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Case law: Lease case illustrates risks of not involving solicitor in drafting legal documents

Parties to commercial agreements, including leases, should ensure the contract documents and any amendments are drafted by a specialist professional, even in what may seem relatively low-value transactions, otherwise they risk potentially disastrous consequences, as a recent case makes clear.

October 2018

This update was published in Legal Alert - October 2018

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

A landlord sent a standard draft lease to a prospective tenant of an office unit. The lease was for a one-year term at a rent of £3,120 per year, but the tenant said it wanted a three-year term. They agreed that they would deal with this by amending the lease so it continued to be for a one-year term, but the tenant would have an option to renew for the next two years, so it could extend the lease to three years if it wished.

The tenant, claiming that it wanted to save solicitors' fees, told the landlord that it could redraft the lease to provide for this. The landlord – perhaps motivated by the fact the lease was a short one at a relatively low rent, so with minimal risk - agreed.

However, the redrafted lease actually gave the tenant the right to renew the lease for ever - it made it a perpetually renewable lease. The law says that a perpetually renewable lease is to be treated as a lease for a term of 2,000 years, so the tenant applied to register it at HM Land Registry as such.

The tenant's amendments did not include any power for the landlord to review the rent during the lease, so if the lease was genuinely for that period, this was disastrous for the landlord. It would only receive £3,120 per year for as long as the tenant renewed the lease.

The landlord, who had signed the lease in the belief it only allowed the lease to run for three years, applied to the lands tribunal to rectify it.

The tribunal found that the lease had only been signed by the landlord because of a unilateral mistake on its part. Further, it found that the tenant had known exactly what it was doing when it redrafted the lease – it had deliberately drafted the changes to take advantage of the landlord. The tribunal therefore ordered that the lease be rectified to provide for a three-year term.

The tribunal rejected the tenant's argument that the lease should only be rectified if the tenant had acted dishonestly, which it said it had not. The tribunal said that dishonesty was not required but, if it had been, it would have found the tenant had acted dishonestly because it had failed to explain the effect of its redrafting to the landlord and its agents.

Operative date

  • Now

Recommendation

  • Parties to commercial agreements, including leases, should ensure the contract documents and any amendments to them, are drafted by a specialist professional, even in what seem to be relatively low-value transactions, otherwise they risk potentially disastrous consequences

Case ref: Palo Alto Ltd v Alnor Estates Ltd [2018] UKUT 231

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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