Landlord and tenant — Tenants’ association — Sale of Berkeley Court — Landlord and Tenant Act 1987, section 18 — Tenants interested in extension of leases and acquisition of shares in new management company following sale of freehold — Consortium of investors formed to purchase freehold through setting up a new company — Proceedings by plaintiff tenant complaining of unfair treatment in regard to acquisition of share in freehold — Motion by defendants to strike out plaintiff’s writ and statement of claim
Court was a building partly residential, partly commercial, the residential
part consisting of 128 flats, the commercial part including shops, offices,
restaurants, banks and the like — When it was decided to put the freehold on
the market the tenants’ association wished to safeguard the interests of
tenants in negotiations with vendors — Many of the tenants were interested in
the prospect of paying for the extension of their leases of flats to 999 years
and in acquiring shares in a new management company — A smaller number were
attracted by the possibility of purchasing the freehold through a consortium of
investors — The plaintiff, Mr Bhatti, was a tenant of one of the flats —
Tenants were kept informed of developments and prospects by a few of the more
active members of the association — Among other matters, the question of
waiving rights under section 18 of the Landlord and Tenant Act 1987 had to be
brought to the attention of tenants — In the light of the initial interest
shown, tenants were circularised by the association and asked to reply to
specific questions as to their wish to extend their leases and to take up
shares in the management company — They were also asked to say whether they
would be interested in obtaining more information in regard to the purchase of
shares in the freehold of Berkeley Court — The plaintiff received this
communication and replied indicating his interest, including his wish for more
information in regard to the purchase of the freehold
tenants were arranged, one of which was attended by the plaintiff — Later a
letter was sent out to tenants who had completed the reply forms and it
contained, inter alia, an invitation to those expressing an interest in buying
shares in the freehold of Berkeley Court to telephone one of the active
association members — The plaintiff did so and gave the name of his solicitor
for the purpose of the conveyancing required for the extension of his lease —
However, he did not mention his interest in acquiring a share in the freehold,
despite the opportunity given to him to do so — In the end the number of people
interested in the freehold diminished to three and these, together with an
outsider, were the consortium who set up the defendant company to acquire the
freehold — The plaintiff did not obtain a share
plaintiff’s action was against the defendant company and four individual
defendants who had been active in the negotiations and in informing tenants of
the developments — The plaintiff complained of breach of fiduciary duty by the
individual defendants and, as regards the company, of its action in taking the
freehold with knowledge of the alleged breaches — The basis of his complaint
was that, having expressed his interest in purchasing a share of the freehold,
he was entitled to expect some circular or other approach directed to him
indicating the price of a share in the freehold — There was no allegation of
dishonesty or even of negligence — Warner J held that it was inconceivable that
any court would hold any of the defendants liable in damages on such a flimsy
foundation — There was no case against the individual defendants and, as the
case against the company depended on some fault by the individuals, the case
against the company also failed — A New Zealand decision cited on behalf of the
plaintiff, Colman v Myers, was distinguishable
procedure of striking out, as Warner J indicated, could be used only in plain
and evident cases where it could be clearly seen that a claim was ‘obviously
unsustainable’ — The present was such a case — The writ and statement of claim
were ordered to be struck out
The following
case is referred to in this report.
Colman v Myers [1977] 2 NZLR 255
The present
proceedings were motions by the defendants to strike out the writ and statement
of claim in an action by Mohammed Ali Bhatti against Berkeley Court Investments
Ltd and four individual defendants, George Hammer, David Goldring, his wife Mrs
Gloria Goldring, and Tim Corker.
Robert Wright
QC and Miss Ceri Bryant (instructed by Cooke Matheson & Co) appeared on
behalf of the plaintiff; Martin Mann QC and Jonathan Henty (instructed by
Philippsohns) represented the first defendant; James Simeon Thrower (instructed
by Mehrotra & Co) represented the remaining defendants.
Giving
judgment, WARNER J said: I have before me two motions for orders
striking out the writ and statement of claim in this action. The statement of
claim was endorsed on the writ which was issued on September 26 1988. During
the hearing before me, Mr Wright, on behalf of the plaintiff, produced the
draft of an amended statement of claim and indicated that he would seek leave
to amend the statement of claim to accord with that draft. My references to the
statement of claim, unless otherwise stated, will be to it in that amended
form.
The plaintiff
in the action is Mr Mohammed Ali Bhatti. There are five defendants. The first
is a company, Berkeley Court Investments Ltd, which is referred to in the
statement of claim as ‘Investments’ but which I will call ‘Berkeley Court
Investments’. The other four defendants are individuals, namely Mr George
Hammer, Mr David Goldring, his wife Mrs Gloria Goldring and Mr Tim Corker. Of
the two motions, one is by Berkeley Court Investments, the other is by the four
individual defendants.
The action
concerns a building at the junction of Marylebone Road and Baker Street, London
NW1, called Berkeley Court. At all material times up to the issue of the writ,
the freehold of that building was owned by a company called Berkeley Court Ltd.
That company
On September
28 1988, after the issue of the writ, Berkeley Court Ltd contracted to sell the
freehold to Berkeley Court Investments for £9.5m. That contract has not yet
been completed; the contractual date for completion is January 31 1989.
The building
is partly residential and partly commercial. The residential part consists of
128 flats of various sizes. The commercial part includes shops, offices,
restaurants, banks and the like. There is also a roof garden for the exclusive
use of the residential tenants and two basements for parking and services. The
floor area of the residential parts of the building exceeds that of the other
parts so that Part I of the Landlord and Tenant Act 1987, relating to tenants’
rights of first refusal, applied. Of the 128 flats, some are held on leases of
which, in June 1988, 34 years were unexpired; some on leases of which 67 years
were then unexpired. At that time, Trafalgar had put the freehold on the
market. It proposed to dispose of it by selling the share capital of Berkeley
Court Ltd, of which that freehold was the only asset, so as to avoid having to
trouble with the provisions of Part I of the 1987 Act. It sought a price ‘in
excess of £9 million’.
On June 6 1988
an annual general meeting of the Berkeley Court Tenants’ Association, which is
an unincorporated association, was held. At that meeting Mr Hammer was elected
a member of the committee of the association expressly for the purpose of
negotiating with Trafalgar in the interests of the residential tenants. Mr
Hammer was and is the tenant of flat no 53 in the building. Mrs Goldring was
already a member of the committee. Mr Goldring was and is the tenant of flat no
88. Following that meeting, Mr Hammer approached Trafalgar. As a result, on
June 27, Trafalgar wrote to him inviting an offer on behalf of the tenants’
association. On July 1 1988 Mr Hammer and Mrs Goldring, on behalf of the
Tenants’ Association, wrote a letter for delivery by hand to all tenants, the
terms of which were these:
Dear
Sir/Madam,
We write to
advise you that the Tenants’ Association has commenced preliminary negotiations
with our landlords to purchase the freehold interest of Berkeley Court.
Should we be
successful this would give the residents total control over how the block is
run and give all participating tenants longer leases plus a share of the
freehold substantially increasing the value of our properties.
It is most
important that the maximum number of tenants participate and we would ask you
to register your interest by completing the enclosed form and returning it to
us, at either of the above addresses, by Monday July 11.
Registering
your interest with us does not bind you to accepting any terms that are offered
and the Association will keep all interested parties advised of negotiations at
all times.
If you are
not already a member of the Association, we would also request that you fill in
the membership form and return it to us with this year’s annual payment of
£20.00.
The ‘above
addresses’ referred to were flat 53 and flat 88 at Berkeley Court. The
‘enclosed form’ was addressed to the Berkeley Court Tenants’ Association,
George Hammer and Gloria Goldring, and stated: ‘I am interested in
participating in the freehold purchase of Berkeley Court and request to be kept
informed of negotiations’. Many tenants responded by completing that form.
Mr Bhatti was
not, however, at that time, the tenant of any flat or any other premises at
Berkeley Court, so that he did not receive the letter of July 1 or respond to
it. He acquired the lease of flat 95 later in July. It is alleged in the
statement of claim that he is also the tenant of flat 94, but I understand that
negotiations are still on foot for the grant of a licence to assign the lease
of that flat to him. Mr Bhatti has never become a member of the Tenants’
Association.
Between July 1
and July 26 Mr Hammer, in the light of the responses to the letter of July 1,
had many discussions with representatives of Trafalgar, with tenants and with
others from whom he sought advice. From those discussions it emerged, among
other things, that only six tenants were interested in sharing in the purchase
of the freehold but that many tenants would be interested in paying for
extensions of their leases to 999 years and acquiring shares in the new
management company and that the money thus raised from them could be used
towards the purchase of the freehold. The idea was conceived of a ‘consortium
of investors’ to purchase the freehold through a new company.
Anticipating,
if I may, in this recital of facts, what happened later, of the six who had
been interested at that time in sharing in the purchase of the freehold, three
eventually dropped out. The three who were left were Mr Albert Dangoor, who was
the tenant of flat 109; Mr Sofaer, who was the tenant of flat 126, and a
company called Monopro Ltd, which was the tenant of flat 105. Monopro Ltd was controlled
by Mr Naim Dangoor, who occupied flat 105 and his son, Mr David Dangoor. It was
those three, together with an outsider, Mr Fattal, who caused Berkeley Court
Investments to be incorporated on September 12 1988 to acquire the freehold.
Some, but not
all, of the facts I have so far stated are alleged in the statement of claim;
the others appear from the affidavit evidence. The statement of claim is
difficult to understand unless one knows most of those facts.
The first
event, chronologically, mentioned in the statement of claim is the receipt by
Mr Bhatti of three documents, namely a letter dated July 26 1988, a reply form
accompanying that letter and invitation to meetings. The letter was a long one
but I think I must read almost all of it. It was headed: ‘The Berkeley Court
Tenants’ Association, George Hammer’ — and underneath his name was his address
— ‘Gloria Goldring’ — and underneath her name was her address. The text is as
follows:
To all
Tenants
Subject to
Contract
Further to our
recent letter to you regarding our attempts to purchase the Freehold of
Berkeley Court we are pleased to confirm that our Landlords, Trafalgar House
Developments Ltd., have finally agreed to sell us the building provided we can
exchange contracts within a short period of time. We cannot afford to let this
opportunity pass us by as this gives us the chance of obtaining.
1. 999 year
leases.
2. Controlling
the management of Berkeley Court.
3. Controlling
and reducing the costs and service charges we all have to pay.
And ensuring
the money is spent properly.
4. This will
result in an enormous increase in the market value of our flats.
It is our
intention to transform Berkeley Court from a poorly managed, neglected building
into one of the most prestigious blocks in the West End and we can only succeed
if a large number of residents participate in this venture.
I would like
to lay out the terms available:
Our records
show your flat to be
— of course,
this is the letter addressed to Mr Bhatti as tenant of flat 95, and it shows the
particulars of his flat as being:
1. No 95
2. Type No C
3. Floor 8th
4. Unexpired
Lease 67 years.
The letter
went on:
We will be in
a position to offer you
An extension
to your existing lease to 999 years together with a share in the new management
company for £27,500.
The above
figure is not negotiable and is the same as offered to all tenants of flats of
similar size and location in the building.
In addition to
your lease extension you will also be able to buy shares in the new Freehold of
Berkeley Court if you so wish. The price of these shares will depend on the
number of people taking lease extensions and will be circularised to all
interested parties.
Low cost
finance is also available and can be arranged for you if required. We strongly
urge you to accept the above offer as we have been told that other potential
landlords of Berkeley Court would be charging between £120,000 and £150,000 for
future lease extensions without offering 999 yrs leases.
Our offer
is only available for a short period of time and it
is essential for us not to lose this unique opportunity as we must not let our
building fall into the hands of potentially unscrupulous landlords who will try
to exploit the tenants and attempt to take away our roof garden and build
additional flats for their benefit.
Please
complete the enclosed form and return it to me by MONDAY AUGUST 15th and I must
repeat please do not delay as you cannot afford to lose time. Should you have
any queries or questions regarding anything in this letter do not hesitate to
call me on any of the following numbers.
And then were
set out Mr Hammer’s day-time and home telephone numbers.
That was
signed by Mr Hammer for the Berkeley Court Tenants’ Association and somebody
had added in Mr Goldring’s name. It concluded:
Should you
have difficulty ‘phoning me you can also refer to Gloria Goldring
. . .
— and her
telephone number was given —
. . . and to
Mr Dennis Shore
— who does not
otherwise figure in this story.
The reply form
which was completed and returned by Mr Bhatti was addressed to ‘The Berkeley
Court Tenants’ Association, George
Subject to
contract I signify my interest in extending my lease to 999 years, together
with obtaining a share in the new Berkeley Court Management Company for the sum
of £27,500.
The words
‘Yes/No’ had been typed in and on the form Mr Bhatti ticked ‘Yes’ and crossed
out ‘No’. Then he filled in his name, his flat number and his telephone number.
Then there was a sentence saying ‘I am interested in low cost finance’ with,
again, ‘Yes/No’ typed in, and again Mr Bhatti ticked ‘Yes’ and crossed out
‘No’. Lastly, there was a sentence: ‘I would also like more information
regarding the purchase of shares in the freehold of Berkeley Court’. There
again, Mr Bhatti ticked ‘Yes’ and crossed out ‘No’; and he signed the form.
The invitation
was headed ‘Berkeley Court Tenants’ Association’. It was addressed ‘TO ALL
TENANTS’ and read:
You are
invited to an informal meeting to discuss any questions you may have regarding
our pending purchase of Berkeley Court and the lease extensions offered.
To be able to
conveniently accommodate all those interested, we are holding these meetings on
three different dates and we look forward to seeing you on the evening of your
choice at Flat 53, Berkeley Court.
Friday, 5th.
6.30 p.m.
Wednesday,
10th. 7.00 p.m.
Thursday,
11th. 7.00 p.m.
Those, of
course, were dates in August.
On July 28
1988 there was a meeting between Mr Hammer, Mr David Dangoor, and
representatives of Trafalgar. At that meeting the latter confirmed that the
minimum that Trafalgar would accept was £9.5m and that that was conditional
upon contracts being exchanged within eight weeks of the ‘investors”
solicitors receiving a draft contract and upon at least 50% of the tenants
agreeing to the purchase.
The meetings
foreshadowed in the invitation that had been sent to the tenants were then
held. Mr Hammer’s account of them in para 18 of his affidavit is as follows:
On the 5th,
10th and 11th August approximately 40 to 50 people attended the open meetings I
had called.
— I am told
that it was 40 or 50 in total —
I made clear
the various possibilities open to everyone. Nobody was denied any information
at those meetings. The meetings went on for about 1 1/2 hours and I know Mr
Bhatti attended one of the meetings but believe he attended for only a short
time. However, I can say that Mr Bhatti did not at that meeting express any
interest in participating in the purchase of the freehold. At the meetings I
was asked who was presently proposing to purchase the freehold and I gave the
names of all the people who were then interested in promoting the company which
was to purchase the freehold. I also explained that it was proposed that the
tenants would be able to purchase a 128th share in the freehold for each flat.
I also discussed the need to leave the roof garden and entrance hall free from
development and the formation of the management company for the tenants was
discussed. A clear invitation to join the investors was given to all present.
As far as I was concerned no one left the meeting discontented and I felt that
the meetings were frank and open.
Mr Bhatti’s
account of the occasion when he attended one of those meetings is in para 12 of
the statement of claim and is supported by an affidavit he has sworn. It is as
follows:
Mr Bhatti
attended one of the aforesaid open meetings for 5 to 10 minutes or thereabouts.
The aforesaid open meeting was addressed by Mr Hammer who stated in Mr Bhatti’s
presence (inter alia):
12.1 the
freehold was to be purchased for £9,500,000;
12.2 the
tenants had an opportunity to buy the freehold and to do so at that low price
because Trafalgar had problems selling it on the open market because of the
tenants’ rights of first refusal;
12.3 if
the tenants could purchase the freehold they could achieve the objectives set
out in the July 26 letter;
12.4 Trafalgar
had offered a limited period to exchange contracts for the purchase of the
freehold and if the contracts could not be exchanged within that period
Trafalgar might sell the freehold to another purchaser.
Mr Wright
invited me not to accept Mr Hammer’s account in para 18 of his affidavit.
Having regard, however, to the way in which Mr Wright put Mr Bhatti’s case, it
does not matter whether I do or not. I will say only that I have no reason not
to accept it.
On August 11
1988 a letter was written to those tenants who had completed the reply form attached
to the letter of July 26 including Mr Bhatti. Again, that was headed ‘Berkeley
Court Tenants’ Association’ and had the names of Mr Hammer, Mrs Goldring
immediately after that and also Mr Hammer’s telephone numbers. It read as
follows:
Dear Tenant,
Thank you for
returning your form regarding a long lease at Berkeley Court. Contracts will
shortly be issued to all interested parties and I would be grateful if you
would supply me with the name, address and telephone no of your solicitors so
that we may contact them. Time is of the essence as we will have to exchange
contracts shortly.
Should you
require finance to assist your purchase, excellent terms have been negotiated
with:
Mr Lewis
Bloch,
Berkeley
Management & Finance Ltd
— and his
address and telephone number were given —
and if you
have signified interest in this Mr Bloch will be contacting you in the very
near future.
That, no
doubt, was a reference to the low-cost finance mentioned in the reply form of
July 26.
Well over 50%
of all tenants have registered requests for lease extensions with more
enquiries arriving daily and we are now optimistic that our efforts will be
successful.
If you are
interested in buying shares in the Berkeley Court freehold including the
commercial shops on the ground floor, I would be grateful if you would
telephone me by Tuesday 17th latest and I will explain your options in detail.
On or about
August 11, following receipt of that letter, Mr Bhatti did telephone Mr Hammer.
His account of their telephone conversation is in para 14 of the statement of
claim and it reads:
On or about
11th August 1988 Mr Bhatti telephoned Mr Hammer. Mr Bhatti gave him the name of
the solicitor who dealt with Mr Bhatti’s conveyancing. Mr Hammer stated (inter
alia) that it would be cheaper and easier if all the tenants who had
responded in July 26 reply form could instruct one solicitor and suggested Mr
Corker because he lived in the property and was very familiar with the
circumstances.
Mr Hammer’s
account of that telephone conversation is slightly different but I need not
trouble with the differences. What is certain is that Mr Bhatti did not, on
that occasion, mention his interest in purchasing a share of the freehold. On
the same day Mr Bhatti telephoned Mr Corker, who agreed to act for him. Mr
Bhatti authorised Mr Corker to contact the solicitors who had previously dealt
with his conveyancing.
On September 5
1988 Mr Hammer sent out another circular. This was again headed ‘Berkeley Court
Tenants’ Association’ but it had only Mr Hammer’s address on it. At the head of
it were these words in capitals and underlined: ‘THIS IS YOUR LAST CHANCE TO
GET A NEW 999 YEAR LEASE FOR YOUR FLAT IN BERKELEY COURT AT A REASONABLE
PRICE’. The text was:
As you are
aware the Tenants’ Association have been negotiating the transfer of the
freehold of Berkeley Court from the present landlords Trafalgar House to a new
company Berkeley Court Investments Ltd which is backed by a consortium of our
tenants.
You have
already been sent a communication offering you terms for your new 999 year
lease. The price offered to you is the same price as all other flats of similar
size, location and length of lease at Berkeley Court. Already 75% of the
tenants have accepted these very reasonable terms.
Contracts
will have to be exchanged,
— and that
was, no doubt, contracts for the 999-year leases —
together with
a 10% deposit lodged with solicitor, by 26th September and completion will take
place in December. If you wish to participate you must contact us immediately.
Once the
September date has been passed no more lease extensions will be issued for a
period of 12 months and after that date we understand there will be a price
increase of at least 50%. We have to advise you therefore not to miss this very
important opportunity.
If you have
any queries please do not hesitate to ring any of us for more information. Time
is running out.
Then were set
out the names and telephone numbers of Mr Hammer, Mr Goldring and Mr Corker.
On September 7
1988 Messrs McCombie, Gordon & Lowe, the solicitors instructed to act for
the consortium that was to form Berkeley Court Investments, sent a letter in
common form to the solicitors acting for tenants who had agreed to take
999-year leases. The one to Messrs Corkers, marked ‘Attention: T Corker Esq.’,
concerning Mr Bhatti’s flat, is among the papers and it reads as follows:
Re: Flat 95
Berkeley Court, Baker Street, London NW1
We act for
the promoters of a Company which is to be called Berkeley Court Investments
Limited and which is being formed to acquire the freehold interest in Berkeley
Court, our clients having negotiated a purchase from the present freeholders.
We understand
you act for the Tenant of the above mentioned Flat and that your client (in
common with the majority of the Tenants in the Block) has indicated a wish to
take a new 999 year Lease from our clients if their purchase of the Block
proceeds. The name of your clients, the proposed purchase price and (in cases
where there is a guarantor under the existing Lease of the Flat) the name of
the proposed guarantor are set out in the Schedule at the foot of this letter.
The schedule in
this case says: ‘Purchaser, Mr M A Bhatti. Price £27,500. Guarantor, none’.
Then they
enclosed copies of conveyancing documents (draft contract, draft lease, office
copies entries of the freehold title and so on) and went on to indicate
differences between the form of draft lease and the form of the existing leases
in the block. Then came these paragraphs:
You will
appreciate that the documents have been prepared in a standard form applicable
to all the Flats and no amendment thereof can be contemplated for individual
Flats. As your client is already fully familiar with the Block, no preliminary
enquiries will be entertained. You will find that we have provided for the deposit
under the Contract to be paid to us as agents for the Vendor and you will
appreciate that these monies will be used towards the deposit payable by our
clients under the Contract for the purchase of the Block.
Our clients
are arranging, as a separate exercise, the service on your client direct at the
Flat of a formal notice under Section 18 of the Landlord and Tenant Act 1987.
We enclose a copy of that notice and of the draft form of reply which will be
sent with it. It is imperative that the reply is completed and returned to us
immediately the notice is served, indicating that your client does not wish to
avail himself of his statutory rights. This is crucial to the transaction as
our clients have to be satisfied before they exchange contracts for the
purchase that there is no possibility of a challenge under the Act.
Unfortunately the Vendors to our clients have stipulated that Contracts must be
exchanged by close of business on 27th September, failing which they will not
proceed with our clients. In the circumstances therefore it is imperative that
we hear from you in approval of the draft Contract and Lease and then with your
clients’ Contract and deposit with the utmost expedition as our clients will
not proceed with the purchase unless at the same time they can exchange
Contracts for the sale of what our clients regard as an adequate number of the
Flats on these new long Leases. Further, after the purchase of the Block, our
clients will not be prepared to offer the Flat on the very favourable terms now
available.
It seems that
Mr Corker did not pass that letter on, or the information in it, to Mr Bhatti.
On or about September 14 Mr Bhatti received three documents. The first was a
letter prepared by Mr Hammer but unsigned; the second was a copy of the section
18 notice and the third was a form of reply to that notice. The letter was
headed: ‘Berkeley Court Tenants’ Association’ and had Mr Hammer’s address on
it. Its terms were these:
Dear Tenant,
Please find
enclosed a formal notice under Section 18 of the Landlord and Tenant Act 1987.
This notice is being served by the proposed new freeholders of Berkeley Court,
Berkeley Court Investments Limited.
It is vital
that you reply to this notice immediately.
Please sign
and date the enclosed reply form where indicated, having deleted Section (i)
and return it without delay.
Please return
the reply form BY HAND, NOT by post to any one of the following:
1) Flat 53.
2) Berkeley Court Investments Ltd
20 Queens
Gate Terrace
London SW7
5PF
3) Your solicitor.
I need not
read the section 18 notice, which is in the form required by the Act, and of
which no complaint is made.
The reply form
was headed:
Re:
Berkeley Court, Baker Street, London NWI
NOTICE FROM
TENANT UNDER SECTION 18(3) LANDLORD AND TENANT ACT 1987
To: Berkeley
Court Investments Limited
— and then the
address in Queens Gate Terrace was given —
Dear Sirs,
I/We . . .
[blank] . . . of Flat —
— and this
must be the copy that was left at flat 94 because ’94’ has been inserted —
Berkeley
Court, Baker Street, London NW1, HEREBY:
a) acknowledge safe receipt of a notice from
you dated September 14 1988 under section 18 of the Landlord and Tenant Act
1987 and
b) give you notice that I/we:
(i) do not regard myself/ourselves as being
entitled to be served by the Landlord with a notice under section 5 of the
Landlord & Tenant Act 1987 with respect to the disposal specified in your
notice
— and somebody
has put a line through that —
(ii) would not wish to avail myself/ourselves of
the right of first refusal conferred by such a notice if it were served.
Dated this .
. . [blank] . . . day of September 1988.
And there is a
space for signature.
Mr Bhatti did
not sign that form. The receipt of those three documents alerted him to the
fact that he might not be included among those who were to acquire a share of
the freehold. As to that he was right. Those who had formed Berkeley Court
Investments had by then decided not to admit anyone else to their number.
Mr Bhatti’s
and Mr Hammer’s affidavits give accounts of subsequent contacts between them,
but I need not go into the details of those. As I have said, the writ in this
section was issued on September 26 1988.
The relief
sought against Berkeley Court Investments is a declaration that:
. . .
Investments holds the freehold on trust for the participating tenants on terms
that the participating tenants shall together be entitled to purchase the
freehold, alternatively all the issued share capital of Investments or any
other company which purchases the freehold, upon terms that each participating
tenant is entitled to purchase a share in the freehold, alternatively shares in
Investments or any other company which purchases the freehold, in respect of
each flat of which he is tenant for a sum dependent upon the number of participating
tenants and the number of leases held by each participating tenant save with
the consent of all the participating tenants, or on such other terms as to the
court shall seem fit.
The definition
of ‘participating tenants’ is in para 1 of the statement of claim and is ‘each
tenant’ and then it says ‘of the freehold’ — but I think that those words are
otiose — ‘who, by the July 26 reply form, or by telephone response to the
August 11 letter, gave notice that he was interested in obtaining a share in
the freehold alternatively the new company which was to purchase the freehold’.
That definition, is, I think, in at least one respect, too wide because it does
not exclude somebody who gave such notice and subsequently indicated that they
wished to drop out — but I do not think that that matters.
Mr Wright told
me that, of course, that formula was the familiar formula of a constructive
trust, which was merely machinery to obtain equitable relief and that it should
be regarded as flexible and possibly leading to accounts and enquiries.
The relief
sought against the individual defendants is damages for breach of fiduciary
duty and the fiduciary duties are pleaded in paras 2 and 9 of the statement of
claim.
Para 2 reads
as follows:
The Tenants’
Association is an unincorporated association which has at all material times
been held out as acting in the interests of the residential tenants. Mr Hammer
and/or Mr Goldring and/or Mrs Goldring at all material times held themselves
themselves out to the tenants, including Mr Bhatti, as representing and acting
for the Tenants’ Association. By virtue of having thus held themselves out each
of Mr Hammer and/or Mr Goldring and/or Mrs Goldring owes a fiduciary duty to
each of the tenants, including Mr Bhatti.
Para 9 is in
these terms:
By virtue of
their representations in paragraph 2 and 8 above
— para 8
repeats the letter of July 26 —
. . . Mr
Hammer and/or Mr Goldring and/or Mrs Goldring placed themselves in the position
of fiduciaries who owed fiduciary duties to Mr Bhatti and to the other tenants
in relation to the purchase of the freehold and the grant of 999 year leases
and the negotiations for such purposes. Such representations established a
relationship of confidence between those making them and each tenant and, in
particular, each participating tenant and imposed upon those making them and
each of them, obligations:
9.1 To keep the tenants informed of the current
position in seeking to carry out the proposals mentioned in the July 26 letter
since the tenants were dependent upon the persons named therein for such
information. Such duty was enhanced by the fact that such proposals were of
great significance to the tenants and each of them.
9.2 To seek to obtain shares in the Management
Company for those tenants and, in particular, participating tenants who might
want 999 year leases, and in the case of participating tenants, to seek to
obtain shares in any company which might purchase the freehold.
I need not
read any more of the statement of claim. I will take Mr Bhatti’s case to be as
it was explained by Mr Wright during his submissions.
I start with
the case against the individual defendants. The starting point of Mr Wright’s
submissions on that was the case of Colman v Myers [1977] 2 NZLR
225, a decision of the Court of Appeal in New Zealand. The headnote of that
reads as follows:
The first and
second respondents, a son and his father, were managing director and chairman
of an old established private company in which many
also directors of a wine and spirit company in which the family owned a half
share, the book value of which was about $5 million. It also owned properties,
including the Strand-Coburg block, and had about $1.8 million in cash. The
first respondent, who had only a small shareholding in the family company,
evolved a plan whereby he would acquire all the shares at a price of $4.80 each
and would pay for them entirely out of the company’s assets, by using the cash
and selling Strand-Coburg and other properties, leaving him sole owner of the
company with remaining interests (principally the share in the wine and spirit
company) worth some millions. The major shareholders included certain family
trusts of which the second respondent was a trustee. As a result of approaches
by both respondents, the shares of these trusts were secured at $4.80; before
the subsequent take-over offer they had consequently been transferred to the
second respondent’s trust. As opposition from a minority was feared, the first
respondent formed a new company (the third respondent) of which he was sole
owner. This enabled a take-over offer to be made to all the then shareholders
in the name of an offeror which, not already holding any shares, could expect
to obtain acceptances from holders of 9/10ths of the shares for which offers
were made, so making available the compulsory acquisition provision of the
Companies Act 1955, s 208.
I understand
that that corresponded to what used to be section 209 of the Companies Act
1948.
The new
company made such an offer. In their statutory statement under the Companies
Amendment Act 1963 the first and second respondents, as directors of the
offeree company, recommended shareholders to accept. The appellants, who were
minority shareholders, reluctantly accepted when served with notice that the
offeror had required nine-tenths. The first respondent successfully carried out
his plan, selling Strand-Coburg at much above book value soon after the
take-over and using the proceeds of $3.5 million and the $1.8 million cash to
pay for the shares. He made these resources available to himself by temporary
loans from the company, followed by capital dividends. When they learned these
facts the appellants brought action claiming fraud, breach of fiduciary duty,
negligence and breach of the Companies Act 1955, s 62.
That was the
equivalent of section 54 of the Companies Act 1948.
They alleged
that the first respondent’s plan and the magnitude of his potential gain had
not been disclosed to the shareholders and that he had represented that he
intended to keep Strand-Coburg, whereas in fact he had engaged property
consultants to sell it and had himself been negotiating for its sale and had
advice as to its true value; and that he had also represented that the cash was
committed to the wine and spirit company, whereas in fact it was available for
capital dividends. They gave evidence of these representations; the documentary
evidence included a letter in which the first respondent indicated that because
of doubts as to legality he had been advised to keep the method of financing to
himself. The appellants claimed rescission and alternatively damages. The
respondents gave no evidence themselves but called expert witnesses. In the
Supreme Court the action was dismissed. The plaintiffs appeal.
Held, allowing the appeal and awarding damages:
1. The
respondent directors owed fiduciary duties to the shareholders, the
circumstances from which their duties arose being the family character of the
company; the position of father and son in the family and in the company; their
high degree of inside knowledge; and the way in which they went about the
take-over and the persuasion of shareholders. They were therefore obliged not
to make to shareholders statements on matters material to the proposed dealing
which were either deliberately or carelessly misleading, and to disclose
material matters as to which they knew or had reason to believe that the
shareholder whom they were trying to persuade to sell was inadequately
informed. On the take-over bid, asset backing was a material factor. On the
facts breach of fiduciary duty and causation were established.
Mr Wright did
not read, and I need not read, holdings 2 and 3. Mr Wright relied in particular
on a passage at pp 324 to 325, in the judgment of Woodhouse J, which is as
follows;
As I have
indicated it is my opinion that the standard of conduct required from a
director in relation to dealings with a shareholder will differ depending upon
all the surrounding circumstances and the nature of the responsibility which in
a real and practical sense the director has assumed towards the shareholder. In
the one case there may be a need to provide an explicit warning and a great
deal of information concerning the proposed transaction. In another there may
be no need to speak at all. There will be intermediate situations. It is,
however, an area of the law where the courts can and should find some practical
means of giving effect to sensible and fair principles of commercial morality
in the cases that come before them; and while it may not be possible to lay
down any general test as to when the fiduciary duty will arise for a company
director or to prescribe the exact conduct which will always discharge it when
it does, there are nevertheless some factors that will usually have an
influence upon a decision one way or the other. They include, I think,
dependence upon information and advice, the existence of a relationship of
confidence, the significance of some particular transaction for the parties
and, of course, the extent of any positive action taken by or on behalf of the
director or directors to promote it.
Mr Wright
submits that, by analogy, that applies to this case, where the tenants’
association took it upon themselves to negotiate on behalf of all the tenants
and assumed an obligation to keep the tenants informed of what was happening
and to seek to obtain for the tenants a controlling interest in or, if that
could not be achieved, an interest in the company acquiring the freehold.
With regard to
the letter of July 26, Mr Wright submitted that it was arguable that the words
‘subject to contract’ related only to the offer of the 999-year leases and that
they were of no significance in relation to the paragraph which said:
In addition
to your lease extension you will also be able to buy shares in a new Freehold
of Berkeley Court if you so wish. The price of these shares will depend on the
number of people taking lease extensions and will be circularised to all
interested parties.
Mr Wright
submits that having, in response to that, ticked ‘Yes’ and crossed out ‘No’ in
the reply form against the sentence ‘I would also like more information
regarding the purchase of shares in the freehold of Berkeley Court’, Mr Bhatti
was entitled to expect a circular in due course, or something of the kind,
indicating the price of a share in the freehold. That was a matter of great
importance to tenants; so much was clear and made clear by the passage earlier
in the letter stating why the tenants could not afford to let this opportunity
pass.
As regards the
invitation to the meetings which followed, Mr Wright submitted that that was
not a sufficient indication that the information sought by a tenant who filled
in the reply form in that way would be supplied at those meetings instead of by
a circular. He pointed out that what Mr Bhatti heard at the meeting that he did
attend for a short time was consistent with what he already knew. Mr Wright
then submitted that the last para of the letter of August 11, where each tenant
who had filled in a reply form was told: ‘If you are interested in buying
shares in the Berkeley Court freehold including the commercial shops on the
ground floor, I would be grateful if you would telephone me by Tuesday 17th
latest and I will explain your options in detail’ did not convey that this was
a substitute for the promise to circulate the information given in the letter
of July 26. Mr Wright said that that last paragraph was consistent with the
view that Mr Hammer’s purpose was to drum up support from people who had not
expressed interest so far and that it should not be interpreted as a warning to
people who had already ticked the word ‘Yes’ in the earlier reply form that
they must express interest again by telephone. Mr Wright pointed out that the
dates were in mid-August when many people might be on holiday and that it was
significant that there was no evidence as to what the options referred to might
be.
Mr Wright
pointed out that the letter of September 5 was mainly about the 999-year leases
and that the first para did not exclude the possibility that someone who had
expressed an interest in buying a share of the freehold would be able to do so.
That para read:
As you are
aware the Tenants’ Association have been negotiating the transfer of the
freehold of Berkeley Court from the present landlords Trafalgar House to a new
company Berkeley Court Investments Ltd which is backed by a consortium of our
tenants.
That did not
indicate that the deadline for participation had passed or was about to pass.
Then, as
regards the three documents received by Mr Bhatti on September 14, Mr Wright
submitted that while, as I have already indicated, there was no criticism of
the section 18 notice itself, the two documents associated with it were
misleading. The truth was that under the Act the tenant had three options: one
was to say that he was interested in buying; the second was to say that he did
not consider himself entitled to buy; and the third that he did not wish to
avail himself of his right to buy. These documents intimated that he must
choose between (2) and (3); they did not mention (1) or the fact that if more
than 50% of the tenants answered in the sense of option (1) the purchase would
be frustrated. It is plain that Mr Bhatti himself was not misled by these
documents. But Mr Wright said that that was immaterial: the important fact was
that the documents were misleading and they did not give the full information
to the tenants that they should have been given. It was again a failure to
comply, so Mr Wright argued, with the duty to keep the tenants informed of what
was happening.
As regards Mr
Bhatti’s case against Berkeley Court Investments, Mr Wright, in a nutshell,
said this: that Berkeley Court Investments took the freehold with notice (if
only because it had received, by then, the statement of claim) of the breaches
of fiduciary duty by the individual defendants; that was enough to entitle Mr
Bhatti to relief
trust.
I was
reminded, of course, that these are motions to strike out the statement of
claim and that I cannot strike it out unless satisfied that Mr Bhatti’s case is
unsustainable. I have come to the conclusion that it is. His whole case against
Mr Hammer and the other individual defendants rests upon the foundation that,
following receipt of the letter of July 26 and his reply to it saying that he
would like more information regarding the purchase of the freehold, he was
entitled to expect a circular, or something like it, from the tenants’
association indicating the price of a share in the freehold. There is no
allegation of a dishonest design, or even of negligence. I do not think it
conceivable that any court could hold any of the individual defendants liable
in damages on that flimsy foundation.
Colman v Myers is, to my mind, distinguishable. In that case there
was a plan to deprive the plaintiffs of their shares for the benefit of the
first respondent. Here no plan is alleged; no benefit to the individual
defendants is alleged nor was Mr Bhatti deprived of any property or right to
which he was entitled. The nearest he came to that was when he was invited to
waive such rights as he might have under the Landlord and Tenant Act 1987. But
he did not do so. Nor is there any allegation or evidence that any other tenant
was misled by the documents of September 14 into doing so.
Mr Bhatti’s
case against Berkeley Court Investments is, of course, dependent on his case
against the individual defendants, since it is that Berkeley Court Investments
took the freehold with notice of their breaches of duty. So, if there was no
such breach of duty, that case must fail, too.
I will
therefore make an order striking out the writ and the statement of claim.
