Contract - will the court rectify an agreement so that a buyer is released from liability to pay overage?

In this edition of Property Update we are looking at two cases on rectification. In April 2008, we reviewed the case of Oun v Ahmad. This case concerned an application to rectify a sale contract to include additional provisions which the parties had agreed to deal with separately, outside the agreement. The High Court held that the parties' express agreement to omit the relevant terms from the sale contract meant that there was no mistake which could be corrected by rectification.

In Transview Properties Ltd v City Site Properties Ltd, the High Court again had to consider the issue of rectification where terms had been expressly omitted from an agreement. A sale agreement contained provisions for payment of overage to the seller on certain trigger events. However, the parties had also agreed that the overage would not be payable in certain circumstances. The difficulty was that the clause which provided for the abatement of the overage had been deleted from the final form of the agreement.

The buyer claimed that the clause had been deleted without its knowledge, as a result of sharp practice on the part of the seller. It therefore sought rectification of the agreement on the ground of unilateral mistake. The seller argued that the clause had been deleted at the buyer's request, and that the parties had agreed to deal with the matter by side letter instead. Unfortunately two different versions of the side letter were in existence; neither of which had been signed by both parties.

The judge found on the facts that the buyer had requested that the overage abatement clause be deleted from the agreement. This was because the buyer did not want to draw the abatement provisions to the attention of its bank, which was providing the majority of the funding for the purchase, in order to make the purchase price appear higher.

Since the sale agreement was executed in a form which was precisely in accordance with the parties' intentions, the court would not rectify the agreement to include the overage abatement provision. In any event, since the seller's solicitors had sent a draft of the agreement to the buyer's solicitors with the deletion of the clause clearly marked, the grounds for unilateral mistake would not be made out.

Under the side agreement, the obligation to pay overage was to cease if the buyer paid off other debts it owed to the seller by a certain time. The two versions of the side letter differed as to the date by which repayment had to be made. The court found that the agreed form of the side letter was the one in the seller's possession. Under this version, the deadline for payment of the debts, and therefore for abatement of the overage, had passed. On this basis, even if the court had been minded to order rectification to reflect the side letter, it would have been of no assistance to the buyer.

Things to consider

In Oun v Ahmad, the buyer was attempting to force the seller to complete the sale. However, the parties' failure to record all of the terms they had agreed in one document meant that the main contract was unenforceable. This is because section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that a contract for the sale or other disposition of an interest in land must incorporate all the terms which have been expressly agreed between those parties.

In Transview Properties, the dispute arose after completion of the sale. No mention of section 2 was made by the court. There is authority that an obligation on a landlord to contribute to the cost of fit-out works, which was contained in a supplemental agreement to an agreement for lease, remained enforceable even though it was not incorporated into the main agreement. This was because the lease had subsequently been completed (Tootal Clothing Ltd v Guinea Properties Management Ltd (1992)). In that case the Court of Appeal held that section 2 only applies to executory contracts, and has no relevance to contracts which have been completed. This may explain why it was not raised as an issue in Transview Properties.

Nonetheless, it is wise to exercise caution in the use of side letters and to ensure that, where used, they are incorporated into the terms of the main agreement. If they are not, the parties may find themselves unable to enforce the obligation to transfer the property/grant the lease, as well as the side agreement.

This analysis was written by Sarah Allen, associate in Wragge & Co's Real Estate group.

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