A case on “corrective interpretation”

A recent case demonstrates that there are clear limits on the powers of the Courts to apply “corrective interpretation” to remedy badly drafted documents. In the case of Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736 the Court of Appeal considered whether corrective interpretation should be used to include a clause which was accidentally omitted from a registered charge over land.

Landmain had borrowed funds from a private lender for the refinancing of a London property which were secured against the property by way of a short Land Registry form of legal charge. The key terms of the loan were contained in a separate facility agreement and the legal charge made no reference to this. One important clause in this facility agreement was the variation and extension of statutory powers of sale conferred on all mortgagees. It is common practice for those powers of sale, as well as other statutory powers, to be extended in the security document.

The lender, arguing that the borrower was in default, sold the property exercising its power of sale under the facility agreement. When the new purchaser of the property, Cherry Tree, sought to register its title with the Land Registry, the borrower objected on the grounds that the legal charge omitted the extended power of sale contained in the facility agreement.

The Court of Appeal had to consider whether the legal charge could be correctively interpreted to incorporate terms contained in the facility agreement notwithstanding that the facility agreement was not specifically referred to. Whilst it was surely the original intention of the borrower and lender that both documents should be read together, the court held that there are limits to the extent that documents can be correctively interpreted. This coupled with the principle that documents on the public Land Registry should be deemed to be complete, certain and reliable by third parties obtaining an accurate state of the property’s title, meant that the charge could not be interpreted to incorporate the extended powers of sale contained in the facility agreement.

The case highlights the fact that great care must always be taken when drafting security documents, facility agreements and other ancillary finance documents. When preparing standard forms, consideration should be given as to what information is included to ensure that the documents contain all appropriate terms the parties might wish to rely upon. Where appropriate, finance documents should cross refer to one another to ensure that key terms are incorporated. The parties should not rely upon the powers of the court to apply corrective interpretation to remedy deficiencies in the drafting.

Mark Carter
September 2012

Please note, this article was published by Rickerbys LLP before merging with Harrison Clark Ltd on 29 April 2013.