The NSW Court of Appeal, in Mayo v W & K Holdings[1], has rectified the terms of a lease where they conflicted with the common intention of the parties.

"Rectification is only available to reform the parties’ documents, but not to reform the parties’ bargain."

Snapshot of the decision

  • Where the effect of a lease agreement differs from the common intention of the parties, the agreement may be varied so as to correct this.
  • A court will more readily rectify an agreement where the terms of the agreement are not clear.
  • Rectification can only be used to change an agreement to reflect the common intention of the parties; it cannot be used to fix an “unfair” bargain or terms regretted by one or more parties.

What do you need to do?

  • Ensure the terms of your lease agreements are carefully drafted, and contain no internal inconsistencies. Lack of clarity makes it easier for a court to interpret an agreement by looking to evidence of common intention in the negotiation of the agreement, rather than the words of the agreement itself.
  • If you intend to rely on common intention rectify an agreement, ensure that you prove the intention of both parties. Inferences as to the parties’ intentions are insufficient to allow for rectification.

The facts

W&K Holdings (NSW) Pty Ltd (WK) was unable to secure financing to lease several items of commercial equipment.

Ms Mayo leased the commercial equipment to WK on favourable terms. These leases were effectively finance leases, as they fully compensated Mrs Mayo for her costs in acquiring the equipment, which would, in practice, belong to WK after the last rent payment was made.

There were three clauses of the leases that were in contention.

  • The first was whether “flat” (i.e. simple) or “reducible” interest was payable. The formula used to describe the calculation of interest implied that reducible interest was to be charged (the term used in the lease agreement was “9% diminishing value”). The payment schedule suggested that flat interest was to be used, which was inconsistent with the formula.
  • The second was whether incorrect GST calculations were binding on both parties.
  • The third was whether a $10 a month bank fee was payable.

Findings of the Courts

The Supreme Court[2] found a common intention for reducible interest, correct GST and no fees, rectifying the leases appropriately.

  • The Court’s finding on reducible interest was based on Ms Mayo’s evidence that she wanted to be paid 2% more than her home loan rate, which she used to finance her acquisition of the equipment. Mr Leonard (the sole director and proprietor of WK) held a similar understanding. Since the home loan rate was calculated on the basis of reducible interest, this was sufficient to show common intention to reducible interest.
  • The Court found that, despite the incorrectly calculated payment schedule, there was a common intention for correct GST calculation. This overrode their intention to be charged according to the repayment schedule.
  • The primary judge further held that Ms Mayo did not have an intention to profit from the transaction, but rather an intention to support the continued operation of the company, because of her relationship with it. The consequence being, since the $10 bank fee was in excess of what Ms Mayo was being charged, the fee was contrary to the common intention of the parties. The Court rectified the contract to remove the fee.

The Court of Appeal largely upheld the decision of the primary judge, except for overturning the ruling on bank fees. This was on the basis that there was not enough evidence to show common intention. There was evidence of Ms Mayo’s intention not to profit. Mr Leonard’s counsel submitted that the court could infer that Mr Leonard did not intend to be charged a bank fee. The Court of Appeal said that such inferences were insufficient: there must be express evidence of the intention of both parties to show that there was a common intention sufficient to provide for rectification.