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Cite as: [2010] EWHC 2320 (Ch)

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Neutral Citation Number: [2010] EWHC 2320 (Ch)
Case No: HC09C00503

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand. London, WC2A 2LL
30 September 2010

B e f o r e :

MISS ELIZABETH JONES Q.C
____________________

Between:
Mohamed Bashir
Claimant
- and -

(1) Mohammad Safraz Ali
(2) Mohamed Arshad Khan
Defendants

____________________

Miss Michelle Stevens-Hoare (instructed by Murdochs) for the Claimant
Mr Zachary Bredemear (instructed by G.H Gelberg & Co) for the Defendants

Hearing date: 25 May 2010

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Miss Elizabeth Jones Q.C.

  1. This is an action in which the Claimant, Mr Mohamed Bashir, seeks specific performance of a contract entered into at auction on 7 October 2008 relating to a property at 66 Leytonstone Road, London El5, registered with title absolute under title number EX93229. The issues in this case arise because the parties both entered into this agreement believing that the building erected on the plot the subject of title number EX93229 comprised a ground floor shop with a flat above comprising 3 rooms, a kitchen and a bathroom (I will refer to this flat as the First Floor Flat, although it in fact extends also into the roof). In fact, the building comprised a ground floor shop, the First Floor Flat, and a ground floor studio flat (I will refer to this additional flat as the "Ground Floor Flat"). Both the Claimant and the Defendants were ignorant of the existence of the Ground Floor Flat on the date of the contract. Both believed that what was present at 66 Leytonstone Road, London El5 was a building comprising the ground floor shop with the First Floor Flat above it. Both were mistaken. The issue for me is the effect in law of that mistake.
  2. Mr Bashir seeks an order that the Defendants transfer to him the freehold of 66 Leytonstone Road subject only to him granting the Defendants a 125 year lease of the First Floor Flat. The Defendants resist the claim on three alternative bases. First of all, they say that as a matter of construction the contract does not require the transfer of the freehold of the property registered under title number EX93229, but only a lesser interest. Secondly they say that the contract should be rectified to so provide. Thirdly, they say that the contract is void as having been entered into on the basis of a fundamental mistake.
  3. At the end of the oral argument, I asked counsel for each side for written submissions in relation to two matters which had arisen from the argument. Those submissions were provided. However, after considering the submissions very carefully and doing a little further research myself, I found myself still unable to reach a conclusion on the basis of the arguments which had been put before me. After considering what the correct course was, I issued a provisional judgment setting out my provisional views which went outside the strict parameters of the arguments put forward by the parties. I invited further submissions in relation to the provisional judgment.
  4. Those submissions were provided to me. As a result of discussions between counsel, Miss Stevens-Hoare for the Claimant dealt with a number of issues which she believed Mr Bredemear would raise for the Defendants. In the event some of those issues were not raised by Mr Bredemear, and I have not therefore dealt in this judgment with those issues.
  5. The facts

  6. The Defendants are the executors of a Mr Mohamed Taj, who owned a number of properties on his death, including a freehold property at 66 Leytonstone Road, London El 5.1 shall refer to the whole of the freehold property as "the Property". The Defendants decided to sell the Property. The First Defendant, Mr Ali, asked the managing agent of the Property, a Mr Khaliq of Move Direct, to arrange for the Property to be sold. Mr Khaliq contacted Mr John Barnett of Barnett Ross, auctioneers and chartered surveyors. Mr Khaliq informed Mr Barnett that the Property had been included in a previous auction held by Strettons in July 2007, and handed the auction particulars from the Strettons auction to Mr Barnett. Those particulars described the Property as follows
  7. "A linked end of terrace property arranged as a ground floor shop and self contained flat above with separate street access....It has not been possible to undertake an internal inspection prior to printing but we understand the accommodation comprises:
    First Floor Flat: 3 rooms, kitchen, bathroom/WC Let on an AST from 01.08.2006 for 12 months at 750 per month.
    Ground Floor Shop; let on an oral tenancy at 500 per month."
  8. Mr Barnett went to inspect the Property. He gave evidence that he had gained access to the shop but not to the residential parts, which were reached by a separate door at the front of the building. He explained that he knew in advance there was to be a long lease so he did not need to gain access to the residential parts. He measured the shop. He also went round to the rear but was unable to obtain full access to the rear of the Property, though he appreciated that there was an open area at the back. He caused the auction particulars to be prepared. A draft of the particulars was sent to the Defendants' solicitors, G.H. Gelberg & Co, and to Mr Khaliq. At some stage Mr Barnett was told that the first floor flat was to be sold back on a long lease, and the draft particulars were amended accordingly. (It was not entirely clear at what stage Mr Barnett had inspected, but I do not think anything turns on this. It was clear that Mr Barnett had not sought to gain access to the residential portion of the Property).
  9. Mr Barnett advised the Defendants as to what the reserve price should be. He did so by taking into account the then passing rent for the shop, but taking into account the forthcoming rent review, which he thought would probably take the rent to 8,000. Applying a multiplier of 10, he suggested a reserve price of about 80,000.
  10. The auction catalogue was prepared. Relevant parts are as follows.
  11. On the inside cover is a page headed "Notice to all Bidders". On this page paragraph 1 says "Please note the General Conditions of Sale which are included with this catalogue and the Special Conditions of Sale which are available on request. An addendum will be made available on the Auction Day and the bidder should check whether the lot in which he/she is interested in bidding for is included". Paragraph 2 says "Prospective purchasers are assumed to have inspected the properties in which they are interested and to have made all usual pre-contract searches and enquiries".
  12. The Property formed Lot 44, which appears on page 45 of the catalogue. The heading says "Lot 44" then "66 Leytonstone Road Stratford London E15 1SQ" then "Reserve Below 80,000, by order of Executors". Underneath are photographs of the property. The situation is described. There is a heading in large type saying "Property" under which it says "A mid terrace property comprising a Ground Floor Shop" with separate front access to a Self-Contained Flat at first floor level". A few lines further on, in bold capitals, the catalogue states "FREEHOLD". There is then a box headed "tenancies and accommodation". There are five columns, headed Property, Accommodation, Lessee and Trade, Term, Ann. Excl. Rental and Remarks. There are two rows. Under the column headed Property, one row says "Ground Floor Shop" and the other says "First Floor Flat". Under Accommodation, the first row gives the dimensions of the shop, and the second says "3 rooms, kitchen, bathroom/WC". Under Term, the first row gives the remaining term for the shop lease, and the second row says "125 years from completion". The rent for the shop is shown as 6,000, and that of the First Floor Flat as 100.
  13. The Special Conditions of Sale comprise a 2 page document. There is a section headed "brief description of the LOT", which says "66 LEYTONSTONE STRATFORD LONDON El5" (sic). There is a section headed "Title" which says "Freehold". There is a section headed "Registered or unregistered", which says as follows:
  14. [Registered at name of land registry Stevenage With quality of title Absolute Title number] EX93229.

    A section headed "Exclusions from the sale" states "None". A section headed "reservations to the SELLER" says "None". A section headed "What the sale is subject to" refers to the matters set out in the General Conditions. A section headed "Extra special conditions" says "The property is sold subject to the tenancies and Leases copies of which are attached hereto. The Seller will not be required to produce originals of the same". No copies of leases or tenancies were in fact attached.

  15. On the day of the auction, an addendum sheet was made available. In relation to lot 44, the addendum sheet states "Shop - the rent is 7,000 per annum, therefore, total income is 7,100 per annum and there is no rent review in 2011".
  16. The Claimant in this action, Mr Mohamed Bashir, invests in rented property. His decision to purchase and for how much is based on a simple formula dependent only on the rental income that a property comes with. He generally purchases property for something between 10 and 15 times the income being generated, whether from residential or commercial property. He purchases the majority of his investments at auctions and never views the property he bids for. He simply looks at what the property is earning and what is the reserve or guide price and keeps within his bidding parameters. When he received the auction catalogue for the auction on 7 October 2008 he considered it carefully and identified a number of lots he was interested in. Mr Bashir attended the auction and collected the addendum sheet. When the lot was announced, the auctioneer, Mr Barnett, described it as a freehold property comprising a ground floor shop and a self contained flat on the first floor; he also mentioned the alteration in rental which was set out on the addendum sheet. Mr Bashir's was the successful bid, and he signed a memorandum of sale after the auction.
  17. As recorded in paragraph 11 above, no leases or draft leases had been attached to the special conditions. Following the auction, Mr Bashir's solicitors, Murdochs, wrote to the solicitors for the Defendants, Gelbergs, asking for an information pack. On 16 October 2008, Gelbergs responded enclosing a draft lease, a copy of the probate and a copy of the freehold title. The letter states "This transaction is subject to a Lease back of the upper part".
  18. On 29 October 2008, after some further correspondence, Gelbergs wrote to Murdochs stating that they were enclosing copies of plans of the property. Only one plan was in fact enclosed. On 31 October 2008, Gelbergs wrote again saying "we believe that earliest this week we sent to you only one plan in fact there are two, part of the residential unit is located on the ground floor and unless agreement is reached regarding your clients acquisition will be retained by our clients" (sic). The plans in fact indicate a self contained flat on the ground floor. The plan of the ground floor clearly shows two separate entrances to the ground floor and first floor residential accommodation, and at the entrance to the ground floor flat there is written "Flat A", while at the entrance to the upper floor flat there is written "Flat B". There was no evidence as to where those plans had come from.
  19. At some stage after the auction Mr Bashir sought to inspect the property but was not permitted to do so (though it is fair to say that the unchallenged evidence of Mr Ali, the First Defendant, was that the Defendants themselves had not known of Mr Bashir's request to inspect). On 21 November 2008 Murdochs wrote to Gelbergs saying:
  20. "You indicated in your letter of 31 October 2008 that the part of the residential flat is comprised on the ground floor but our client notes that the freehold was sold subject to the lease of the ground floor shop lease and the lease of the first floor flat comprising 3 rooms kitchen and bathroom. That description as set out in the auction contract accords with the flat on the first floor the plan of which identifies it as "Flat B".
    On the ground floor plan there is also a studio flat is referred to as "Flat A" and appears to be a self contained unit with rear garden access. No lease of that flat is referred to as being a lease to which the sale is subject and the description in the auction catalogue does not extend to incorporate any part of Flat A as being included as part of the first floor flat B.
    It would appear to be the case that the property thus comprises the ground floor shop unit and two self contained residential units - Flat A on the ground floor and Flat B on the first floor and that the property as contracted to be sold would comprise the freehold subject to lease of only the ground floor shop and first floor flat and vacant possession of the ground floor flat A. Perhaps you will confirm our understanding is correct".
  21. Gelbergs responded on 24 November 2008 saying "The only parts of the property that are being disposed of is the ground floor commercial element. The residential part of the building and your clients offer was obviously made on that basis and the price reflects the same". There are obviously some words missing, but the sense is, I think, clear.
  22. A notice to complete was served on 8 December 2008. Gelbergs responded on 12 December 2008 stating that there was a substantial error in the preparation of the auction particulars, and suggesting that the matter proceeded either by the contract being set aside and the deposit returned, or by the price being increased to reflect the value of vacant possession of the ground floor flat, or by a lease being granted to the Defendants of the ground floor flat on the same terms as the lease of the first floor flat. This was not agreed, and the claim was issued on 18 February 2009.
  23. The contractual provisions

  24. The General Conditions of Sale contain the following relevant clauses:
  25. i) Condition 1.1.2 provides that "the property" means the property offered for sale by the Auctioneers as specified in the auction catalogue and/or the Special Conditions.

    ii) Condition 1.1.2 provides that "Particulars of the Property" means those details of the Property contained in the auction catalogue whether under reference to its lot number at the auction or in the Special Conditions.

    iii) Condition 1.2 provides that the Property is sold subject to the General Conditions and the Special Conditions.

    iv) Condition 1.3 provides that the General Conditions incorporate the Standard Conditions so far as they are not varied by or inconsistent with the General Conditions, and further provides that a copy of the Special Conditions is available at the Auctioneers' offices and at the Auction.

    v) Condition 13.2 provides that any measurements given in the particulars of the Property or Special Conditions are approximate for guidance only and photographs or plans are for convenience only and each is excluded from the basis of the agreement.

    vi) Condition 13.3 provides that it is the Buyer's responsibility to satisfy himself before making a bid as to the accuracy of the Particulars of the Property and the Special Conditions.

  26. The Standard Conditions contain the following relevant provisions:
  27. i) Condition 3.1 provides that the seller is selling the property free from incumbrances other than those mentioned in condition 3.1.2.

    ii) Condition 3.1.2 provides that the incumbrances subject to which the property is sold are (a) those specified in the contract (b) those discoverable by inspection of the property before the contract and (c) those the seller does not and could not reasonably know about.

    iii) Condition 3.2.1 provides that the buyer accepts the property in the physical state it is in at the date of the contract unless the seller is buying or converting it.

    iv) Condition 4.1.2 provides that the seller having provided the buyer with full details of each lease or copies of documents embodying the lease terms the buyer is treated as entering into the contract knowing and fully accepting those terms.

    v) Condition 6.4.1 provides that the seller need not, further than it may be able to do from information in its possession (a) prove the exact boundary of the property (b) prove who owns fences, ditches, hedges or walls (c) separately identify parts of the property with different titles.

    vi) Condition 9.1 is headed errors and omissions. Condition 9.1.1 provides that if any plan or statement in the contract, or in the negotiations leading to it, is or was misleading or inaccurate due to an error or omission, the remedies available are as follows: condition 9.1.2 provides that when there is a material difference between the description or value of the property as represented and as it is, the buyer is entitled to damages; and condition 9.1.3 provides that an error or omission only entitles the buyer to rescind the contract (a) where the error or omission results from fraud or recklessness or (b) where the buyer would be obliged, to its prejudice, to accept property differing substantially (in quantity, quality or tenure) from that which the error or omission had led it to expect.

    The evidence

  28. I heard evidence from Mr Bashir, from Mr Ali, the First Defendant, and from Mr Barnett, the auctioneer. All three were candid and helpful. There was little challenge to the evidence given and a reasonably clear picture emerged. It was plain that each of the three witnesses believed at the time the contract was entered into that (a) the property comprised only the ground floor shop and the First Floor Flat and (b) the contract was a contract for the sale of the entire freehold subject to the existing shop lease and a lease back of the First Floor Flat. Each of the three witnesses was ignorant of the existence of the Ground Floor Flat. I will return to the precise nuances of the evidence in connection with the issues to which those nuances are relevant. Mr Barnett gave evidence that the reserve price would have been different if he had known of the existence of the ground floor flat. Mr Bashir accepted that he had made his bid on the basis that there was no accommodation other than the ground floor shop and the First Floor Flat being sold, and that he did not expect to be getting a ground floor flat as well; he believed he was buying the freehold subject to the existing lease of the shop and a lease back of the flat described in the auction catalogue. Mr Bashir also accepted that the reserve price shown in the auction catalogue was an important piece of information and that he understood that it would have been calculated by reference to the rent for the shop and the ground rent of the flat which was to be subject to a leaseback.
  29. Construction

  30. Both parties were agreed that the first task for the court was construction of the contract. Both parties referred me to Investors' Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at p 912-3 and to Chartbrook Ltd v Persimmon Homes Ltd and anr [2009] 1 AC 1101 at paragraphs 14 and 21-25. Miss Michelle Stevens-Hoare for the Claimant submitted that the court was engaged in an objective exercise to identify what a reasonable person, with the background knowledge the parties to the contract had, would understand the parties to have meant by the words they chose to use. A fundamental issue between the parties soon became apparent; what background knowledge should the court take the parties to have had? Should it be the knowledge that they actually had, namely that the Property comprised a ground floor shop and the First Floor Flat, notwithstanding that that "knowledge" was mistaken? Or should it be knowledge of the true facts, namely that there was also the Ground Floor Flat at the property? This was one of the issues on which I invited supplemental written submissions at the end of the oral hearing.
  31. Miss Stevens-Hoare submitted that the court should construe the contract against the factual background which was assumed by the parties at the date of the agreement, namely that the Property comprised a ground floor shop and the First Floor Flat. Miss Stevens-Hoare referred me to Prenn v Simmonds [1971] 1 W.L.R. 1381 where at page 1385 at H Lord Wilberforce says that "evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the "genesis" and objectively the "aim" of the transaction". She acknowledged that in Investors Compensation Scheme Lord Hoffman said at page 912H "Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract....subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next it includes absolutely anything which would have affected the way in which the language of the document would have been understood by the reasonable man."
  32. In her supplemental submissions Miss Stevens-Hoare pointed me to Reardon Smith Line v Yngvar Hansen-Tangen [1976] 1 W.L.R. 989 at page 995H to 997D, to National Bank of Sharjah v Dellborg, Court of Appeal (Civil Division), 9 November 1992 and to Scottish Power Plc v Britoil 1997 WL 1104414 at pages 2-4. In Reardon Smith at page 997B-C, in a passage also cited by Mr Bredemear for the Defendants, Lord Wilberforce said this:
  33. "what the court must do is to place itself in thought in the same factual matrix as that in which the parties were. All of these opinions seem to me implicitly to recognise that, in the search for the relevant background, there may be facts which form part of the circumstances in which one or both, may take no particular interest, their minds being addressed to or concentrated on other facts so that if asked they would assert that they did not have those facts in the forefront of their mind, but that will not present those facts forming part of an objective setting in which the contract is to be construed".

  34. Miss Stevens-Hoare submitted that in Scottish Power Staughton L.J commented that an earlier case decided by him, Youell v Bland Welch (1992) 2 LIoyd's Rep 127, had not been before the court in Investor's Compensation Scheme, supra, that the principle set out by Lord Hoffman was not supported by authority, and that it was not clear whether it had been the subject of argument. In Youell, supra, Staughton L.J had said this:
  35. "the notion is that what the parties had in mind, and the Court is entitled to know, [is] what was going on around them at the time when they were both making the contract. This applies to circumstances which were known to both parties, and to what each might have reasonably expected the other to know".

  36. Miss Stevens-Hoare also pointed out that in Investors' Compensation Scheme, supra, Lord Hoffman ended his description of the relevant principles by saying "on the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language the law does not require judges to attribute to the parties an intention which they plainly could not have had." She submitted that the factual matrix taken into account by the court should not include a fact which was not actually known to either party on the basis that it was "reasonably available", and that
  37. I should construe the contract on the basis of the understanding that the parties actually had at the time of the contract.
  38. Mr Bredemear for the Defendants submitted that the factual matrix which should be taken into account by the court is the factual matrix as it actually is, namely that the Property comprised a shop, the First Floor Flat and the Ground Floor Flat. He pointed to the fact that the notice to bidders contained on the first internal page of the auction catalogue states "Prospective purchasers are assumed to have inspected the properties in which they are interested and to have made all usual pre-contract searches and enquiries". Mr Bredemear relied upon the passage from the judgment of Lord Hoffman in Investors Compensation Scheme, which is set out in paragraph 23 above. He also pointed me to a different passage in Rear don-Smith, supra, at page 996E in which Lord Wilberforce said:
  39. "It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties".
  40. I have found this an extremely difficult question. Ultimately, however, I accept Mr Bredemear's submission. First, not only did the auction catalogue tell the purchaser that he would be assumed to have inspected, the contract itself provides that it is the Buyer's responsibility to satisfy himself before making a bid as to the accuracy of the Particulars of the Property and the Special Conditions (General condition 13.3). As it happened, the Claimant, who had not inspected and was not aware of the true facts, was the highest bidder and therefore the purchaser; but the buyer might equally have been someone who had inspected and did know the true facts. Since it appears to me that the contract itself assumes that the purchaser will have satisfied himself as to the accuracy of the Particulars of the Property and the Special Conditions, and the factual matrix on any basis includes the provisions of the auction catalogue stating that the purchaser will be assumed to have inspected, I think that the contract also requires me to construe it on the basis that the Purchaser had done so - although of course what he would have discovered is the inaccuracy, rather than the accuracy, of the Particulars of the Property. In effect, the Claimant is asking the court to construe the contract on the basis that he has not complied with his contractual obligation. That does not seem to me to be an appropriate course.
  41. Second, I think the key is in remembering, as set out by Lord Wilberforce in the passage cited in paragraph 27 above, that what the court is doing is conducting an objective exercise. Reasonable people in the position of the parties and given the express terms of the contract would be assumed by the objective observer to know the true layout of the Property. It is by an extraordinary set of circumstances that in fact, subjectively, neither of the parties in this case was aware of the true facts. The Vendors were selling as executors and had no personal knowledge. Their managing agent, whom one would assume to have known the facts, gave a patently incorrect set of particulars to the auctioneers. The auctioneer only sought to inspect the shop. The purchaser chose not to inspect. I note also in this context a passage in the judgment of Saville LJ in National Bank of Sharjah v Dellborg, supra. The defendant in that case had sought to explain a provision in the contract in question by reference to the fact that one of the negotiators for the Bank had not been aware of certain suspense accounts. Saville L.J. said at page 12 of his judgment:
  42. "I would also reject the attempt to use the fact that one of the negotiators may have been unaware of the suspense accounts. The subjective state of mind of the parties or their representatives is equally impermissible as an aid to construction".
  43. Third, this approach accords with the passage from Investors' Compensation Scheme set out above, which itself, in my view, stems from the objective approach set out by Lord Wilberforce in the passage cited in paragraph 27 above.
  44. Finally, I am fortified in the view I have taken by a judgment of Warner J in Mustafa v Baptist Union Corporation Ltd (1983) 266 E.G. 812. In that case a contract was entered into at auction. The property was described as vacant, and the sales particulars listed the accommodation on each floor. On one floor was a room which was blocked off from the rest of the property; the sales particulars did not list that room as forming part of the accommodation. Neither did they say that any part of the building was to be excluded. The conditions of sale included a term similar to general condition 3.1 in this case:
  45. "The Purchaser shall be deemed to acknowledge that he has not entered into this contract in reliance on any of the said statements [sc in the auction catalogue] and that he has satisfied himself as to the correctness of the said statements by inspection or otherwise and that no warranty or representation has been made by the Vendors or the said agents in relation to or in connection with the property".
  46. Warner J held that the contract should be interpreted in accordance with what it would mean to an ordinary reasonable person who had inspected the property and who knew what was visible on such an inspection. (It is fair to point out that the purchaser in that case had in fact inspected; but that does not seem to me to alter the principle).
  47. Miss Stevens-Hoare submitted that what was reasonably available to the parties did not include the fact that the Ground Floor Flat existed because Mr Barnett, the auctioneer, did not discover it when he inspected. She says therefore that if the Claimant had inspected he would not have discovered the existence of the ground floor flat either. I am unable to accept this. Mr Barnett was not trying to ascertain the full extent of the Property. He did not seek to gain access to the residential parts. The obligation under the contract on the purchaser is to satisfy himself as to the accuracy of the Particulars of the Property and the Special Conditions; simply opening the separate entrance from the street to the residential accommodation would have showed that there were two further entrances to two flats. It is true that the Claimant was denied access after the issue had arisen, but there is nothing to suggest that he would have been denied access prior to the auction. He simply chose not to make any investigations. Similarly, the Defendants could themselves have inspected prior to the auction, as they did in fact after the contract was entered into. I find that the true facts were reasonably available to both parties.
  48. Accordingly I turn to the construction of the contract against the fact that the Property in fact comprises a shop, the First Floor Flat and the Ground Floor Flat.
  49. Mr Bredemear's pleaded case is that on the true construction of the contract, Lot 44 included only the First Floor Flat and the shop. In his skeleton argument his submission was that a bidder who had made proper inspection and earned out precontract searches and enquiries would have realised that only those parts specified in the catalogue were being offered for sale. In oral submissions Mr Bredemear submitted that the reasonable bidder would have understood that what was being offered for sale were flying freeholds limited to the shop and the first floor flat; and that the flying freeholds would not include the common parts or the garden.
  50. Miss Stevens-Hoare pointed out that a contract to create a flying freehold would be a very unusual contract and would require clear words. She pointed out the reference to the freehold and the simple description "66 Leytonstone" in the special conditions and the statement that there were no exclusions or reservations. She pointed out that there was no reference to the Lot comprising only part of the Property, as was the case in some other lots in the auction catalogue. Her submission was that the contract must be taken to require the transfer of the whole freehold.
  51. The contract defines the property as "the property offered for sale by the Auctioneers as specified in the auction catalogue and the Special Conditions". I have set out in paragraphs 8 to 11 and 19 to 20 above the provisions of the auction catalogue and the special conditions. On the one hand the special conditions refer to the freehold (as does the auction catalogue) and to the title number and the address and state that the property is conveyed subject to the leases attached thereto; on the other hand no leases were actually attached, the property is described as "comprising" a ground floor shop with separate front access to a self contained flat at first floor level and refers to a lease of the first floor flat for 125 years from completion at a rent of 100. There is simply no mention of the ground floor flat which in fact existed.
  52. I agree with Miss Stevens-Hoare that the contract would not have been taken by the reasonable observer to require the creation of flying freeholds, which are indeed very unusual. I find Mr Bredemear's construction wholly uncommercial, so much so that no reasonable observer could have thought that this was what the parties intended. Although Mr Bredemear referred me to clause 18.2 of the General Conditions of Sale and clause 3.3 of the Standard Conditions of Sale and submitted that these made flying freeholds workable, I am not persuaded that the reasonable observer considering this contract would have even considered the possibility of flying freeholds.
  53. However, the contract is clearly not simply for the sale of a freehold; it is for the sale of a freehold subject to the existing lease of the shop and with a lease-back of the First Floor Flat for 125 years at a fairly nominal rent. The price reflects the value of the reversion on the shop lease and a lease for 125 years of the First Floor Flat at a rent of 100. Miss Stevens-Hoare accepted in oral submissions that a party knowing the true facts and looking at the contractual documents would "be a bit surprised" not to see a reference to the Ground Floor Flat and a lease back of that. She accepted that there was a tension between the words of the contract and the facts, and that someone looking at the contract would "do a double take" and ask if someone had made a mistake here. I find myself equally unable to accept Miss Stevens-Hoare's submission that the objective observer would consider that the contract meant that the vendor had to transfer the freehold subject only to a lease back of the First Floor Flat, so that the purchaser obtained a windfall of vacant possession of the Ground Floor Flat. The objective observer would, as I think Miss Stevens-Hoare conceded, realise that something had gone wrong with the language of the contract, and not expect the contract to give a gift of vacant possession of an additional flat to the purchaser. Accordingly, Miss Stevens-Hoare's submission seems to me to be equally plainly a wholly uncommercial construction of the contract.
  54. In the further submissions following on from the provisional judgment Miss Stevens- Hoare submitted that her concessions had been inaccurately recorded. Her submission was that she had conceded that an objective observer who was aware that;
  55. i) The Property included a Ground Floor Flat which was not expressly mentioned in the auction particulars; and
    ii) The reserve represented a value around the market value for the freehold if it consisted only of the shop and the First Floor Flat with both being subject to leases:

    might look again ("do a double take") to check if the property described was the freehold subject to only the two leases.

    Miss Stevens-Hoare submitted that it was not accepted that an objective observer seeing that the action particulars referred to the property, the title number and the freehold (which she submitted could only mean the whole of the Property) and then that it referred to that freehold interest being subject to two leases only, one of the shop and one of the first floor flat, would realise or know that something had gone wrong. Miss Stevens-Hoare says that the concession was limited to the situation where the reasonable observer also knew that the consideration to be paid was inadequate for the transfer of the freehold subject only to the two leases (of the shop and First Floor Flat); and that the task of construction which I must carry out should not take into account an assessment of the proper value for the interests to be sold, or whether the bargain is a good, reasonable of bad one. Miss Stevens-Hoare submits that although the reasonable observer would have done a "double-take", on going back to the contract documents the observer would have realised that the freehold included an unencumbered flat.

  56. I do not accept that Miss Stevens-Hoare's submissions are incorrectly recorded in paragraph 39 above. Miss Stevens-Hoare's oral submission that a reasonable observer knowing what the Property in fact comprised would "do a double take and think - has someone made a mistake here" was immediately followed by her submitting that there was a tension between on the one hand the description of the Property as "comprising" a shop and the First Floor Flat and the rest of the provisions in the documents, which refer to the address, the title, the freehold and so on, which indicated that the whole Property was to be transferred. In other words, Miss Stevens- Hoare accepted that there was a mistake on the face of the documents without considering the price.
  57. Further, I consider that:
  58. i) There plainly is a mistake on the face of the document even without reference to the price; a reasonable observer knowing what the Property in fact
    comprised would immediately realise that the description of the Property was incomplete;
    ii) I cannot construe the contract without reference to the price and the knowledge that it would not be adequate consideration for the sale of the freehold subject only to the existing lease of the shop and an obligation to grant a 125 year lease of the First Floor Flat. The first is an essential term of the contract; the second is an important part of the factual matrix.
  59. I am left, therefore, unable to accept the submissions of either party. I have therefore considered whether there are any other alternatives. One alternative is to find that the contract is void for uncertainty. However, I consider that there is a further alternative. What I think Mr Bredemear is really saying is that the objective observer would not expect the purchaser to obtain vacant possession of an additional flat. The description of the property in the auction catalogue makes it clear that the economic interest which the purchaser is obtaining is the reversion on a 125 year lease of the First Floor Flat at a nominal rent plus the reversion on the shop lease. The description taken together with the reserve (and actual) price would make it clear that the purchaser was not expected by either party to obtain vacant possession of an additional studio flat. Where Mr Bredemear falls into difficulty is that the conveyancing option he suggested to me during argument, namely that the contract required flying freeholds to be created, is, as I have already found, one which no reasonable observer would have expected. I agree with Mr Bredemear that the reasonable observer would expect the contract to give the purchaser the economic interests set out above, and not vacant possession of an additional flat; but I think that the reasonable observer would expect that result to be achieved by a different conveyancing route, namely by construing the contract to require the transfer of the whole of the freehold of 66 Leytonstone Road comprising a ground floor shop, the Ground Floor Flat and the First Floor Flat, with the benefit of the existing lease of the shop and subject to a lease back of both the First and Ground Floor Flats on the same terms, namely for a period of 125 years at a ground rent of 100. This is a sensible and workable construction of the contract, and indeed seems to me to be the only possible construction if the contract is not to be void for uncertainty. Although this involves a considerable addition of words to the contract, I consider that this is the only possible outcome and falls fairly within the passage at paragraphs 22-25 of the judgment of Lord Hoffman in Chartbrook, as follows:
  60. "22. In East Pantiles (Plant Hire) 1981 263 E.G. 61 Brightman L.J. stated the conditions for what he called "correction of mistakes by construction":
    Two conditions must be satisfied; first there must be a clear mistake on the face of the instrument; secondly it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied then the correction is made as a matter of construction"
    23. Subject to two qualifications, both of which are explained by Carnwath J in his admirable judgment in KPMG LLP v Network Rail Infrastructure Ltd [2007] Bus LR 1336, I would accept this statement which is in my opinion no more than an expression of the common sense view that we do not readily accept that people have made mistakes in formal documents. The first qualification is th at "correction of mistakes by construction" is not a separate branch of the law, a summary version of an action for rectification. As Carnwath LJ said, at p 1351, para 50:
    "Both in the judgment, and in the arguments before us, there was a tendency to deal separately with correction of mistakes and construing the paragraph 'as it stands', as though they were distinct exercises. In my view, they are simply aspects of the single task of interpreting the agreement in its context, in order to get as close as possible to the meaning which the parties intended."
    24 The second qualification concerns the words "on the face of the instrument". I agree with Camwath LJ, paras 44-50, that in deciding whether there is a clear mistake, the court is not confined to reading the document without regard to its background or context. As the exercise is part of the single task of interpretation, the background and context must always be taken into consideration.
    25 What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied."
  61. Although this construction was not pleaded by the Defendants in terms, it simply clothes the economic effect of the Defendants' pleaded case with a more conventional method of achieving that effect. In effect, the dispute between the parties on construction has been whether the Claimant is entitled to the windfall of vacant possession of the Ground Floor Flat or not. In my view on the true construction of the contract he is not so entitled; and I do not consider it a bar to my so finding that the Defendants' legal advisers did not put forward the appropriate method of achieving that outcome in their pleading (and the Clamant has not suggested that it is a bar). I note, however, that this method of resolving the difficulty was put forward by Gelbergs in the letter dated 12 December 2008 which is referred to in paragraph 18 above.
  62. Miss Stevens-Hoare's further submissions after the provisional judgment submit that it was telling that two experienced property barristers had considered the matter and pleaded it in different ways, but had not suggested the construction I have now found was the correct one. In fact, the original pleading (which was amended) did plead that the contract was for the sale of the freehold subject to the existing lease of the shop and new leases of the Ground and First Floor flats.
  63. Miss Stevens-Hoare submitted that I should not consider whether the bargain made was a good or a bad one; and that an approach which took this into consideration would serve to undermine the principles of contract law and engage the courts in the policing of the fairness of private contracts in a way that conflicts with freedom of contract and would undermine the certainty at the heart of English contract law. Miss Stevens-Hoare referred me to Bishops Wholesale Newsagency Ltd v Surridge Dawson Ltd [2009] EWHC 2578 (Ch), particularly at paragraph 21. In that case the court held that there was no error or absurdity produced by the ordinary meaning of the language used; and that the court could not evaluate whether a particular provision was generous, or work out whether one party or another was getting a good or bad deal. This case is entirely different. In this case, as I have found, there is an obvious error even without reference to the price; and this is not a case in which there has been negotiation in which it is possible that a "provision favourable to one side was [...] in exchange for some concession elsewhere or simply a bad bargain" (per Lord Hoffman in Chartbrook at paragraph 16, set out in paragraph 43 above). Of course the simple fact that a party has entered into a bad bargain does not mean that the court can remake the contract. But sometimes the fact that a particular construction which is contended for would produce what is obviously a bad bargain may be one of the factors which leads a court to conclude that that cannot have been the meaning which the parties intended.
  64. Miss Stevens-Hoare in her further submissions after the provisional judgment also submitted that the correction of mistakes referred to in Chartbrook is about correcting the mistakes the parties made in the formal documentation not correcting mistakes about what their transaction was or consisted of; and that a mistake the parties made about what they were buying or selling must be dealt with by relying on principles such as unilateral or common mistake or misrepresentation if that is open to them. I do not agree. The first task of the court is to decide what the contract, objectively speaking, means. Of course, that is often different from what the parties' subjective intention actually was. But for the puipose of construing the contract the court does not consider the subjective intention of the parties. The questions are: is it clear that something has gone wrong with the language, and is it clear what a reasonable person would have understood the parties to have meant?; see Chartbrook, supra, at paragraph 25. I have found that both of those questions are answered in the affirmative. I have also considered the case of Westvilla Properties Limited v Dow Properties Limited [2010] EWHC 30 (Ch), in which the parties had not in fact addressed their minds to an issue, so that they certainly had not, subjectively speaking, reached any agreement about the point; but where the court nonetheless was satisfied that it could say with reasonable certainty what the reasonable person with the parties' knowledge would have thought the parties intended to include to correct the mistake (in that case a blank in the document).
  65. In the same submissions Miss Stevens-Hoare submitted that if the contract is construed as I have suggested, then clause 9.1 of the Standard Conditions of Sale would give the Claimant a claim for damages amounting to the difference in the value of the property sold as described and the property actually acquired. This cannot be right. The property as described was a freehold comprising one shop and one flat, with the benefit of one lease and subject to an obligation to grant a 125 year lease of the flat. I have held that it should be construed as if it described a freehold comprising one shop and two flats, with the benefit of one lease and subject to an obligation to grant a 125 year lease of each of the flats. Miss Stevens-Hoare's submission is tantamount to saying that in making a claim under standard condition 9.1 the contract should not be construed as I have construed it, but as if it required vacant possession of the Ground Floor Flat. That is plainly wrong.
  66. Accordingly I find that on its true construction the contract requires the Defendants to convey the freehold in 66 Leytonstone Road, London E11 to the Claimant subject to the Claimant granting a lease back of each of the First Floor Flat and the Ground Floor Flat for a term of 125 years at a rent of 100 per flat. I consider that the reasonable observer would expect there to be 2 separate leases of the two flats since he would have in mind that the vendor might well wish to sell the leasehold interests.
  67. I should also record that at the beginning of the hearing Mr Bredemear indicated that he intended to apply for permission to amend the Defence so as to add a new paragraph 21A saying "The Parties were not ad idem and there was no binding contract". However, during the course of the argument Mr Bredemear stated that he did not wish to pursue that amendment, and so I have not considered that as a possible solution to the conundrum raised by this case.
  68. Uncertainty

  69. Miss Stevens-Hoare's submissions following my provisional judgment dealt in detail with the possibility that the contract is void for uncertainty, and urged upon me that the courts have long been reluctant to conclude that agreements the parties believed they have made are void for uncertainty. Miss Stevens-Hoare referred me to Lewison, Interpretation of Contracts, 4th edition at paragraphs 8.10, 8.11 and 8.13, and to Westvilla Properties Limited v Dow Properties Limited, supra. In the event Mr Bredemear's submissions following my provisional judgment did not appear to me to be raising a case of uncertainty. Since I have found that it is possible to give meaning to the contract, it follows that I do not consider that the contract is void for uncertainty. I will not therefore deal with this point further.
  70. Rectification

  71. Since I have reached the conclusion I have in relation to construction, rectification does not arise; but lest this matter go further I will set out my views in relation to rectification.
  72. Mr Bredemear's case was that the parties shared a common intention, namely that only the shop and the first floor flat should be transferred. I was referred to Joscelyne v Nissen [1970] 2 QB 86 and to Chartbrook at paragraph 60. However, in my view Mr Bredemear's case is fatally flawed. Here, of course, evidence of the parties' subjective intention and knowledge is central. That evidence showed that the parties were indeed ad idem; as the evidence showed, both parties intended that the whole freehold should be transferred subject to a lease back of the First Floor Flat, and both also intended that the Claimant should obtain the reversion of the shop lease and a ground rent in relation to the First Floor Flat and nothing else. That agreement they wrote down perfectly well. The difficulty is that on the true facts, those two elements on which they were agreed were not both possible. The mistake needed for rectification is a mistake in writing down the terms of the agreement; not a mistake as to the underlying facts.
  73. Mistake

  74. Finally, Mr Bredemear submitted that the contract was void by reason of a fundamental common mistake. Mr Bredemear candidly accepted that he saw this as a more difficult submission. I deal with this alternative ground for the same reasons that I have dealt with rectification.
  75. The parties both referred me to Great Peace Shipping Ltd v Tsavliris Shipping (International) Ltd [2003] QB 679, and to the passage in Chitty on Contracts, Thirtieth edition, at paragraph 5-017 which sets out the following test for a contract being void for mistake:
  76. "In summary, if: (i) the parties have entered a contract under a shared and self induced mistake as to the facts or law affecting the contract (ii) under the express or implied terms of the contract neither party is treated as taking the risk of the situation as it really is (iii) neither party was responsible for or should have known of the true state of affairs (iv) the mistake is so fundamental that it makes the "contractual adventure" impossible, or makes performance essentially different to what the parties anticipated, the contract will be void".
  77. I pause to note that this issue only arises if on the true construction of the contract the contract requires the Defendants to transfer the freehold to the Claimant subject only to the existing lease of the shop and a lease back of the First Floor Flat, so that the Claimant would obtain vacant possession of the Ground Floor Flat.
  78. Mr Bredemear submitted that the mistake was self induced (ie not induced by the other party) in that neither party had actually inspected. He submitted that the terms of the contract did not require either party to take the risk of the mistake. In this context he referred me to standard conditions 3.2 and 6.4.1, and to general condition 13.2. As to requirement number (iii) above he submitted that here both parties were responsible, or "at fault" and that in those circumstances the contract should be void. Finally, he submitted that a contract to convey the freehold reversion on two leases was entirely different from a contract to convey the freehold reversion on two leases and vacant possession of a flat.
  79. Miss Stevens-Hoare's first point was that there had not been a shared mistaken belief that the only land comprised in the Property was that which was described in the auction catalogue, as pleaded by the Defendants in paragraph 19(a) of their defence. She submitted that neither party had a positive belief as to whether, for example, there were other matters such as lofts or basements or rear yards. Miss Stevens-Hoare accepted that requirement (ii) above was satisfied. She then submitted in relation to requirement (iii) above that it was clear that there was fault on the part of the Defendants, who were in a position to obtain the information about the true state of affairs. She submitted that the Claimant was not at fault because there was no evidence that if he had asked for access he would have got it; or that if he had obtained access he would have discovered the existence of the ground floor flat. She also submitted that if parties choose to enter into a written contract without making enquiries then they chose to take the risk of the mistake. Finally she submitted that the contractual adventure was still possible to perform; the property existed and could be transferred, and the situation was more analogous to the painting thought to be by a well known artist but in fact not, than to the non-existent property cases.
  80. My conclusions are as follows. In my view it is clear from the evidence that both parties shared a common positive belief that the only units within the Property were one shop and one flat, as set out in the auction particulars. It is true that neither seemed to have addressed their minds to extraneous and economically uninteresting parts of the building or land, but that does not alter the fact that they did share a common and mistaken belief about what the Property comprised.
  81. As to the second requirement, both parties accepted that the contract did not allocate the risk of the mistake. I have my doubts about this in the light of condition 9.1 of the General Conditions, but since neither party referred me to condition 9.1, and since, as will appear below I have concluded that the contract is not void for mistake for other reasons, I have not considered that issue further.
  82. As to the third requirement, Mr Bredemear accepted in oral submissions that there was fault on the part of the Defendants since they could have inspected the property, and despite Miss Stevens-Hoare's submissions I find there was also fault on the part of the Claimant since the notice to bidders and the terms of the contract both threw upon him an obligation to make enquiries and to inspect. I asked for further written submissions as to any guidance in the authorities in relation to the question of whether a contract would be void for common mistake where the mistake was the fault of both parties.
  83. Mr Bredemear drew my attention to Grist v Bailey [1967] 1 Ch 532. He accepted that this case was not authority for the proposition he had put forward at the hearing, but put it forward as an example of what is meant by fault. Miss Stevens-Hoare referred me to Associated Japanese Bank (International) Ltd v Credit Du Nord S.A. [1989] 1 WLR 255 and in particular to a passage at page 268G to 269B of that judgment. I will quote the whole of the paragraph from which the passage to which Miss Stevens- Hoare referred me came:
  84. "The first imperative must be that the law ought to uphold rather than destroy apparent contracts. Secondly, the common law rules as to a mistake regarding the quality of the subject matter, like the common law rules regarding commercial frustration, are designed to cope with the impact of unexpected and wholly exceptional circumstances on apparent contracts. Thirdly, such a mistake in order to attract legal consequences must substantially be shared by both parties, and must relate to facts as they existed at the time the contract was made. Fourthly, and this is the point established by Bell v. Lever Brothers Ltd. [1932] AC 161 , the mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist. While the civilian distinction between the substance and attributes of the subject matter of a contract has played a role in the development of our law (and was cited in speeches in Bell v. Lever Brothers Ltd. ), the principle enunciated in Bell v. Lever Brothers Ltd. is markedly narrower in scope than the civilian doctrine. It is therefore no longer useful to invoke the civilian distinction. The principles enunciated by Lord Atkin and Lord Thankerton represent the ratio decidendi of Bell v. Lever Brothers Ltd. Fifthly, there is a requirement which was not specifically discussed in Bell v. Lever Brothers Ltd. What happens if the party, who is seeking to rely on the mistake, had no reasonable grounds for his belief? An extreme example is that of the man who makes a contract with minimal knowledge of the facts to which the mistake relates but is content that it is a good speculative risk. In my judgment a party cannot be allowed to rely on a common mistake where the mistake consists of a belief which is entertained by him without any reasonable grounds for such belief: cf. McRae v. Commonwealth Disposals Commission (1951) 84 C.L.R. 377 , 408. That is not because principles such as estoppel or negligence require it, but simply because policy and good sense dictate that the positive rules regarding common mistake should be so qualified."
  85. Miss Stevens-Hoare also referred to paragraph 5-041 of Chitty, supra, which says:
  86. "If any party entered the contract relying on his own self induced mistake rather than any misrepresentation by the other, he will only wish to argue that the contract is void."
  87. I will therefore order specific performance of the contract to sell the freehold in 66 Leytonstone Road, London E11 subject to the Claimant executing a 125 year lease to the Defendants at a rent of 100 in respect of each of the First Floor Flat and the Ground Floor Flat.
  88. I will hear the parties as to costs and any other consequential matters.


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