KPMG LLP v Network Rail Infrastructure Ltd

Factual and Procedural Background

This dispute concerns the interpretation of a break-clause in a reversionary sub-underlease dated 11th July 1985 between Company A and Company B (originally Peat Marwick Mitchell & Co and British Railways Board respectively). The lease followed the form of a draft lease attached to an agreement dated 13th December 1974 involving a third party, The University.

The contested clause, paragraph 5 in Part II of the 5th Schedule, relates to the lessee's right to determine the lease at specified intervals, conditional upon prior rent reviews and, originally, an increase in rent. A critical portion of the clause—the "increased rent condition"—was omitted in the final 1985 lease, creating ambiguity as to whether the lessee has three break opportunities dependent on rent review and increased rent, or five break opportunities, some independent of rent review.

The background includes extensive negotiations and multiple drafts between solicitors for the parties, during which the omission occurred, likely as a typographical error. The lease term was split into an initial 21-year term and a 31-year reversionary term to save stamp duty, adjusting dates in the break-clause accordingly.

The original trial judge found in favor of Company B, granting rectification of the lease to include the omitted words on the basis of mutual mistake. Company A appeals that decision.

Legal Issues Presented

1. Whether the omission of the increased rent condition in the break-clause can be corrected by rectification on the basis of mutual mistake.
2. If rectification is not possible, what is the correct construction and meaning of the disputed paragraph in the lease?
3. Whether the court can correct the mistake by construction, supplying the omitted words as part of interpreting the lease.
4. Whether the lessee has three break rights dependent on rent review and increased rent, or five break rights with some independent of rent review.

Arguments of the Parties

Appellant's Arguments (Company A)

• The lease should be construed as it stands, without the omitted words, giving the lessee five break opportunities: three dependent on rent review and two "free-standing" based solely on notice during specific years.
• On the evidence, the parties’ intentions changed after the omission, with Company A mistakenly believing the omission was deliberate and favorable.
• The trial judge's finding that the parties’ intentions remained unchanged was not supported by the evidence and was an erroneous inference.
• The 1974 draft lease should be given limited or no weight in construction, especially as leases are addressed to successors who may not have access to prior agreements.
• The claim for rectification based on mutual mistake was not proven by convincing evidence.

Respondent's Arguments (Company B)

• The lease should be rectified to reinstate the omitted increased rent condition, reflecting the parties’ common continuing intention at the time of execution.
• The omission was a mutual mistake, and there was convincing proof that the parties intended only three break rights, all dependent on a rent review and an increase in rent.
• Alternatively, if rectification is not granted, the lease should be construed to give effect to the parties’ intentions, either by implying the omitted words or construing the additional break rights as dependent on rent review.
• Reliance on the legal principles from Swainland Builders Ltd v Freehold Properties Ltd to argue that the court can rectify even where details are not fully agreed, provided the common intention is clear.

Table of Precedents Cited

Court's Reasoning and Analysis

The court first considered the claim for rectification based on mutual mistake, applying the established legal requirements. The trial judge found that the omission was a mistake and that the parties’ common intention remained to include the increased rent condition, thus justifying rectification. However, on appeal, this conclusion was critically examined. The appellate court found that the evidence did not convincingly establish that the parties’ intentions remained unchanged after the omission, especially given the contemporaneous correspondence and meeting evidence. The court concluded that Company B failed to discharge the burden of proof for rectification.

The court then examined the alternative argument that rectification could be granted in a more flexible manner as in Swainland Builders Ltd, but rejected this approach because the difference in intentions was substantive, not merely procedural.

Turning to construction, the court applied the principles from Investors Compensation Scheme and related authorities, permitting consideration of the 1974 draft lease as part of the factual matrix. The court rejected the trial judge’s narrow approach to the relevance of the prior draft lease, emphasizing that it was a detailed, negotiated document closely related to the final lease.

The court considered the power to correct obvious mistakes by construction, citing The Starsin and other authorities which allow courts to supply omitted words when the omission is clear and the missing words can be identified with reasonable certainty.

Applying this to the disputed clause, the court found that the omission of the increased rent condition was obvious and that the 1974 draft lease provided a clear precedent for the missing words. The court rejected the appellant’s interpretation that the lease granted five break rights, finding it inconsistent with the structure and purpose of the clause and the parties’ intentions.

Ultimately, the court concluded that the proper construction of the clause, corrected by supplying the omitted words, gave the lessee only three break rights, all dependent on a rent review and an increase in rent, in line with the original commercial intention.

Holding and Implications

The appeal is dismissed.

The court upheld the trial judge's decision to rectify the lease to include the omitted increased rent condition, thereby limiting the lessee’s break rights to three, all contingent on rent reviews resulting in increased rent. The direct consequence is that Company A does not have additional "free-standing" break rights and must await the lessor's initiation of rent reviews to exercise break options.

No new legal precedent was established; the decision applies established principles of rectification and contract construction to the facts of this case.