the Court to the conclusion that something must have gone wrong with the language.

iv) The immediate context is the entire document in which the words are to be found.

v) A broader context may be found in the terms of other documents entered into in connection with the same transaction, which may (particularly if the parties are the same) be taken to be intended to form a coherent whole.

vi) The process is not simply one of linguistic analysis; the words to be construed were used in a practical context (as well as a linguistic one) and the background knowledge available to the parties in the situation in which they were at the time of the transaction may affect the meaning they intended to convey by the words they used.

vii) But the pre-contractual negotiations of the parties must not to be used as an aid to construction, save insofar as they may assist in the objective ascertainment of the common commercial or business object of the transaction. The identification of the genesis of the transaction may assist where one reading of a document renders that commercial or business objective futile, but another does not. But the identification of the commercial objective from the negotiations cannot be used at a more granular level to support detailed points of interpretation. On this see Prenn v Simmonds [1971] 1 WLR 1381 at 1384-85, Excelsior v Yorkshire TV Ltd [2009] EWHC 1751 at [25] and Lewison "The Interpretation of Contracts" First Supp. page 27.

viii) The fact that a provision may appear unduly favourable to one party is not of itself a sufficient reason for supposing that it does not mean what it says. The fact that the party gets less than he might have hoped for in a bargain does not mean that the bargain produces "a nonsense". In construing a document the Court is seeking to ascertain the bargain the parties have made, not to make a new bargain for them; and it is not the task of the court to reformulate contractual provisions that are relatively clear simply because they appear to the judge to operate unfairly to one party.

ix) The process of interpretation does not require one to formulate some alternative form of words which approximates to those chosen by the parties. Once it is clear that something has gone wrong with the language the issue is simply whether it is clear what a reasonable person would have understood the parties to have meant.

18. The words that fall to be construed are those which govern the payment of rent after the end of the period during which there is a rent reduction equal to the discounted cash flow arising from the notional reverse premium of £10 million, namely:-

"thereafter [whichever is the greater of] the Subsequent Rent [£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 [on 29 September 2006] and subject to further review in accordance with the provisions of the Third Schedule".

19. Once the detectable defect (of omitting to say which of the alternatives is to be selected) is remedied then the wording of the clause as it stands is relatively clear. If the property market does not recover above £1,285,424 at either of the 2001 or 2006 review dates then from 18 December 2010 BGC has to pay the onerous rent without subsidy: and that happens to be the rent that Scottish Widows will be liable to pay Barings under the SW Sub-underlease. If the property market recovers steadily and by 2006 the market rent exceeds £1,285,424 then from 18 December 2010 BGC has to pay the market rent: and that again is the rent that Scottish Widows will be liable to pay Barings under the SW Sub-underlease.
20. It is only if the property market recovers in a particular irregular manner (such that the 2001 open market value is above £1,285,424 and then the 2006 market value is below the 2001 open market value) that any difference emerges between what Scottish Widows is liable to pay Barings under the upwards-only rent reviews in the SW Sub-underlease and what BGC is liable to pay to Scottish Widows.
21. Clause 2(c) is not unique in not carrying through into the Relevant Lease the effect of the upwards-only provisions in the SW Sub-underlease.
22. First, on its face clause 2(b)(ii) would, on the facts postulated in the preceding paragraph, also result in the rent payable by BGC during the "discount period" from the 2006 review being lower than the rent previously payable from the 2001 review (because the "excess" from 2006 will be lower than that calculated at 2001, and might disappear altogether). To counter this Scottish Widows argues (though it does not seek a declaration to this effect) that although clause 2(b)(ii) appears to identify two specific "topslices" to be paid in successive periods ("with effect from…..") it should be read as providing alternatives, the greater of which should be chosen. So clause 2(b)(ii) should contain the words "whichever is the greater of" before the two limbs are specified in sub-clauses (i) and (ii).
23. Second, there are the provisions contained in the Sixth Schedule to the Relevant Lease. Under a side agreement (to which I will next turn) BGC could ask Scottish Widows to undertake fitting out works up to £10 million in value. If Scottish Widows did pay for those fitting out works then under the Sixth Schedule the Subsequent Rent of £1,285,424 became payable at an earlier date than was provided for under clause 2. In effect the cost of the works was treated as early payment of part of the notional reverse premium so that the discount period had to be shortened. Thus the period dealt with under clause 2(c) might not start on 19 December 2010; it might (depending on the cost of the fitting out works) start earlier, perhaps even before the 2006 review date. But the oddity is that under the Sixth Schedule it is the Subsequent Rent that then becomes payable (and not for example the 2001 market rent if higher). So again there might be a mismatch between the rent payable by BGC under the Relevant Lease (the Subsequent Rent of £1,285,424) and that payable by Scottish Widows under the SW Sub-underlease (the Open Market Rent fixed at the 2001 review).
24. At the same time as the Relevant Lease the parties entered into a supplementary Agreement. It dealt with the fitting out works. It also dealt with rent and outgoings. Clause 3.3 said:-

"Without prejudice to clause 2 of and the Sixth Schedule to [the Relevant Lease] the parties agree that their intention is that the Principal Rent agreed or determined at the review dates on 29 September 1996 29 September 2001 and 29 September 2006 under [the Barings Lease] and [the SW Sub-underlease] and the [Relevant Lease] should be the same and to the extent that they have capacity to do so [Scottish Widows] and [BGC] agree not to settle any such review without the consent of the other … and to take all steps necessary or desirable to give effect to that intention"

25. Clause 6 of the supplemental agreement contemplated that Scottish Widows would apply to its superior landlords for licence to assign the Barings Lease (if then vested in Scottish Widows) and the SW Sub-underlease to BGC. This assignment would take place (under clause 6.2 (a))

"on the date on which the Principal Rent reserved by the [Relevant Lease] … equals the Principal Rent reserved by the Barings Lease relating to that part of the Property…."

26. It is apparent from these clauses taken together that the parties sought to achieve a result whereby the rent payable under the Barings Lease, the SW Sub-underlease and the Relevant Lease should be the same (save insofar as clause 2 and the Sixth Schedule required otherwise), and that once that result had been achieved at some point then the derivative terms should be merged and the Barings Lease transferred to BGC, thereby enabling Scottish Widows to drop out of the picture. Counsel for BGC accept that this is so, but point out that the clause does not assume that the alignment of rents will occur on or immediately after 18 December 2010. The arrangements leave open the possibility that there will continue to be a difference between the rent payable by Scottish Widows to Barings and the rent payable by BGC to Scottish Widows after 18 December 2010. Counsel for Scottish Widows submits that the language of clause 6.2(a) is simply a reflection of the fact that until 18 December 2010 there is a discount of £532,659 on the rent otherwise payable and that the Sixth Schedule means that the discount period may be shorter.
27. The grant of the Relevant Lease required the consent of Barings: so as part of the process of grant Barings and BGC entered into a Deed dated 27 September 1996. This included a direct rental covenant. It provided that if the SW Sub-underlease was forfeited and BGC wanted to claim relief from forfeiture in respect of the Relevant Lease then that lease would be varied by deleting clause 2(b) and clause 2(c), and instead BGC promised to pay £1,285,424…or such other sum as shall be agreed or determined to be the Open Market Rent on the Review Dates in accordance with the provisions of the Third Schedule or where a review under the [SW Sub-underlease]….has occurred such rent as will become payable under [the SW Sub-underlease]…". Counsel for Scottish Widows submitted that this showed the BGC was intended to pay whatever rent Scottish Widows was obliged to pay Barings. But the preservation of Barings rights against Scottish Widows (and making them enforceable against BGC) seems to me to throw little light on the intended relationship between Scottish Widows and BGC.
28. What of the background knowledge available to the parties in the situation in which they were at the time of the transaction? Counsel are agreed that this includes (a) the existence and terms of the Barings Lease and of the SW Sub-underlease and the duration of those leases; (b) the onerous rent, far in excess of the 1996 open market rent; (c) the fact that the premises were empty and that Scottish Widows needed to find an occupier. Counsel for Scottish Widows would add knowledge that a reverse premium of £10 million could be devalued as the net present value of an annual sum amounting to the difference between £1,295,424 (the passing rent) and £753,765 (the approximate open market rent at the date of the transaction) payable in quarterly instalments for a period expiring on 18 December 2010. I agree. Counsel for BGC would add knowledge of the office market rental in September 1996 and the availability of incentives such as long rent-free periods and tenant break clauses. I agree in principle: but there is no evidence which establishes precisely what this knowledge would have been. Counsel for BGC would further add that each party would have known in general the taxation issues likely to be generated by a transaction between them (and in particular stamp duty and VAT). I agree, and would add that they would have known that the same commercial transaction could be given a number of different legal forms, and that the slightly different economic effects of each of those forms might require to be addressed by particular provisions.
29. Looking at this admissible background Counsel for Scottish Widows says that it is clear that the parties' objective was to transfer Scottish Widows' responsibility for rent under the Barings Lease and the SW Sub-underlease to BGC and in return to provide BGC with value amounting to a capital sum of £10 million. Looking at the same material Counsel for BGC say that it is clear that the intention of the transaction was simply to secure a letting of the premises on terms that were acceptable to both parties.
30. I accept that the Court should be cautious in reading the actual words in a sense different from their "natural" meaning. These were sophisticated parties advised by top quality transactional lawyers. The documents they produced were in fact subsequently reviewed and by agreement rectified to correct some errors that had become apparent (though nobody suggested an error in relation to clause 2(c)). The rent review provisions were implemented without anyone suggesting that the words did not bear their apparent meaning. Yet even careful lawyers can allow errors of expression to creep into a complex transaction, and the error can lie hidden until some triggering event occurs.
31. In my judgment the Relevant Lease is to be read as achieving the effect contended for by Scottish Widows: though I would not in fact insert the words they seek to read into clause 2(c). My preference would be to read the words

"thereafter [whichever is the greater of] the Subsequent Rent or such other sum as shall be agreed or determined to be the Open Market Rent on the immediately preceding Review Date and subject to further review in accordance with the provisions of the Third Schedule"

as if they said

"thereafter [whichever is the greatest of] the Subsequent Rent or such other sum as shall have been agreed or determined to be the Open Market Rent on any preceding Review Date and subject to further review in accordance with the provisions of the Third Schedule".

Although an alternative formulation approximating to the words actually used is not required, that is what I consider a reasonable person would have understood the parties to have meant by the words they actually used.

32. These are my reasons (the order does not indicate any particular priority):-

(1) The task is to draw together in a single process a number of indicators as to the meaning intended by the words used;

(2) Something undoubtedly went wrong with the language of clause 2(c) of the Relevant Lease; and the task is to identify the extent of the error. The draftsman has made a mistake about how you choose between the options: but has he also made a mistake about the options themselves?

(3) The only reason for having the Subsequent Rent as one of the options is that that was the minimum rent that would be payable once the discount period (calculated by reference to the notional reverse premium) came to an end. It was the minimum rent because of the effect of the upwards only rent review provisions in the SW Sub-underlease and the Relevant Lease. One therefore might expect the sum with which it is to be compared also to recognise the effect of "upwards only" rent review provisions. It is something of a surprise to find that it does not, but instead refers only to the immediately preceding Review Date (although the rent being paid up the chain might in fact fixed by reference to an historic review date). A reasonable person would suspect that something had gone wrong with the language.

(4) The transaction was a sub-underletting of premises held subject to "upwards only" rent reviews and currently let at an onerous rent. It is obvious that commercial entities such as Scottish Widows and BGC would want to address the onerous rent issue (which was an immediate and known problem). In the absence of direct evidence about market behaviour it is not obvious that they would want specifically to address the operation of a perfectly standard form provision such as future reviews under an "upwards only" regime. Whilst an incoming tenant would expect to be compensated for taking on over-rented premises, nothing in the evidence suggests he would expect to be compensated for (or protected against) the future routine operation of an upwards only rent review.

(5) In the instant case the Supplemental Agreement demonstrates that the parties contemplated an eventual alignment between the rents under the Barings Lease, the SW Sub-underlease and the Relevant Lease and the merger of derivative interests in superior titles. As one might expect BGC would thereafter take the risk that the "upward only" rent provisions might mean it would pay a rent greater than the market rent for part of the term. I accept that the Supplemental Agreement does not of itself drive one to the conclusion that the rent alignment (and the taking on of that risk of over-renting) would occur on 18 December 2010 at the latest. But I think the Court is entitled to enquire what commercial purposes could have been in the minds of the parties before reading the Relevant Lease as providing a continuing subsidy once the Open Market Rents are aligned and the discount period deriving from the reverse premium is at an end. None would be apparent to a reasonable person having all of the background knowledge available to the parties in the situation in which they were at the time of the transaction.

(6) It is true that the provisions of the Relevant Lease do not always reflect the fact that the rent payable under the SW Sub-underlease (with which the Relevant Lease will eventually be aligned) may not be either the onerous rent or the current market rent (but might be an historic market rent imposed under the "upwards only" regime). That the Relevant Lease operates unfavourably towards Scottish Widows in that regard would not of itself justify a departure from a literal treatment of the language used. But the instances where BGC apparently receives a subsidy (or an additional subsidy) (clause 2(b)(ii) and the Sixth Schedule) lack commercial coherence; there is no consistent allocation of risk. The instances look more like the consequences of drafting than the results of bargaining.

(7) The reason for dividing the rent payable under the Relevant Lease by reference to 18 December 2010 was that that was when a notional reverse premium of £10 million (paid to compensate for the over-rented element of the onerous rent) would be exhausted. It looks as though BGC bargained to receive £10 million (or its economic equivalent) as compensation for all over-renting risk in return for taking a lease under which it would eventually pay the rent due to Barings. The rents were not aligned before the 18 December 2010 because BGC was until then to receive a subsidy. A continuing subsidy in relation to over-renting after 18 December 2010 which is not related to the £10 million strikes one as distinctly odd: why was this particular risk not covered by the reverse premium? Why is it that BGC agrees to pay as rent under the Relevant Lease the same as Scottish Widows is obliged to pay Barings in all circumstances save where there has been a particular irregular pattern of historic rental growth? In my judgment a reasonable person placed as the parties were would say that if that is the effect of the words the parties used then there is something wrong with the language; and it is clear what the error is.

33. I would therefore construe clause 2(c) as meaning that from 18 December 2010 BGC must pay a rent equal to the higher of £1,285,424 or the rent that would have been payable under the review provisions absent any subsidy.
34. This makes consideration of the alternative rectification claim strictly unnecessary. But questions of construction are notorious for striking different minds differently: so although I am firm in my view I will undertake the requisite fact-finding.
35. I will refer to those parts of the correspondence and of the oral evidence that were relied on at trial. But in doing so I should make plain that I think some of it of little weight. If I have correctly understood Chartbrook [2009] UKHL 38 the doctrine of rectification requires there to have been a mistake about whether the written instrument correctly reflects the prior consensus (not a mistake about what the party in question believed that consensus to have been): and in identifying that prior consensus the question is what a reasonable observer would have thought the intention of the parties to be. So trying to divine the subjective thoughts of the parties (as for example by considering the internal communications within the teams on either side) is of little value: see Chartbrook at [64]-[65].
36. These are the facts as I find them. On 8 December 1995 Mr Boon (the agent for BGC) wrote to Mr Wallace (the agent for Scottish Widows) to confirm the basic structure of an intended deal. BGC would take over all of the Barings accommodation for the whole of the remainder of the term of the leases, with a substantial rent free period in respect of one floor, but short rent free periods for the others, and thereafter would pay the rents "as per the existing leases". Scottish Widows was to pay £10 million plus VAT (which would in part fund the move). This is the barest and simplest outline of the intended transaction: and it was the opening shot in negotiations.
37. By 9 February 1996 BGC had increased its required reverse premium to £13 million plus VAT because "[New York were] not convinced that a gross annual growth rate of 9% [would] be achieved that would be necessary for the current market rental of the accommodation to match the existing rent payable by September 2001". This demonstrates that BGC was assessing the risk of over-renting and was pricing that risk.
38. For the time being the transaction kept that form. On 1 March 1996 Scottish Widows countered with a proposal that BGC should take an assignment of the existing leasehold interests, should be offered the rent free periods sought and (on the footing that BGC took financial responsibility for One America Square as from 25 March 1996) offered a reverse premium of £8.8 million, subject to further advice on the taxation implications. Shortly thereafter a reverse premium of £10 million was agreed.
39. This was the commercial transaction. The legal form of the transaction was regarded as flexible, and the various options were largely tax-driven. The idea was floated that BGC should take a direct assignment of the Barings Lease. This might have meant that VAT would be payable on the reverse premium (so that BGC would have required £10 million plus VAT): Scottish Widows wanted to avoid that. There was a proposal that (to save stamp duty) BGC should acquire the shares in the Barings company that held the Barings Lease. These possibilities were open because (as at that date) the SW Sub-underleases had not in fact been granted (being then subject to an agreement for lease). If the SW Sub-underlease was to be granted then the possibility was raised that BGC could acquire the Scottish Widows company in which the leasehold interest was vested. Thus, although it had been agreed in principle that BGC would take the accommodation at One America Square comprised in the Barings Lease and which was available to Scottish Widows, the form of the transaction was by no means settled. Likewise, although agreement in principle had been reached that a cash value of £10 million should pass (in addition to the rent free periods then being negotiated and the assumption by Scottish Widows of certain other liabilities of BGC) the form in which this cash value should be transferred was not settled either.
40. The options narrowed when Scottish Widows was obliged to take the SW Sub-underlease in April 1996. At that time the matter passed into the hands of Freshfields (Mr Fordham) for Scottish Widows and Norton Rose (Mr Packer) for BGC. Freshfields proposed that Scottish Widows should grant sub-sub-underleases to BGC "at the same "headline" rents reserved by [the SW Sub-underlease] subject to rent free periods". These sub-sub-underleases were to be terminable when BGC acquired the Barings Lease (out of which these subsidiary interests were created) which it was to be under an obligation to do (by the exercise of existing "put and call" options). In that event Scottish Widows would surrender the SW Sub-underlease and pay BGC £10 million. The proposal therefore clearly was that BGC should pay as rent what Scottish Widows had to pay Barings, until such time as the Barings Lease vested in BGC. No agreement was reached on this proposal.
41. The counter-proposal was that Scottish Widows would establish an SPV capitalised at £10 million to which it would grant sub-sub-underleases, and it would then sell the SPV to BGC for a nominal consideration. Scottish Widows would then acquire the Barings Lease, and Scottish Widows and BGC would apply for permission to assign the Barings Lease to BGC. These were the core proposals in an extremely complex arrangement with many other features of considerable economic significance: and the entire package, as a package, remained subject to negotiation. But the tenor of the arrangements is clear. The object is to give occupation to BGC and for Scottish Widows (by some means or another) to leave the scene.
42. Yet further variations were proposed. They were driven on the BGC side by tax considerations and on the Scottish Widows side by tax considerations and a desire to see that any continuing obligations which it had arising out of privity of contract were properly secured. The differing objectives are apparent both from the course of the negotiations and from the terms of the correspondence in which those negotiations are conducted between the respective legal teams.
43. One feature which assumed prominence towards the end of July 1996 (and is mentioned in a letter of 26 July) was the difference between the actual rent payable under the derivative lease which it was then intended that Scottish Widows would grant to the SPV (which was intended to be the onerous rent) and the market rent payable. Scottish Widows would be receiving from its subsidiary a rent far in excess of the market rent: and that might constitute a "distribution". So there was to be a "waiver" by Scottish Widows of so much of the onerous rent payable by the SPV as exceeded the market rent. It was intended that when BGC acquired the SPV (which held the leasehold) it should in the share sale agreement take on an obligation to pay the difference between the onerous rent and the market rent (or submit to a release of the waiver). This is the genesis and origin of the provision which addresses the difference between the market rent and the passing (onerous) rent and which contemplates a covenant to deal with that difference.
44. The proposal relating to a covenant to pay the difference between the onerous rent and the market rent caused BGC tax problems (into the detail of which it is unnecessary to descend). But out of those conversations emerged a consensus that the choice lay between (a) the "plain vanilla" route of Scottish Widows paying a reverse premium for the grant of the Relevant Lease or an assignment of its existing interests (with tax consequences being shared between Scottish Widows and BGC): or (b) the retention of the SPV structure with its interlocking waivers and covenants (with Scottish Widows taking all of the tax risks). This was the position at the beginning of August 1996.
45. At that time internally within the Scottish Widows advisory team assessments were being made as to what the difference between the onerous rent and the market rent was for the purpose of formulating the covenant that would need to be entered into. The onerous rent was £1,285,424. The agents assessed the then current rent at about £838,175. They looked at the forthcoming reviews on September 2001, September 2006 and September 2011 and (for the purpose of calculation) projected that the market rent would rise steadily (without falling back) and would only exceed the onerous rent from and after the September 2011 review.
46. On 8 August 1996 Norton Rose (for BGC) wrote to Freshfields (for Scottish Widows) in these terms:-

"As you know, the changes to the structure put forward by corporate counsel in relation to the SPV create a number of potential tax difficulties. [BGC] have been considering whether a different approach could be adopted which would have the same economic effect. …under the new structure the steps would be as follows:-

(1) [Scottish Widows] would grant sub-sub-underleases to a [BGC] entity at a market rent (with the rent free periods) for a period, and thereafter at the onerous rent. That period would be one which would result in the current [net present value] of the onerous/market rent difference being £10 million, but the rent would increase to the onerous rent on earlier final repayment of the loan in paragraph 2 below.

(2) [Scottish Widows] would lend £10 million to a [BGC] entity at a commercial rate of interest with repayments of principal and interest payable over the period that the market rent is payable on the sub-sub-underleases, the aggregate of principal and interest being equal to the difference between the market rent and the onerous rent…..

(3)……….

(4) The fitting out works…. would result in an acceleration of the point at which the onerous rent becomes payable.

(5) Once the onerous rent becomes payable, [BGC] would take over [Scottish Widows] leases.

(6) The effect of these arrangements is that [BGC] will always pay [Scottish Widows] enough to enable it to cover its onerous rent obligation… [BGC's] payments to [Scottish Widows] will be comprised of a combination of market rent, interest on the loan and repayment of principal.

If [Scottish Widows] are prepared in principle to consider this structure [BGC] will…prepare cash flow forecasts to show how this would work with real, rather than illustrative, figures".

47. The response of Scottish Widows was that they were content to look at anything that worked, and that they were not bothered by the "lower rent with loan" arrangement. In consequence the promised cash flows were sent on 19 August 1996. In the commentary which accompanied them Norton Rose (for BGC) explained that the cash flow identified the existing onerous rent, and assumed a particular market rent payable as from the end of the rent free period. They added:-

"If a rent review was to result in the quarterly rent being increased above [the onerous rent] then the figure payable as market rent would be increased by a corresponding amount".

That is the arrangement that is reflected (if not necessarily completely embodied) in Clause 2(b) of the Relevant Lease. Norton Rose continued their commentary to explain that after final repayment of the associated loan of £10 million the arrangement would:-

"…produce rent from that point of £775,750 per quarter [the onerous rent] (subject to any upward adjustment pursuant to operation of the rent review provisions)".

Counsel for Scottish Widows invited me to take that as an indication that what the parties had in mind was that after the period of rent reduction came to an end the rent that would be payable would be the rent with the benefit of subsequent reviews (so illustrating what had been said in point (6) of the letter of 8 August 1996).

48. Now although that was the proposal put forward by Norton Rose it cannot be said that Freshfields (or Scottish Widows) immediately agreed to it. As Freshfields were to point out in their letter of 28 August 1996 "our respective clients have yet to sign off on a revised structure and commercial terms". There is a danger in focusing upon this one element of the negotiations in overlooking that it was but one part of a package. There were significant points outstanding in relation to the structure itself. The rent free periods had yet to be identified. The risk of a liability for VAT on the intended value of £10 million had yet to be allocated. The precise way in which the rent review provisions would operate in the Relevant Lease remained to be drafted. The negotiations regarding the associated loan of £10 million and the consequences of its early repayment were still under discussion. These issues were not resolved and recorded in heads of terms. The transaction evolved and the issues resolved in the course of drafting the various documents.
49. The drafting of the rent payment provisions can be traced. Ignoring what is irrelevant the evolution of the Relevant Lease followed this course:-

(a) The original proposed text was "until 24 March 1997 the yearly rent of a peppercorn and thereafter the yearly rent of [£x] or such other sum as shall be agreed or determined to be the Open Market Rent on the first Review Date and subject to further review in accordance with the provisions of the Third Schedule":

(b) To incorporate the new suggested arrangements this proposal was amended by Freshfields to read "(a) until 11 April 1997 the yearly rent of a peppercorn and (b) from [ ] April 1997 until [ 2007] (the Reduced Rent Period) the yearly rent of [£y] plus (i) with effect from the Review Date on 29 September 2001 the difference between the Open Market Rent on that Review Date and the sum of [£x] (the Full Rent) or (ii) with effect from the Review Date on 29 September 2006 the difference between the Open Market Rent on that Review Date and the Full Rent and (c) Thereafter the yearly rent of [£x] or such other sum that shall be agreed or determined to be the Open Market Rent on the immediately preceding Review Date and subject to further review in accordance with the provisions of the Third Schedule….":

(c) Norton Rose accepted the amendments to Clause 2(a), altered Clause 2(b) to read:-

"From [ ] April 1997 until [ 2007] (the Initial Rent Period) the yearly rent of [£x] plus (i) (with effect from the Review Date on 29 September 2001) the excess (if any) of the Open Market Rent on that Review Date over the sum of [£y] (the Subsequent Rent) or (ii) (with effect from the Review Date on 29 September 2006) the difference between the Open Market Rent on that Review Date and the Subsequent Rent".

and approved the terms of paragraph (c).

(d) In that way the rental periods assumed their final form.

50. There is little doubt what Freshfields (subjectively) thought they had achieved by this drafting. Mr Fordham explained it to his client in these terms:-

"Clause 2 provides for a rent free period until 13 April 1997…at that point the "Initial Rent Period" begins; this is the agreed level of current market rent…together with any excess over the current onerous rent which is agreed at review in September 2001 and 2006. On present projections the Initial Rent Period will last until December…2010…and then the full "Subsequent Rent" becomes payable. This is either the onerous rent currently passing under the [Barings Lease] or whatever higher rent has been agreed at the subsequent review".

But what Freshfields or Scottish Widows subjectively believed the draft to have achieved carries very little weight where the consensus is expressed entirely in writing (and is not dependant upon evidence of oral exchanges). The question is what an objective observer would have thought the intentions of the parties to be from the words and acts by which they demonstrated their intentions i.e. the correspondence and drafts passing between them.

51. BGC's agent appears to have shared Freshfields' understanding of the effect of the draft. He wrote on 9 September 1996 to the agent for Barings explaining the provisions for a reduced rent but then adding:-

"The rent will in any event revert to the full amount settled at the September 2006 review by December 2010 so that the 2011 rent review will be on a normal basis".

(The amount "settled" at the 2006 review would, of course, take account of the "upwards only" provisions). But once again, the subjective belief of one member of the team advising BGC as to the effect of the draft carries very little weight on the question is what an objective observer would have thought the intentions of the parties to be.

52. The completion took place on the basis of the agreed draft. The executed document contains some cross referencing errors. It was agreed between Scottish Widows and BGC that these errors should be corrected by a Deed of Rectification. It is evident from the terms of the correspondence that the relevant documents had been carefully checked before completion (so that there was surprise that the errors had escaped notice) and had been carefully checked again after completion (so that the errors were discovered).
53. The documents were reconsidered by Freshfields on behalf of Scottish Widows in January 1999. There is again no doubt that Freshfields read the rent payment provisions as embodying the overriding principle that the sums due from BGC always matched (in time and amount) those owing by Scottish Widows up the chain. In particular Freshfields understood the lease to provide that:-

"Subsequent Rent or Open Market Rent on 29 September 2006 if higher, is payable in any event from 19 December 2010. A further, normal review is due on 29 September 2011".

54. The Relevant Lease was again considered on 26 November 2002 when a Deed of Variation was entered into varying some of the rent review provisions: but the variation did not affect the terms of Clause 2.
55. In January 2003 BGC found prospective takers for the premises comprised in the Relevant Lease. In explaining the rent payable under the Relevant Lease BGC's agent again stated:-

"The rent reverts on 29 September 2010 to either the amount set with Scottish Widows at the September 2001 review or, if higher, the amount set with Scottish Widows at the September 2006 review".

(The "amount set" at the 2006 review would take account of the "upwards only" provisions). Although Counsel for Scottish Widows relied upon this in opening as an important confirmation of the position for which he contended, in my judgment it is not. As an inexpert view of the legal effect of the documents which had been entered it is not, of course, admissible. As a statement of the terms of what the agent understood to have been agreed it is some evidence tending to show what terms were in fact agreed (and accordingly admissible) even though it constitutes subsequent conduct. But it carries very little weight where any prior consensus has been expressed in writing passing between the parties. The same is true of subsequent expressions of view by the same agent to the same effect.

56. The same principle applies to the statements of Freshfields and of Scottish Widows's agents when advising Scottish Widows in relation to the 2006 rent review. Contrary to the position now contended for on behalf of Scottish Widows, Freshfields then expressed the opinion that the 2006 rent reviews in the Relevant Lease were likely to be upward or downward reviews, and the agents expressed the view that it was uncertain whether the Relevant Lease provided for the rent payable from December 2010 to be the Subsequent Rent or the rent payable on the 2006 review. These are either their respective opinions on the legal effect of the document: or statements of subjective belief as to what the agreement made was. So although they tend to support BGC's position they carry no weight.
57. On this evidence, if I had construed the Relevant Lease in the sense contended for by BGC I would not have felt able to rectify it in the manner sought by Scottish Widows. The burden would have lain on Scottish Widows. Given that this is a document governing the relationship between sophisticated market participants advised by top-quality transactional lawyers who might be expected to produce a document which correctly records the bargain made, one would need convincing proof that a mistake had been made in recording the bargain (just as the starting point in construing the document is to take the words as having been chosen carefully and deliberately by competent draftsmen). Scottish Widows must show that the parties had a common continuing intention as to the rent payable after 18 December 2010 which has been objectively manifested by words and acts demonstrating that intention. Where the evidence which proves the words and acts is principally oral exchanges or conduct then the evidence of a party as to what he subjectively understood to have been agreed is some evidence tending show what had been agreed. But where the evidence which proves the words and acts is documentary (as is the case here) evidence of what a party subjectively understood to have been agreed is of little use. The objective observer will look at the documentary material to ascertain what it discloses as to the intentions of the parties.
58. When the objective observer looks at the words of a document and the context in which they were used he may well be able to see clearly what the parties meant by the words they used. If he has to consider a mass of additional material (such as the course of negotiations) that additional material might produce confusion rather than clarity. If I am looking in the correspondence, attendance notes and circulating drafts for an objectively manifested continuing common intention as to the rent payable after 18 December 2010 which differs from the bargain embodied in the Relevant Lease (whatever that is), I do not find it. It seems to me the parties were in constant negotiation both as to the fundamental form of the transaction and as to all of its detailed terms right until the very end. Counsel for BGC submitted that the detail of the "deal" was only worked out in the process of drafting the documents. There was no prior accord. I agree. The meeting of minds was in the engrossed document.
59. Counsel for Scottish Widows relied heavily (in resisting this analysis) on the letter of 8 August 1996 as embodying some consensus. But that cannot be accepted. First, the letter proposed an arrangement which was said to have the "same economic effect" as a number of different arrangements involving an SPV (which arrangements themselves did have the same economic effect): not the same economic effect as an immediate assignment with a reverse premium. Second, the actual arrangement proposed did not have the same economic effect as an immediate assignment with a reverse premium. If works were undertaken (and the discount period shortened) the rent that was accelerated was the onerous rent (not the rent at that time being paid by Scottish Widows to Barings). Third, the response to the proposal was not acceptance, but comment about tax difficulties and a reminder that the clients had yet to sign off on a revised structure and commercial terms. So I adhere to my view that the only consensus is to be found in the Relevant Lease itself.
60. There is one final issue. If I had decided that the evidence supported rectification as sought, Counsel for BGC submitted that recification should not be granted because of laches. I would have rejected this submission. The mere passage of time does not suffice. For the purposes of the defence of laches (a) time only begins to run when the mistake which founds the claim to rectification has been discovered (Beale v Kyte [1907] Ch 564): and (b) some form of detrimental reliance during the period when time is running is usually an essential ingredient (Fisher v Brooker [2009] UKHL 41 at [71]). BGC cannot point to any event since the discovery by Scottish Widows of "the mistake". which renders it inequitable to grant rectification if the claim is otherwise properly made out.
61. I will hand down this judgment at 10:00am on 31 March 2011. I do not expect the attendance of legal representatives. I will hear submissions on costs or any other applications at a further hearing to be fixed through the usual channels: or (if the parties agree between themselves upon this course) by written submissions. Given the calibre of representation I am confident that a sensible view will be taken as to what is best for the parties. I will adjourn any application for permission to appeal to that disposal hearing.

Mr Justice Norris………………………………………………………31 March 2011