Harvey v Facey

B e f o r e :

LORD JUSTICE MAURICE KAY Vice President of the Court of Appeal, Civil Division LORD JUSTICE LONGMORE and SIR JOHN CHADWICK ____________________

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(Transcript of the Handed Down Judgment of WordWave International Limited A Merrill Communications Company 165 Fleet Street, London EC4A 2DY Tel No: 020 7404 1400, Fax No: 020 7404 1424 Official Shorthand Writers to the Court)

Mr Nicholas Dowding QC and Mr Ciaran Keller (instructed by Nabarro LLP Solicitors, Lacon House, 84 Theobald's Road, London WC1 8RW) for the Appellant Mr John Martin QC and Miss Joanne Wicks QC (instructed by Collyer Bristow LLP 4 Bedford Row, London WC1R 4DR) for the Respondent Hearing date: 28 July 2010 ____________________

HTML VERSION OF JUDGMENT ____________________

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Sir John Chadwick:

This is an appeal from the order made on 19 February 2010 by Sir Edward Evans-Lombe, sitting as an additional judge in the Chancery Division, on the trial of preliminary issues in proceedings brought by Crest Nicholson (Londinium) Limited ("Crest") against Akaria Investments Limited ("Akaria") and another.

So far as material, the judge held that for the purposes of a profit sharing provision in a development agreement made between the parties:

The issue raised by the appeal is whether the judge was correct to take that view. The appellant, Akaria, contends that the judge should have held that the open market rent for each un-let unit as at 13 March 2008 had not been agreed; and so remained to be agreed between the parties or to be determined by the expert to be appointed under the provisions of the development agreement.

The development agreement

The development agreement is dated 27 February 2004. It was made between Akaria (therein described as "the Owner"), Crest (then known as Crest Nicholson (London) Limited and described as "the Developer") and Crest's parent company, Crest Nicholson Operations Limited, as guarantor for Crest's obligations. The agreement contained the terms upon which Crest would develop property adjoining the Plough Roundabout, Hemel Hempstead, of which Akaria was the leasehold owner, by carrying out the Works and letting the Buildings as therein provided. The development was to be known as "the Riverside Development".

Clause 11 of the development agreement required Crest to carry out and complete the Development in accordance with the Approved Construction Documents with a view to achieving a Final Practical Completion Date by 29 September 2005. Clause 14 provided for the issue of a Final Certificate of Practical Completion. Clause 18 provided for the letting of the Development. In particular, clause 18.2.1 required Crest to seek prospective occupational tenants in the open market for each of the Unlet Units at the open market rent reasonably obtainable and to use reasonable endeavours to obtain the Target Rent for each Unlet Unit.

In that context, "Target Rent" (so far as material) meant the rent attributable to each Unit as listed in the relevant column at Schedule 4 to the agreement. Schedule 4 takes the form of a spread sheet, described on its face as "Riverside –Hemel Hemstead – Funding Rent Schedule", on which there are listed (in the rows) the individual units in the Buildings comprising the Development and (in the columns) information as the area and the estimated rental value (ERV) of each of those units. It is common ground that the "relevant column" for the purpose identifying the Target Rent is that headed "Say" immediately adjacent to the column in which the ERVs are set out. The figures in that column are a rounding up (or down) of the ERVs.

Clause 19 contained provisions under which 92 per cent of the profit derived from the Development would be paid to Crest, as Developer. In broad terms profit is calculated by deducting expenditure from a capitalised value of the rents achieved on letting the units. Put shortly, the provisions contemplate three stages. First, the calculation, agreement and payment of an Initial Profit Payment when the capitalised value of rents achieved in respect of leases then completed first exceeds the expenditure in completing the Development: clauses 19.5 and 19.6. Second, the calculation and payment of further Profit Payments on the dates of the subsequent letting of each Unit not included in the computation of the Initial Profit Payment: clause 19.7. Third, the calculation and payment of a Profit Payment in respect of Units where no lease has been completed by the date which is two years after the Final Practical Completion Date: clause 19.8. The multiplier to be applied in capitalising the rents for the purpose of the calculations to be carried out in respect of the first two stages is 14.59 (reflecting a gross yield of 6.85 per cent); the multiplier in respect of the third stage is 12.5 (reflecting a gross yield of 8 per cent). There are provisions for additional Profit Payments in respect of Overage (that is to say, where the rents receivable from a letting exceed the Target Rent for the relevant Unit: clause 19.10) and in respect of certain other matters which are not material in the present context.

The issue on this appeal arises in connection with Clause 19.8.1. The clause is in these terms:

The Final Practical Completion Date was 13 March 2006. Accordingly, 13 March 2008 was the relevant date for the purposes of clause 19.8 (as reflected in the order which the judge made).

The Lease in the Agreed Form is set out in the First Schedule to the development agreement. The Fourth Schedule to that form of lease contains provisions relating to the method of assessment of the rent payable thereunder. It is common ground that the reference in clause 19.8.1 to paragraph 1 of that schedule is in error: paragraph 1 is concerned with the rent period. It is paragraph 2 which defines the "annual rack rent value". It means the yearly rent reasonably obtainable for the Premises at the relevant date.

Clause 19.1 requires that, for the purpose of clause 19, reference to the Owner shall be deemed to mean reference to the Owner's Asset Manager "who shall act on the Owner's behalf". The Owner's Asset Manager is defined in the development agreement to mean Aberdeen Property Investors ("Aberdeen"). The judge found that Akaria employed Aberdeen to manage its investment in the Riverside Development pursuant to an agreement of 24 July 2002; and that Crest had no direct dealings with Akaria, but dealt exclusively with Aberdeen.

The letter of 21 June 2007

As I have said, the issue on this appeal is whether, as the judge held, the open market rent for each Unlet Unit to which clause 19.8.1 of the development agreement applies was agreed between the Owner and the Developer to be the figures shown in the schedule to a letter dated 21 June 2007. That was a letter written by Mr Duncan Tindale, an employee of Crest, to Ms Helen Smith, an employee of Aberdeen. The letter followed a meeting between them on 8 June 2007. The judge set out their respective accounts of what had taken place at that meeting in paragraphs 25 and 26 of his judgment, [2010] EWHC 243 (Ch) . It is not, I think, necessary for me to do so in this judgment.

It is, however, necessary, to set out the letter of 21 June 2007:

The "updated Target Rent schedule" to which Mr Tindale referred in the penultimate paragraph of that letter was a revised and updated version of the Funding Rent Schedule which had been incorporated in the development agreement as Schedule 4. The column formerly headed "Say" had been re-headed as "Target Rent". The "remaining un-let units", as at the date of the letter, can be identified from the updated schedule; which contains particulars of the actual rents achieved (and the capitalised values of those rents) in respect of the units which had then been let.

Ms Smith responded to that letter by an e-mail dated 26 July 2007:

A "turnover deal" may, I think, be taken to be a reference to the letting of a unit by way of a Turnover Lease: that is to say, a lease under which a portion of the rent reserved is calculated by reference to the occupational tenant's turnover from the demised premises. Clause 19.9 of the development agreement makes provision for an adjustment to the Profit Payment in respect of a letting by way of a Turnover Lease.

Mr Tindale's replied to that e-mail on 30 th July 2007:

Subsequent events

As the judge explained, at paragraphs 30 to 38 of his judgment, during the period from July 2007 until March 2008, when Mr Tindale left his employment with Crest, he and Ms Smith dealt with each other on the basis that it was common ground that the rents to be adopted in respect of unlet units, for the purposes of the calculation to be made pursuant to clause 19.8.1, would be the Target Rents shown in the schedule to the letter of 21 June 2007. In particular, an e-mail sent by Ms Smith to Mr Tindale on 27 February 2008 – and his reply sent on 10 March 2008 – agreeing a variation to the rents to be adopted in respect of units A5 and C4 assumes that, absent the agreed variation, the Target Rents would be adopted. That assumption seems to have persisted, following Mr Tindale's departure, until 31 March 2008.

On 31 March 2008 Ms Smith sent an e-mail to Mr David Clark, who had taken over Mr Tindale's responsibilities for the Riverside Development, in which she raised "two more points . . . on the Development Agreement following advice from Nabarros". As she observed, those points "will have a significant effect on the numbers". The second of those points was:

The judge's reasons

The judge set out the contentions which had been advanced before him at paragraphs [47] and [48] of his judgment:

The judge accepted the analysis in the first of those paragraphs. His reasoning may, I think, fairly be summarised as follows:

The judge concluded (at paragraphs [65] and [66] of his judgment):

The alternative approach to which the judge referred in paragraph [66] of his judgment was that earlier identified when, at paragraph [48], he had set out the case advanced before him by Akaria: that, on the evidence, either or both of Mr Tindale and Ms Smith, when engaged in the correspondence to which he had referred, did not intend to make a contract, in other words they did not intend to create a legal contractual relationship between them. He rejected that submission "for all the reasons already set out in this judgment for rejecting Akaria's submissions on the effect of the letter of 21 st June". As he said, at paragraph [68] of his judgment:

The grounds of appeal

Akaria appeals on the ground that the judge was wrong to hold that the letter of 21 June 2007 included an offer made by or on behalf of Crest to agree that, for the purpose of the function "a" in clause 19.8.1 of the development agreement, rents shown as Target Rents in the schedule to that letter should be treated as the open market rents of units which remained unlet as at 13 May 2008. In oral and written submissions, that ground was developed under number of heads; but, in essence, Akaria relies on the following points:

(1) In considering whether the letter of 21 June 2007 contained an offer by Crest to agree that the rents shown as Target rents in the schedule should be treated as the open market rents in respect of unlet units for the purposes of clause 19.8.1 of the development agreement, the judge applied the wrong test in law. It is said that the judge confused the approach to be adopted to the construction of a contract – recently re-affirmed in Chartbrook v Persimmon – with that to be adopted in a case where the question is not "what did the parties intend by the words used in the agreement which they made" but rather "was there an offer capable of being accepted by the offeree". It is said that the correct approach, in the latter case, is to ask whether the offeree, acting reasonably, would understand that the offeror was making a proposal to which he intended to be bound in the event of an unequivocal acceptance. Reliance was placed on Harvey and another v Facey and others [1983] AC 552 and Schuldenfrei v Hilton (Inspector of Taxes) [1998] STC 404.

(2) On a proper reading of the letter of 21 June 2007 the statement in the penultimate paragraph that the updated Target Rent schedule ". . . shows the open market rent for the remaining un-let units . . ." is no more than a statement by Mr Tindale as to what he thought the legal or factual position was under the existing development agreement. On a true analysis his understanding was incorrect: Target Rents were not equated with open market rent under the development agreement and there had, in fact, been no subsequent agreement (prior to the letter of 21 June 2007) that they should be. A statement by a party to an already existing contract which (incorrectly) purports to set out the legal effect or factual position under that contract is not, without more, to be taken as an offer to be bound by the position as stated. The request for confirmation, in the final paragraph of the letter, that "the above correctly reflects the agreed position", does not (when read in the context of the letter as a whole) invite agreement to a statement in relation to a matter which has not been previously agreed (or even discussed) and which (as an interpretation of the underlying agreement) is incorrect.

(3) Whether the letter of 21 June 2007 contained an offer by Crest to agree that the Target Rents shown in the schedule should be treated as the open market rents of properties which remained unlet as at 13 March 2008 was to be determined by reference to the letter itself, construed in the light of facts then known to the parties, and not by reference to their subsequent conduct.

The correct approach

Some support for the proposition that the correct approach, in determining whether a statement by A to B amounts to an offer capable of being accepted by B, is to ask whether a person to whom that statement was made, acting reasonably, would understand that A was making a proposal to which he intended to be bound in the event of an unequivocal acceptance is to be found in the decision of the Privy Council in Harvey v Facey [1893] AC 552 . The facts are set out, succinctly, in the headnote to the report:

The Privy Council held that there was no contract. The final telegram was not the acceptance of an offer to sell, for none had been made. In delivering the judgment of the Board, Lord Morris pointed out that the first telegram had posed two distinct questions. The appellants had to contend that the second telegram should be read as if it contained an affirmative answer to the first of those questions. But there was nothing to support that contention. As he said ( ibid, 565-6):

We were taken, also, to the decision of Mr Justice Neuberger in Schuldenfrei v Hilton Inspector of Taxes) [1998] STC 404. In the present context, the relevant question was whether an amended notice of assessment issued by the Revenue contained an offer which was capable of acceptance by the taxpayer for the purposes of section 54 of the Taxes Management Act 1970. Mr Justice Neuberger held that it did not. He said this ( ibid, 421 h –422 a ):

In the Court of Appeal, [1999] STC 821, Mr Justice Jonathan Parker (who gave the lead judgment) agreed with that view. He said this ( ibid , 831 a- e ):

We were taken, also, to Chitty on Contracts (Thirteenth Edition, volume 1). At paragraph 2-003 an offer is defined as "an expression of willingness to contract on specified terms made with the intention (actual or apparent) that it is to become binding as soon as it is accepted by the person to whom it is addressed". It is enough that the intention to be bound appears from the words used: "the alleged offeror (A) may be bound if his words or conduct are such as to induce a reasonable person to believe he intends to be bound, even though in fact he has no such intention".

In my view the appellant is correct to draw a distinction between the court's task when seeking to ascertain the parties' intention under the terms of a contract which both accept has been made and the court's task when seeking to determine whether or not a contract has been made at all. In the former case the question is "what did the parties intend by the words used in the agreement which they made": in the latter, the questions are (i) "was there an proposal (or "offer") made by one party which was capable of being accepted by the other" and, if so, (ii) "was that proposal accepted by the party to whom it was made". In determining the first of those questions – was there a proposal made by one party (A) which was capable of being accepted by the other (B) – the correct approach is to ask whether a person in the position of B (having the knowledge of the relevant circumstances which B had), acting reasonably, would understand that A was making a proposal to which he intended to be bound in the event of an unequivocal acceptance.

Identifying the relevant "offer" in the present case

As the judge explained, at paragraph [47] of his judgment, the submission advanced on behalf of Crest was that the letter of 21 June 2007 contained an offer by Mr Tindale (on behalf of Crest) to treat the Target Rents shown in the schedule in respect of units then unlet as the market rents of those units (if remaining unlet on 13 March 2008) for the purposes of clause 19.8.1 of the development agreement. But it was not submitted that that offer was the subject of an unequivocal acceptance by Ms Smith (on behalf of Aberdeen) in her e-mail dated 26 July 2006. Rather, it was said ( ibid ) that "the response of Ms Smith by e-mail dated 26 th July 2007 . . . , by adding a provision relating to turnover rents, constituted a counter-offer". On Crest's analysis the contract was formed by "Mr Tindale's agreement to the proposal relating to turnover rents by e-mail dated 30 th July 2007 which constituted acceptance of that counter-offer". The judge must, I think, be taken to have accepted that analysis. His conclusion, at paragraph [66] of his judgment, was that "the Documents constitute a contract which had the effect, inter alia, of fixing the market rents in respect of unlet units for the purposes of the calculation of final profit payment under clause 19.8.1". In that context "the Documents" has the meaning which he had given to that expression at paragraph [47]: it meant the letter of 21 June 2007 and the two e-mails of 26 and 30 July 2007.

If that analysis were correct, then the relevant offer would not be found in Mr Tindale's letter of 21 June 2007; but, rather, in Ms Smith's e-mail of 26 July 2007. It is necessary, therefore, to examine the terms of that e-mail. So far as material Ms Smith wrote:

But it is, as it seems to me, far from clear that Ms Smith's e-mail of 26 July 2007 contained any other proposal to which she invited acceptance: in particular, it is far from clear that her e-mail contained a counter-proposal to the effect that she would agree the proposals in Mr Tindale's letter of 21 June 2007 if, but only if, he agreed her proposal in respect of the treatment of turnover rents. There is nothing in the e-mail of 26 July 2007 which suggests that her agreement (in the first sentence of that e-mail) to the proposals in Mr Tindale's letter is conditional on his agreement to her proposal (in the second sentence of that e-mail) as to turnover rents. And it is plain that Mr Tindale did not understand her e-mail in that sense. The first sentence of his e-mail of 30 July 2007 acknowledged Ms Smith's "confirmation on these development issues" – that is to say, acknowledged her agreement to the proposals in his letter of the 21 June 2007. The second sentence (which I have just set out) begins with the words "In addition . . .".

It seems to me, therefore, that the analysis of offer, counter-offer and acceptance – in relation to the treatment of Target Rents as market rents of unlet units for the purposes of clause 19.8.1 of the development agreement - is incorrect. The correct analysis is that Ms Smith's e-mail of 26 June 2007 contained an unequivocal acceptance of "the proposals set out" in Mr Tindale's letter of 21 June 2007. The relevant question is whether that letter contained a proposal – in respect of which Ms Smith's acceptance was invited and required – in relation to the treatment of Target Rents as market rents.

Did the letter of 21 June 2007 contain an "offer" in relation to the treatment of Target Rents as market rents of unlet units for the purposes of clause 19.8.1 of the development agreement?

In my view, the answer to that question is "No". I am led to that conclusion for the following reasons.

The final paragraph of the letter of 21 June 2007 invites confirmation that "the above correctly reflects the agreed position". That final paragraph must, of course, be read in the context of the letter as a whole. But, unless and to the extent that the context requires some different meaning to be given to the words used in that paragraph, they seek confirmation that what has gone before reflects, or records, matters which have already been agreed: they do not invite agreement de novo to matters which have not already been agreed.

In particular, the invitation in the final paragraph must be read in conjunction with the first paragraph of the letter, which explains its purpose. The purpose is (i) "to set down the approach that we have agreed for further leasing in the time remaining under the Agreement down to the second anniversary of the Final Practical Completion Date i.e.13 March 2008" ; (ii) "[to set down] . . . the way that this [further leasing down to 13 March 2008] will be treated in terms of the Development Agreement"; (iii) "to confirm the position in terms of Overage"; and (iv) [to confirm the position in terms of] . . . the potential letting of an ATM within Unit B7". The treatment of Target Rents as market rents of unlet units for the purposes of clause 19.8.1 falls within none of those four purposes.

Each of the four specified purposes is developed in a separate section under an appropriate heading. Those headings are: "Leasing"; "This means that in terms of the Development Agreement"; "Overage"; and ATM-Unit B7". There is nothing in the those headings to suggest that any of the four sections is intended to introduce a further purpose in addition to the four which have been identified in the first paragraph.

The first section ("Leasing") contains two paragraphs. The first of those paragraphs records the instructions which – it is said in terms - have already been agreed should be given to letting agents in respect of units then unlet: in particular, that the units should be marketed with "incentive packages ranging up to two years rental equivalent". The effect of extending the incentive to be offered to lessees from the nine months rental free equivalent anticipated in schedule 4 to the development agreement (the original Funding Rent Schedule) – a cost which, under the development agreement would be borne by Crest - was that agreement was required as to which of Crest and Akaria would bear the additional cost. Agreement on that point is recorded in the second paragraph of the first section. The judge made no express finding that that point had been agreed at the meeting on 8 June 2007; but appears to have accepted (in the second sentence of paragraph [54] of his judgment) that it had been.

The second section of the letter of 21 June 2007 ("This means that in terms of the Development Agreement") explains how effect will be given to the agreement that Akaria will bear the additional cost of a extended incentive package (recorded in the first section) in applying the capitalisation provisions in clauses 19.5.1 and 19.7. The judge found (at paragraph [54] of his judgment) that there was no evidence of any discussion, at the meeting on 8 June 2007, as to how effect would be given, in applying those capitalisation provisions, to the agreement that Akaria would bear the cost of an additional equivalent rental period; but, as it seems to me, discussion on that matter was unnecessary. If Akaria was to bear that cost, it would follow, necessarily, that the additional equivalent rental period would have to be disregarded in the calculation of factor "d" in clause 19.5.1 and its equivalent, factor "c", in clause 19.7. The judge thought that the explanation in the second section of the letter "could be controversial". I think he was wrong to take that view: it seems to me to be an explanation of the obvious. If Akaria was to bear the cost of an additional equivalent rental period, then it was plainly necessary to exclude that additional period from the expenditure which was to be taken into account in calculating profit shares. That is the effect of disregarding the additional equivalent rental period in the calculation of factor "d" in clause 19.5.1 and in the calculation of factor "c" in clause 19.7. It follows that, in inviting Ms Smith to confirm agreement with the second section of his letter, Mr Tindale was doing no more than seeking her acknowledgement as to the necessary consequence, in the context of applying the capitalisation provisions in clauses 19.5.1 and 19.7, of the agreement recorded in the first section.

The expressed purpose of the third section of the letter of 21 June 2007 ("Overage") is "to properly record what I understand to be the agreed position between us as to the treatment of Overage . . .". The judge noted that it was common ground that the treatment of Overage had not been discussed at the meeting on 8 June 2007; but it had been the subject of an earlier exchange of e-mails between Mr Ian White (of Crest) and Mr Tim Turnbull (of Aberdeen). As the judge observed (at paragraph [56] of his judgment), Mr Tindale's letter seeks confirmation from Ms Smith "that his understanding of the past agreement of the parties as to how overage is to be treated for the purposes of the final profit payment is correct". There is nothing in the third section of the letter to suggest that Mr Tindale was inviting Ms Smith to agree something that had not already been agreed.

The expressed purpose of the fourth section of the letter of 21 June 2007 ("ATM – Unit B7") is to address a matter on which agreement is needed in respect of the proposed letting of an ATM Unit which is to be carved out of Unit B7. It records that – as is common ground – the proposed letting at a rent of £12,000 per annum had been "previously discussed" – and that, as previously discussed, "for this deal to progress we need confirmation that this income is to be capitalised at the full 14.59 multiplier and that the Target Rent on the balance of Unit B7 remains at £101,000." An "updated Target Rent schedule" is attached, which it is said, correctly, "reflects this change". Thus far, it is plain that Ms Smith is invited in the fourth section of the letter to confirm that, in relation to a matter already discussed, the income from the letting of the ATM is to be capitalised at the rate applicable under clauses 19.5.1 and 19.5.7; and that there is to be no corresponding diminution in the Target Rent which had appeared (in the schedule 4 to the development agreement) in respect of Unit B7.

There follows, in the third sentence of the fourth section of the letter of 21 June 2007, the statement on which Crest relies:

A statement that the open market rents, as at 13 March 2008, ascertained or agreed in respect of units which remained unlet as at that date would be capitalised by applying a multiplier of 12.5 under the provisions of clause 19.8.1 of the development agreement is, again, a statement of the obvious: that is what clause 19.8.1 provides. A statement that the updated Target Rent schedule "shows the market rents for the remaining un-let units" is plainly incorrect. The schedule attached to the letter does not show market rents: it shows Target Rents (as had already been recognised in the immediately preceding passage of the letter in respect of Unit B7). "Target Rents" and "open market rents" are distinct concepts: each carefully defined in the development agreement. They are not interchangeable descriptions of the same concept.

How, then, should the statement that the updated Target Rent schedule shows the open market rents for the remaining unlet units be understood by a person in the position of Ms Smith? Such a person must be taken to know (i) the relevant provisions of the development agreement and (ii) that there has been no previous agreement (other than that, as required by clause 19.8.1, they should be determined by the Rental Expert in default of agreement), or even discussion, as to what the open market rents for the units remaining unlet as at 13 March 2008 should be. It seems to me that the only answer to that question that can be given with any confidence is that the properly informed reader would appreciate that the statement was incorrect. It was incorrect (i) because the updated Target Rent schedule showed Target Rents not open market rents; (ii) because the concepts were not interchangeable; (iii) because (absent agreement) Target Rents were irrelevant for the purposes of the capitalisation required under clause 19.8.1 and (iv) because there had been no agreement (as contemplated by clause 19.8.1) as to what the open market rents as at 13 March 2008 should be. The properly informed reader, acting reasonably, would appreciate that Mr Tindale had made a mistake: although he, or she, could not be confident which, out of a number of possible, misapprehensions had led to that mistake.

The answer which Crest submits the Court should give to the question just posed - how should the statement that the updated Target Rent schedule shows the open market rents for the remaining unlet units be understood by a person in the position of Ms Smith – is that it should be understood to be an invitation to agree to a proposal, advanced for the first time and in the absence of any prior discussion, that the Target Rents shown in the schedule should be taken as the open market rents for the purposes of clause 19.8.1. I am satisfied that, when the statement is set in the context of the letter of 21 June 2007, read as a whole, and the discussions which had preceded that letter, that submission must be rejected. I think that the judge was wrong to reach a contrary view.

Subject, therefore, to the point raised by Crest in its respondent's notice, I would allow this appeal.

The respondent's notice

Crest seeks to uphold the judge's conclusion on a basis which formed no part of its pleaded case and which the judge did not address. It is said that, even if the Court were to conclude that, judged objectively, the letter of 21 June 2007 would not have been understood by an informed reader to include an invitation to agree to a proposal that the Target Rents shown in the schedule should be taken as the open market rents for the purposes of clause 19.8.1, that was how the letter was, in fact, understood by Ms Smith; and that her subjective understanding, taken with Mr Tindale's subjective intention, was a sufficient basis upon which to conclude that there was a contract.

It is unnecessary to express a view, on this appeal, on the question whether mutuality of subjective intention and understanding – not communicated between the parties – could form the basis of a contract. I should not be taken to accept that it could do so. The question does not arise on this appeal because there is no sufficient evidential basis for a submission that Ms Smith did, in fact, understand that she was being invited to agree to a proposal that Target Rents should be treated as open market rents.

Ms Smith's evidence – at paragraph 32 of her second witness statement, which the judge set out at paragraph [26] of his judgment - was that she did not appreciate at the relevant time that profit payment for unlet units was based upon open market values. Without that appreciation it would have been impossible for her to reach an understanding that the letter of 21 June 2007 was inviting her to agree to a proposal, advanced for the first time and in the absence of any prior discussion, that the Target Rents shown in the schedule should be taken as the open market rents for the purposes of clause 19.8.1.

Although the judge was critical of Ms Smith's evidence in a number of respects (at paragraphs [75] and [86] of his judgment) he did not reject that statement. It is true that, at paragraph [86] he found that "[Ms Smith] would have appreciated the significance of the [21 June 2007] letter's penultimate paragraph that Crest was asking them to agree that the target rent schedule attached to the letter of 21 st June was to be treated as showing market rents for the purpose of the application of clause 19.8.1 of the Development Agreement in the calculation of the final profit payment to Crest". But that finding must be set in the context of the judge's earlier finding at paragraph [66] of his judgment (which, for the reasons I have set out, I would not uphold) that that was what the letter would have conveyed to a reasonably informed reader in the position of Ms Smith. If the earlier finding is flawed, the later cannot be seen as an independent finding as to her subjective understanding of the position.

Conclusion

I would allow this appeal.

Lord Justice Longmore

I agree.

Lord Justice Maurice Kay

I also agree.