The Upper Tribunal has agreed to correct a lease where one party had taken advantage of the other's mistake to create a perpetually renewable lease.
Commercial leases often contain an option to renew. This option allows a tenant to renew its lease for a further term on the same or similar terms and conditions. However, both the further term granted and the number of times it can be renewed are usually limited for good reason.
In Palo Alto Ltd v Alnor Estates Ltd the tenant of an office unit with a yearly rent of £3,120 inadvertently secured a lease which could, effectively, last forever.
It was the landlord's practice to grant short leases in a simple form. The tenant was offered a one year term and told that if it wanted a lease for three years (which it did) the lease would need to be drafted by solicitors, and the tenant (for unknown reasons) did not want to involve solicitors. So, the parties agreed that the tenant would take a lease for a term of one year but would have the option to renew it.
The landlord's agents sent a two page lease to the tenant containing an option to renew. The tenant amended the draft lease and sent it back.
The relevant clause, with the tenant's amendments, read as follows:
'The tenancy is granted for a period of one year with an option to renew at the end of the term/or a further one year on the same provisos and agreements as are herein contained including the option to renew such tenancy for a term of one year at the end thereof. '
The lease was completed and, subsequently, the tenant applied to HM Land Registry to register the lease as a lease for a term of 2000 years.
The reason it did so was that the lease permitted renewal but contained no limitation on the amount of times it could be renewed. Accordingly it was 'perpetually renewable' and under section 145 and Schedule 15 of the Law of Property Act 1925, it was converted to a 2000 year term.
Understandably, the landlord objected and it applied for rectification of the lease on the basis that it was only intended to permit a maximum of two renewals
When the dispute was heard by the First Tier Tribunal the judge recognised that "a perpetually renewable lease is a disastrous encumbrance on a landlord's title unless.it happens to make provision for a market rent throughout its life-span".
The First Tier Tribunal held that there had been a unilateral mistake by the landlord and ordered the lease to be rectified such that it would only be renewable twice so as to permit a maximum letting period of three years.
The judge found that the tenant had taken advantage of the landlord's agents, knowing perfectly well what he was doing. The amendments he had made to the renewal clause had a very different effect from that which had been discussed and to which the landlord was agreeable.
The tenant appealed but lost, again, in the Upper Tribunal.
On appeal, the tenant argued that the First Tier Tribunal judge had been wrong to find there was a unilateral mistake because such a finding required dishonesty by the tenant and the tenant had not been dishonest.
The Upper Tribunal concluded that where the defendant was found to have actual knowledge of the mistake made by the other party, this was sufficient for unilateral mistake; dishonesty was not required. The judge had been sure that the tenant had actual knowledge of the mistake the landlord's agents were making in accepting its amendments to renewal clause in the lease and that was sufficient to find in favour of the landlord and to rectify the agreement.
In any case, the Upper Tribunal said that it would have found dishonesty to have been established on the facts because the tenant's failure to explain the effect of its amendment to the landlord's agents amounted to dishonest conduct.
It can be tempting for parties to believe that the smaller a property, the lower the rent or the shorter the term, the less need there is to have professionally drafted documents. The facts of this case prove how wrong this is.
Options to renew always require very careful drafting, particularly to avoid the unintended consequence of the lease becoming perpetually renewable.
Palo Alto Ltd and Others v Alnor Estates Ltd (Land Registration)  UKUT 231 (TCC) (31 July 2018)