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Verba ita sunt intelligenda ut res magis valeat quam pereat (Validate where possible) 4 February 2014

It’s every solicitor’s nightmare.  You complete a lease, or a licence, or a deed of variation, and then a third party claims that it does not achieve what you intended it to achieve.  Typically, the third party is a potential buyer who needs to be 110% satisfied (as modern parlance would have it).  What do you do ?

There seem to be only two practical options.  The first is to approach the second party (typically a tenant), cap in hand, and ask for the document to be amended (at your expense).  In an extreme case, a completely new document needs to be completed – such as where a contracting-out process has gone awry, and the lease has already been completed.

The second approach is to tell the third party to live with the problem (and, in the worst case, to provide an indemnity for any loss arising out of the error – but that is best avoided if possible).  The attraction is obviously there is no need to go back to the tenant (in the example above) – who may not have spotted that anything was wrong in the first place.

The recent case of Pavilion Property Trustees Ltd v Permira Advisers LLP [2014] EWHC 145 (Ch), decided on 30 January 2014, demonstrates that there is a viable third option – to apply for a declaration that the document does what you intended it to do in the first place.  That has always been a theoretical possibility, but the courts are reluctant to opine on the meaning of a document that involves two people without giving them both the opportunity to put forward their points of view.

In this case, the document in question was a strangely worded authorised guarantee agreement (AGA) that appeared to make the guarantor liable for the defaults of not just the assignee of the lease, but the next assignee as well.  At least, that was apparently what the document was trying to do although there was considerable doubt as to whether it actually achieved it on its wording.  But of course an AGA is valid only to the extent that it complies with section 16 of the 1995 Act, so it cannot require the outgoing tenant’s guarantee to continue past the first assignment.

Unusually, Morgan J (who was of course a silk at Falcon Chambers before being elevated to the bench) agreed to decide on the meaning of the guarantee, despite only one of the parties being represented.  He decided that it was appropriate to act in accordance with the maxim that is being used as the title to this blog entry – Verba ita sunt intelligenda ut res magis valeat quam pereat  (or “Validate where possible”).  On that basis, it was clear what the badly drafted AGA was intended to achieve (ie only what is permitted under section 16), and the deed was construed accordingly.  On that basis, the AGA was valid.

However, Morgan J did consider an ingenious alternative solution: section 25 allows severance of any provisions that go beyond what is permitted, by (in this case) invalidating any term [only] “to the extent that” it does not comply with section 16.   On that basis, the provisions of the guarantee that arguably were not permitted within an AGA were struck out using the “blue pencil” test, leaving the remainder of the document valid.

So it turned out that (with a bit of expert judicial assistance, and a fair amount of expense, presumably), the AGA was valid.  But it would have been far more preferable to have drafted the AGA correctly in the first place, taking heed of what is permitted by section 16 – and what most definitely is not permitted.

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