Sale of block of flats – Attempt to avoid tenant pre-emption rights under Landlord and Tenant Act 1987 by vesting block in subsidiary company and contracting to sell controlling shareholding – Whether contractual obligation to transfer shares put an end to subsidiary status
In 1965 Taylor Woodrow Property Company Ltd (TWP) acquired a large block of flats on the Marylebone Road in London and in 1992 entered into an agreement to sell the same to a subsidiary company, Taylor Woodrow Development Ltd (TWD), which thereby became sole beneficial owner of the block. Later that year the second defendant was incorporated under the name Jaguar Properties Ltd (Jaguar) as the wholly-owned subsidiary of TWD. In early 1993 TWD agreed in principle to sell the block to Frogmore Estates plc (Frogmore) for £15,750,000 and to effect the transaction in such a manner that it would operate under section 4(2)(l) of the Landlord and Tenant Act 1987 as a disposal to an associated company and consequently not as a ‘relevant disposal’ giving rise to tenants’ statutory rights of pre-emption. To that end TWD entered into two agreements on February 26 1993, the first with Jaguar who would buy the block for £15,750,000 with funds to be furnished by TWD; the second with Frogmore who would, conditionally upon prior completion of the sale to Jaguar, acquire TWD’s shareholding in Jaguar and take certain measures to ensure repayment of the loan by TWD. On March 25 1993 both the block and the shares were transferred in the order agreed upon. Shortly afterwards Jaguar changed its name to Harley House (Marylebone) Ltd. In October 1996, after protracted correspondence between solicitors, the plaintiff tenants brought proceedings claiming, inter alia, that the transfer of the block to Jaguar fell outside section 4(2)(l) because Jaguar ceased to be a subsidiary of TWD as from February 26 1993 when TWD became contractually bound to part with its shareholding.
Held The action was dismissed.
1. Under section 736 of the Companies Act 1985 a company is a subsidiary company of another where the other holds a majority of the voting rights . However, by section 736A rights held by a person in a fiduciary capacity shall be treated as not held by him. In arguing that section 736A applied, the plaintiffs had correctly contended that Frogmore had acquired as from February 26 1993 a specifically enforceable right to call for the transfer of the shares and had thus acquired a species of equitable ownership thereof. The contractual condiditions did not (as the defendants had argued) create a bar to specific enforcement as they were capable of being satisfied by the parties themselves and accordingly did not operate as conditions precedent to enforcement: see Eastham v Leigh London & Provincial Properties [1971] Ch 871.
2. However the shares were not held on an ordinary trust. Even where the shares are the subject of a specifically enforceable contract it is the vendor who can decide how to cast the relevant votes and he is not subject to any direction from the purchaser, it being immaterial that he could be restrained by injunction from exercising that right in a manner inconsistent with the contract: see Musselwhite v CH Musselwhite & Son Ltd [1962] Ch 964.
John Mowbray QC and Edward Cousins (instructed by Merriman White) appeared for the plaintiffs; Kim Lewison QC and Anthony Tanney (instructed by Titmuss Sainer Dechert) appeared for the defendants, Harley House (Marylebone) Ltd; Anthony Trace (instructed by McKenna & Co) appeared for Taylor Woodrow Property and Development companies; the first defendant, Frogmore Estates plc, was dismissed from the action previously.
