Landlord and tenant — Landlord and Tenant Act 1987 — Tenants’ right of pre-emption — Whether notice by new landlord valid response to section 11 request — Whether disposal a ‘relevant disposal’
In October 1992 the defendant was
incorporated as a subsidiary of TWD and the owner of the subject block of
flats, TWP, agreed to sell the premises to TWD for a sum of £1m, which was then
paid with the title left outstanding in TWP. An offer to purchase the premises
for £15.750m was received from F. In order to avoid the application of Part I
of the Landlord and Tenant Act 1987, a number of transactions were agreed. On
February 26 1993 TWD entered into a contract with the defendant to sell the
premises for £15.750m. By an exchange of letters dated February 25 1993, TWD
agreed that it would advance the defendant £15.750m to enable the defendant to
complete the purchase on the terms of loan notes. Also on February 26 1993 TWD
agreed with F to sell F the two issued £1 shares in the defendant and the loan
notes, conditionally on completion of the sale of the premises to the
defendant. F had the ability to elect to satisfy any part of the consideration
for the shares and loan notes by allotting to TWD new ordinary shares in itself
of 50p each, which were then to be sold for cash under a placing agreement. F
chose to use new placing shares to satisfy £10,044,825 of the consideration
payable. Completion of the sale of the premises to the defendant and the sale
of the shares in the defendant to F took place on March 25 1993, and TWP
executed a transfer of its interest in the premises in favour of the defendant
who became the registered proprietor. The defendant contended that the share
transfer and loan note transfer were mistakenly dated March 24 instead of March
25 1993. On May 24 1993 the majority of the then qualifying tenants served a
notice on the defendant in reliance on section 11 of the Landlord and Tenant
Act 1987 seeking information about the disposal. The defendant’s solicitors
provided some information in reply, but the tenants did not serve a notice
under section 12 of the Act within three months seeking to purchase the
premises. In December 1995 the plaintiffs, who were statutory tenants, informed
the defendants that section 11(3) of the Act had not been complied with and
that unless the default was rectified within 14 days, proceedings would be
commenced under section 19 of the Act.
the purposes of the 1987 Act, takes place on the execution of the transfer of
the title to premises, not its subsequent registration. The shares in the
defendant were not transferred to F until after the transfer of the title in
the premises had been executed unconditionally. F became shareholder in the
defendant on March 25 and not 24. The provisions of the share sale agreement,
that the property sale agreement should first be completed, did not make it a
conditional contract such that equitable ownership of the shares did not pass
until the condition was satisfied. The relevant rights in the shares in the
defendant were not held in a fiduciary capacity for the purposes of section
736A(5) of the Companies Act 1985; at the time of the transfer to the
defendant, it and TWP (and also TWD) were associated companies. By reason of
section 4(2)(l) of the 1987 Act the disposal was not a relevant disposal. The
section 11 notice was not validly served because section 11(1)(c) had not been
shown to be satisfied on the date of the notice. The tenants were not entitled
to request information about the share transfer or the loan notes. If the
plaintiffs had otherwise been entitled to succeed, they would be estopped from
asserting that the defendant was in default.
The following cases are referred to in
this report.
Belvedere Court Management Ltd v Frogmore Developments
Ltd [1996] 3 WLR 1008; [1996] 1 All ER 312; [1996] 1 EGLR 59; [1996] 05 EG
131
Chattey v Farndale unreported May 24 1996
Cousins v Metropolitan Guarantee Ltd
[1989] 2 EGLR 223; [1989] 31 EG 56, LVT
Eastham v Leigh London & Provincial
Properties Ltd [1971] Ch 871; [1971] 2 WLR 1149; [1971] 2 All ER 887, CA
Gartside v Silkstone (1882) 21 ChD 762
Gordon Hill Trust v Segall [1941] 2 All
ER 379
Keith Bayley Rogers & Co v Cubes Ltd (1975) 31
P&CR 412
London & South Western Railway Co v Gomm (1882) 20 ChD 562
Mainwaring v Henry Smith’s Charity Trustees
[1996] 3 WLR 1033; [1996] 2 All ER 220; [1996] 2 EGLR 25; [1996] 29 EG 110
Musselwhite v Musselwhite (CH) & Son Ltd
[1962] Ch 964; [1962] 2 WLR 374; [1962] 1 All ER 201
Norman v Kay [1991] 2 EGLR 237; [1991] 49
EG 80, LT
Pritchard v Briggs [1980] Ch 338; [1979] 3
WLR 868; [1980] All ER 294; (1979) 40 P&CR 1, CA
Reese River Silver Mining Co Ltd v Smith (1869) LR 4 HL
64
Sainsbury (J) plc v O’Connor (Inspector of
Taxes) [1991] 1 WLR 963, CA
Taylors Fashions Ltd v Liverpool Victoria
Trustees Co Ltd [1982] QB 133; [1981] 2 WLR 576; [1981] 1 All ER 897;
[1979] 2 EGLR 54; (1979) 251 EG 159
30 Upperton Gardens Management Ltd v Akano [1990] 2 EGLR
232; [1990] 45 EG 121 & [1990] 46 EG 131
This was an application by the
plaintiffs, Harvey Michaels and Valentina Michaels, for relief under Part I of
the Landlord and Tenant Act 1987 in proceedings against the defendant, Harley
House (Marylebone) Ltd.
John Mowbray QC and Edward Cousins
(instructed by Merriman White & Co) appeared for the plaintiffs; Kim
Lewison QC and Anthony Tanney (instructed by Titmuss Sainer Dechert)
represented the defendant.
Giving judgment, LLOYD J said:
This action is about a large block of flats on the Marylebone Road in London.
The plaintiffs are statutory tenants of flat 11. The defendant is the
freeholder and their landlord. The defendant became the freeholder as a result
of a transfer executed on March 25 1993. The plaintiffs claim that this was a
disposal to which Part I of the Landlord and Tenant Act 1987 applied, so that
the previous landlord should have given notice to the tenants of its proposal
to make the transfer, and since it did not the qualifying tenants had the right
to obtain certain information from the defendant after the transfer. The
defendant did in fact give some information by a letter dated May 26 1993 in
response to a notice by tenants served in reliance on section 11 of the 1987
Act. Among the issues in the action are whether that was a valid notice and, if
it was, whether it was fully complied with, and further, if not, whether the
plaintiffs are estopped from asserting any rights that they might now have
under the Act. The fundamental issue, however, is whether the disposal of the
freehold to
Act.
Facts up to and including the transfer to
the defendant
From 1965 on the landlord of the building
was Taylor Woodrow Property Co Ltd (‘TWP’). It was TWP that executed the
transfer under the Land Registration Act 1925 in favour of the defendant on
March 25 1993. The question whether the transfer was or was not a relevant
disposal turns on whether, at the time of that transfer, the defendant was a
subsidiary of TWP within the meaning of the Companies Act 1985. However by the
end of 1992 TWP had ceased to hold more than the bare legal estate in the
property. At the end of November or the beginning of December 1992 TWP agreed
to sell the building to a company which was undoubtedly its subsidiary company,
Taylor Woodrow Development Ltd (‘TWD’), for a sum which seems to have been
about £1m and which was then paid although the title was left outstanding in
TWP.
On October 12 1992 the defendant was
incorporated, under the name Jaguar Properties Ltd (‘Jaguar’), as a subsidiary
of TWD. Following some testing of the market on behalf of Taylor Woodrow Group,
Frogmore Estates plc offered to buy the building for £15.750m early in 1993,
and this was found acceptable. At about the same time the recently formed
residents’ association in the building expressed interest in acquiring the
freehold. The view was taken that the property was, or was likely to be, one to
which the provisions of Part I of the 1987 Act applied. Accordingly, a method
was adopted of achieving the commercial effect of a sale of the building to
Frogmore, which it was intended and hoped would not give rise to statutory
rights of pre-emption in favour of the qualifying tenants.
On February 26 1993 TWD entered into an
agreement (‘the property sale agreement’) with Jaguar to sell the building to
Jaguar for £15.750m. By an exchange of letters dated February 25 1993 TWD
agreed that, for the purpose of enabling Jaguar to complete the purchase of the
property, it would advance to Jaguar by way of loan the sum of £15.750m on the
terms of loan notes in a specified form. Also on February 26 1993 TWD entered
into an agreement with Frogmore Estates plc (‘the share sale agreement’) to
sell to Frogmore the two £1 issued shares in Jaguar and the loan notes,
conditionally on completion of the property sale agreement. Frogmore had the
ability to elect to satisfy any part of the consideration for the shares and
loan notes by allotting to TWD new ordinary shares in itself of 50p each, which
were then to be sold for cash on behalf of TWD as allottee by SG Warburg
Securities Ltd under a placing agreement. Completion of both the share sale
agreement and the property sale agreement was to take place on March 25.
Frogmore chose to use new placing shares
to satisfy £10,044,825 of the consideration payable and entered into the
necessary placing agreement with Warburgs on March 23 1993. It was a
precondition of the effectiveness of this agreement, and therefore of payment
by Frogmore for the loan notes, and therefore in turn of completion of the sale
of the shares and the loan notes, that the newly issued shares of Frogmore be
admitted to the official list by the Stock Exchange. On March 23 the respective
firms of solicitors, Ross & Craig for TWD and Titmuss Sainer & Webb for
Frogmore, confirmed to Warburgs the terms on which they would hold in a joint
account the proceeds of the placing, that is to say on behalf of Warburgs until
listing of the newly issued shares and thereafter for TWD.
On March 24 the two firms of solicitors
held a pre-completion meeting at which an escrow memorandum was agreed and
signed (in accordance with clause 5.5 of the share sale agreement) which
recorded what was to happen that day and the next, and the documents necessary
for completion of the two agreements were executed in escrow. These included
the loan note instrument and a loan note certificate, the transfer of the
property from TWP to Jaguar, in which TWD also joined to record receipt of the
consideration, a deed of indemnity by Jaguar in favour of TWD, the transfers of
the shares and of the loan notes. Each party’s solicitors went away from that
meeting with the documents that its clients were intended to have at the end of
the process. Also on that day, as a necessary precondition of the allotment of
the new shares to TWD, Frogmore’s auditors, Touche Ross, issued a report under
section 103(1) of the Companies Act 1985.
On March 25, first thing in the morning,
a notice was posted by the Stock Exchange under r 520 confirming the admission
of the newly issued shares to listing. Warburgs informed Titmuss Sainer &
Webb of this and thereby effectively transferred the placing money to the
account of TWD. Frogmore instructed its bankers to remit the balance of the
consideration to TWD. Upon confirmation that the consideration had been
received, Ross & Craig confirmed to Titmuss Sainer & Webb that the
conditions of the escrow were satisfied. The most material documents then had
dates inserted on them. The property transfer and the deed of indemnity were
dated March 25, but the share transfer and the loan notes transfer were dated
March 24. This is said to have been a mistake and I shall have to consider the
evidence about this and its effect. The share transfer was stamped on March 25
and then registered in the company’s register of members, the latter showing
March 24 as the date of the transfer.
Also on March 25, pursuant to steps taken
the previous day, the directors of Jaguar resigned and two new directors were
appointed. These and other relevant events are recorded in the minutes of two
board meetings of Jaguar held on March 24, by the second of which the approval
and registration of the transfer of the shares and the loan notes, and the
changes in the board, were to take effect subject to the escrow documents being
released from escrow.
On completion both TWP and Jaguar wrote
to the tenants of the building to inform them of the sale of the freehold.
Just to anticipate some later related
events and conclude this aspect of the history, on April 7 the transfer of the
property was stamped. On April 8 Jaguar changed its name to Harley House
(Marylebone) Ltd. On April 13 the defendant applied to the Land Registry to
register the transfer and it was, and remains, registered as the proprietor of
the freehold with effect from that date.
Outline of the history after the transfer
It is common ground on the pleadings that
on March 25 1993 a majority of the flats in the building were let to qualifying
tenants, so that Part I of the 1987 Act did then apply to the building. One of
the issues (to which I will turn in due course) is whether that was still the
case on May 24 1993 when a majority of the then qualifying tenants served a
notice on the defendant in reliance on section 11. By then the defendant was
already preparing for substantial refurbishment and improvement works. On May
26 Titmuss Sainer & Webb wrote to the residents’ association, whose
chairman had been nominated under section 11 as the person to receive the
information, stating that they were not entitled to the information requested,
but giving certain information. If that was a proper compliance with section 11
(on the assumption that it applied at all) the tenants then had three months in
which to serve a notice under section 12 if they wished to purchase the freehold.
They did not do so. Part of the significance of the plaintiffs’ claim is that,
if section 11 did apply and the request was not fully answered, but the
defendant is ordered to answer it by the supply of further information to the
nominated person, the tenants might be able to say that the three months would
only run from the date of that supply. In December 1993 solicitors acting on
behalf of some of the tenants challenged the adequacy of the response to the
section 11 notice and asked for some further information. This was not accepted
and no further information was supplied at that stage.
In January 1994 a meeting was held by the
landlord’s managing agents to which the tenants were invited, to discuss the
plans for the refurbishment of the building. There had been a display of the
defendant’s refurbishment plans for some months before this in one of the
vacant flats. The plaintiffs knew of the display and of the meeting but did not
attend the meeting or inspect the display. Mr Michaels was abroad at the time
of the meeting. Soon afterwards the refurbishment work began, which included
very extensive work to the common parts of each of the six main staircases in
the building, to parking and other external areas, and to the vacant flats, and
also involved the creation of
inconvenience, disturbance and annoyance to the plaintiffs and no doubt to
other tenants. Most of the works have been undertaken and completed, although
some £5m worth of work is ready to be put out to contract and awaits only the
outcome of this action.
During 1995 the plaintiffs obtained legal
aid and on December 1 1995 their new solicitors wrote to Titmuss Sainer Dechert
(as they had by then become) alleging a failure to comply with section 11(3)
and warning that unless the default was rectified within 14 days proceedings
would be commenced under section 19 of the Act. No further information was
given. Eventually in October 1996 these proceedings were commenced. Following
interlocutory applications, directions were given for an expedited hearing
which led to the action coming on for trial at the end of January.
Was the transfer to the defendant a
‘relevant disposal’?
In Mainwaring v Henry Smith’s
Charity Trustees [1996] 3 WLR 1033*, the Court of Appeal decided that a
disposal, for the purposes of Part I of the Act, takes place on completion, not
on exchange of a contract for the sale of the relevant reversion. It is
therefore common ground that the disposal was the transfer from TWP to the
defendant, although Mr John Mowbray QC for the plaintiffs submits that it was
not the execution of that document but its subsequent registration, by which
the legal estate was vested in the defendant, that effected the disposal. I do
not accept that. I consider that a disposal of a registered estate, for the
purposes of Part I of the 1987 Act, takes place on the execution (in
unconditional form, not in escrow) of the transfer, just as a disposal of an
unregistered estate takes place on the execution of the conveyance. Since the
date of registration is, in practice, the date of the application to register
but in some cases that application may not be processed, and therefore the
registration may not be confirmed, for some considerable time, it would be
quixotic to take the date of registration as the date of the disposal. It would
make, for example, the exception in section 4(2)(f) very difficult to apply
since the land would change from being functional land of the transferor
charity to that of the transferee charity on completion, not on registration.
It seems to me that the cross-reference to section 3 of the Landlord and Tenant
Act 1985 in section 11(2)(a) also supports completion not registration being
the disposal since the time for a notice under section 3 clearly seems to run
from completion not from registration.
*Editor’s note: Also reported at [1996] 2
EGLR 25
It is accepted that the disposal was a
relevant disposal unless it is excepted by section 4(2)(l):
Where the landlord is a body corporate, a
disposal to an associated company.
An associated company is defined by
section 20(1) as follows:
‘Associated company’, in relation to a
body corporate, means another body corporate which is (within the meaning of
section 736 of the Companies Act 1985) that body’s holding company, a
subsidiary of that body or another subsidiary of that body’s holding company.
The provisions of the Companies Act 1985
which it is necessary to consider are as follows:
Section 736(1):
A company is a ‘subsidiary’ of another
company, its ‘holding company’, if that other company —
(a) holds a majority of the voting
rights in it, or
(b) is a member of it and has the
right to appoint or remove a majority of its board of directors, or
(c) is a member of it and controls
alone, pursuant to an agreement with other shareholders or members, a majority
of the voting rights in it,
or if it is a subsidiary of a company
which is itself subsidiary of that other company.
Section 736A:
(2) In section 736(1)(a) and (c)
the references to the voting rights in a company are to the rights conferred on
shareholders in respect of their shares or, in the case of a company not having
a share capital, on members, to vote at general meetings of the company on all,
or substantially all, matters …
(5) Rights held by a person in a
fiduciary capacity shall be treated as not held by him.
Mr Mowbray says that section 736(1) was not
satisfied at the moment of the completion of the disposal of the property by
TWP to Jaguar because the rights held by TWD in Jaguar were held in a fiduciary
capacity pursuant to the uncompleted share sale agreement. Alternatively he
says that the share transfer was in fact completed on March 24 before
completion of the transfer of the property. I will deal with this second
contention first.
Completion process
I find as a fact that the transfers of
the shares and loan notes were executed in escrow on March 24, after the
execution in escrow of the transfer of the building and of the deed of
indemnity, and they were not dated until the following day. I find that the
condition of the escrow was satisfied during the morning of March 25. I find
that Mr Vogel, the partner of Titmuss Sainer & Webb responsible for this
aspect, inserted the date March 24 on these two transfers by mistake, and did
so because other documents which he was also dating at the same time were to
be, and were correctly, dated March 24. Mr Mowbray said that Warburgs could not
be satisfied that all was in place ready for the admission of the new shares to
listing unless completion had already taken place. I find that that is not the
case: it was sufficient (and was the case) that there should be no impediment
to completion. Admission to listing was indeed a pre-condition of completion
since until that took place the consideration money for the placing could not
be released to TWD and completion could not, therefore, take place.
Mr Mowbray submitted alternatively that
all the various documents emerged from the escrow simultaneously, and that it
could not be said that the share transfer was executed unconditionally at a
later instant than the transfer of the property. Mr Kim Lewison QC submitted,
first, that the crucial moment was the registration of the share transfer,
which took place later in the day. I do not accept that: the moment of
unconditional execution is what has to be looked at. Second, however, he
submitted that, it being clearly the intention of the parties that the property
transfer should become unconditional prior to the share transfer, the court
could and should find that that is what happened. He relied on Gartside
v Silkstone (1882) 21 ChD 762, as regards the priority between two sets
of debentures executed on the same day, and Keith Bayley Rogers & Co
v Cubes Ltd (1975) 31 P&CR 412 as regards the order in which two
notices served by a landlord on the same day were to be taken as having been
served. In Gartside Fry J considered the contents of the respective
debenture deeds in order to determine the intended order. But I do not think
that the court is limited to internal evidence of that kind. Fry J also looked
at the board resolution pursuant to which the debentures were issued, and said
that he found nothing in that to show the intended priority of the debentures.
I infer that if there had been any such indication in the resolution, he would
have taken that into account. Here there is similar material, in the two sale
agreements and in the escrow memorandum, executed in accordance with the share
sale agreement, and providing for the completion procedure. Given that, by
clause 2.1 of the share sale agreement it was conditional on the property sale
agreement first being completed, I consider that I should infer and find, and I
do so, that the contractual order of events was respected. The same sequence is
set out in paras 2.2 to 2.4 of the escrow memorandum. It would have been even
clearer if that memorandum had said that the conditions of the escrow for the
share transfer and loan note transfer included the prior release from escrow of
the property transfer, but, in my judgment, that is what the document amounts
to, and that is in any event clearly indicated by clause 2.1 of the share sale
agreement. I therefore accept Mr Lewison’s submission that the shares were not
transferred until after the transfer of the building had been executed
unconditionally.
Mr Mowbray also submitted that the entry
in the company’s register showing that Frogmore became registered as a
shareholder on March 24 should be taken as conclusive. The register is prima
facie evidence: Companies Act 1985 section 361 and section 352(2)(b)
and (c). He submitted that it should be taken as conclusive unless and
until rectified, that there was no statutory power to rectify it in this
respect under section 359, and that it had not been and could not now be
rectified. I disagree. The register is of course prima facie evidence,
but it can be rebutted, and has been. If it is or becomes plain that an entry
is mistaken, it is open to the company to rectify it without an order of the
court, and the company should do so: see Reese River Silver Mining Co Ltd
v Smith (1869) LR 4 HL 64 at p81. It is understandable, and appropriate,
that the error should not have been rectified pending the current proceedings,
but, in my view, it can and should now be corrected to show that Frogmore
became a shareholder on March 25, not March 24, and even in the absence of that
being done I am entitled to proceed on the basis of the facts as proved, albeit
inconsistent with the entry in the register.
Effect of the conditional contract
Mr Mowbray’s other argument is that, even
so, the subsisting contract for the sale of the shares had the result that,
already before the transfer of the building, Jaguar did not fall within the
definition of a subsidiary of TWP in section 736. He points out that, certainly
apart from the effect of the condition in clause 2.1, on normal principles of
equity, the vendor under an uncompleted contract for sale holds the property
agreed to be sold on trust for the purchaser, albeit that it is a special kind
of trust under which the vendor also has rights to be protected, because the
contract may go off, and he has in the meantime the unpaid vendor’s lien, and
the purchaser is not entitled to possession of the property or its fruits until
completion. He says this was the case here as well, notwithstanding clause 2.1,
either because the general rule applies sufficiently for this purpose even
before the condition is satisfied, or because clause 2.1 was not a suspensive
condition comparable to, for example, a condition as to the grant of planning
permission.
The general principle is set out by
Nourse LJ in J Sainsbury plc v O’Connor (Inspector of Taxes)
[1991] 1 WLR 963, a tax case turning on whether one company or another was the
‘beneficial owner’ of particular shares in given circumstances. The facts were
very different but Nourse LJ reviewed the general rules as part of his
analysis. At pp978E–979D he contrasted unconditional and conditional contracts
and said at p979B that in the latter case, until the condition was waived or
satisfied, there could be no right to specific performance and no passing of
the equitable interest in the subject-matter of the contract, and it follows
that there would be no trusteeship. Of course it does not follow that the
purchaser could not obtain the protection of a court of equity, for example by
injunction, to restrain the vendor from acting inconsistently with the
contract, and he could no doubt, in the case of a sale of land, protect his
contract under the Land Charges Act or the Land Registration Act.
Mr Mowbray however relied on Gordon
Hill Trust v Segall [1941] 2 All ER 379. That was a decision of the
Court of Appeal which involved several issues on facts rather remote from the
present. It was an action in deceit against a man, who, it was said, had
falsely and fraudulently represented, by his agents, that he was the owner of
particular land, whereas he was no more than the contracting purchaser under a
contract, completion of which could not take place until the vendors had found
alternative accommodation, which they were obliged to exercise all reasonable
endeavours to do but had not yet done, and where the purchaser had, but had not
exercised, the right to rescind under the contract because it had not been done
within two years. Wrottesley J found for the plaintiff, but this was reversed
by the Court of Appeal. One ground for that was that the statement by the agent
that the defendant was the owner was not made with the authority of the
defendant. A second ground was that it was contrary to the evidence to hold
that, even if the representation was false and was made with authority, the
defendant knew it not to be true or did not believe it to be true. But Mr
Mowbray says that the Court of Appeal also decided that the statement was not
false, that is to say that the defendant was indeed the owner in equity.
Luxmoore LJ says three things relevant to this. At p388A–B is the passage Mr
Mowbray most relies on:
As a result of entering into that
contract, the Defendant … became the owner in equity of the property, certainly
as from the date of the contract, for the vendors were precluded from dealing
with that property in any way except with the consent of the Defendant or the
company.
The next passage at p390G–H is as
follows:
However, the matter does not end there,
for, if the representation was not in fact false, no liability can arise. The
contract between Segall and the convent was not subject to any condition so
long as it remained on foot, and, in my judgment, it was not untrue to refer to
Segall or his company as the owner or owners of the land. The circumstances at
least show that they thought the contract entitled them to compel the vendors
to complete the contract when they started the action for its specific
performance on May 19, 1938.
The third passage is at p391F–H:
Segall’s actions, including the action
which he brought for specific performance, are really explicable on the one
ground only, and that is that he thought that he or his company had become in
equity owners of the property when they entered into the contract in question.
In that belief it seems to me that he was well founded, because, as I read the
contract and the cases which have been repeatedly relied on, he was in fact the
owner of the property, and, that being so, there should never have been any
finding that he had made a false and fraudulent representation that he was the
owner of the property when he knew full well that he was not entitled so to
describe himself.
I do find the first of these passages
puzzling because the classical principle is not based on the test of whether
the vendor is precluded from dealing with the property inconsistently with the
contract. That would be true just as much of a right of pre-emption before the
occasion has arisen for it to be exercised, but that does not give rise even to
an interest in land: see Pritchard v Briggs [1980] Ch 338. The
general rule, being based on the purchaser’s ability to obtain specific
performance, does not seem readily applicable to a case in which the vendors
could resist such an action by saying that, despite all reasonable endeavours,
they had not been able to find suitable accommodation for the school which they
had been running at the property. However, in the light of the way that
Luxmoore LJ expresses himself at p390 — ‘the contract … was not subject to any
condition so long as it remained on foot’ — it seems to me that, whether or not
I understand the basis on which Luxmoore LJ said that, I cannot treat the case
as a binding decision that, if there is a condition precedent, not yet waived
or satisfied, the ownership of the subject property is to be treated as having
passed already in equity to the purchaser. If the case did decide that it would
be inconsistent with other Court of Appeal authority and that would itself
provide a basis for not following it.
The case was cited by Blackburne J in Chattey
v Farndale (unreported May 24 1996) a case concerned with whether a
contracting purchaser under a conditional contract had a lien on the
subject-matter of the contract for his deposit before the condition was
satisfied. Gordon Hill Trust v Segall was cited, along with London
& South Western Railway Co v Gomm (1882) 20 ChD 562 and other
cases better known than Gordon Hill Trust. The judge held that the
contracting purchasers became owners in equity of the premises of which they
were to take subunderleases as soon as their contracts were exchanged and
(apart from the effect of a separate clause) became entitled to liens on the
payment of their deposits, even though the contract was still conditional. That
decision was appealed and in the judgment of Morritt LJ in the Court of Appeal
(unreported October 11 1996) Gordon Hill Trust was not cited. However
the Court of Appeal decided that a lien did arise, even though the contract was
not yet specifically enforceable, because the purchaser had a right to call for
the legal estate, albeit in the future and subject to conditions, so that
ownership in equity was to be understood in that sense. The grant of an as yet
unexercised option, as in London & South Western Railway v Gomm
gives the option holder an equitable interest or estate in this
property for the option holder. By the same token, in the present case I do not
regard Gordon Hill Trust v Segall or Chattey v Farndale
as requiring me to hold that the vendor under a conditional contract, where the
condition has not yet been waived or satisfied, holds the property on trust for
the purchaser. This is so despite the fact that the purchaser might already
have a lien for any deposit, would be able to register a land charge or
suitable entry at the Land Registry, and would be entitled to have the vendor
restrained by injunction from dealing with the property in breach of the
contract.
Mr Mowbray cited other authority to me in
support of this proposition but none, I think, was closer to the point than
those that I have discussed.
Was the contract subject to a condition
precedent?
Mr Mowbray also pointed out, correctly,
that the condition in the present case was much closer to fulfilment than that
in point in Gordon Hill Trust and that it was a term of the share sale
agreement that TWD was to procure that the property sale agreement was
completed and thus the condition satisfied, and TWD was also obliged to lend to
the purchaser the money with which to pay the price on completion and procure
the issue of the loan notes: clause 10.3. On that basis, and given that the
other party to the property sale agreement was under the control of TWD, he
said that this condition was not in the same category as those conditions,
dependent on third parties or on events outside the control of the parties to
the contract, which would prevent the case from falling within the general
principle of equity as to uncompleted contracts. He says that this case is much
more analogous to a condition, for example, as to good title which is not a
condition precedent but rather just another term of the contract. This point
emerged more clearly in reply than in Mr Mowbray’s opening, and no authority
was cited to me in relation to it. There is a good deal of discussion of points
of this kind in the cases in a number of different contexts. For example, in Eastham
v Leigh London & Provincial Properties Ltd [1971] Ch 871, at p891D–F
Buckley LJ said:
Although clause 4 is couched in
conditional language, in my view it amounts to no more than this: it provides
that if the tenants perform their part of the contract then the landlords will
perform their part of the contract; in other words it is a recognition of the
fact that the obligations of the parties are mutual and that the granting of
the lease will, in fact, follow the completion of performance of the
obligations of the tenants. That is not, in my judgment, a condition precedent
to the contract at all, it is part of the terms of the contract. You may call
it a condition if you please, but it does not make it a condition precedent to
existence of a contract, it merely indicates what is part of the terms of the
bargain, just as in all contracts for sale the terms of the bargain are
customarily described as conditions of sale.
It seems to me that Mr Mowbray is right
to contend that where a contract for the sale of property by A to B is
expressed to be conditional on the completion of another contract for the sale
of other property by A to C, but A undertakes to B to procure the completion of
the latter contract, and C is wholly under the control of A, the effect of the
‘condition’ is merely to provide for the order of events in which the two completions
are to take place, and it does not amount to a condition precedent to the
contract of the kind that was under consideration in Sainsbury v O’Connor.
It does not subject the parties’ contractual obligations to the occurrence of
some event which is not wholly under their control. If the condition is, at
least in part, outside the control of the parties, it does not matter that one
party may be obliged to use its best endeavours to procure the satisfaction of
the condition: see Eastham [1971] Ch 871 at p882E, per Goff J.
However where the condition depends on an event which is not (in Goff J’s
words) ‘outside the contract and beyond the parties’ control’, then it cannot
be regarded as subjecting the contract to a condition precedent. If it had been
out of TWD’s control the latter would not have entered into an unqualified
obligation to procure that it happened. Accordingly, in my view, the presence
of clause 2.1 in the share sale agreement does not make it a conditional
contract such that the equitable ownership of the subject-matter of the
contract, that is to say the shares, did not pass to the purchaser until the
condition was satisfied.
Were the relevant rights held in a
fiduciary capacity?
The question whether Jaguar was, at the
relevant moment, a subsidiary of TWD and therefore also of TWP depends on
whether section 736A(5) applies to take the case out of section 736(1) which
would otherwise be satisfied. Sections 736 and 736A in their present form were
introduced by the Companies Act 1989 and provide for a much more precise
definition of control through the exercise of majority voting power than had
previously applied. Correspondingly section 736A(5) refers to ‘rights’ held by
a person in a fiduciary capacity whereas the previous section 736(4)(a)
referred to shares held in a fiduciary capacity as well as to powers
exercisable in such a capacity. These new sections were introduced in order to
comply with the Seventh Company Law Directive of the European Community on
Consolidation of Group Accounts, 83/349/EEC.
Accordingly if Mr Mowbray is to be able
to rely on section 736A(5) to take the case out of the general rule in section
736(1) he has to show that any ‘rights’ by virtue of which Jaguar would
otherwise qualify as a subsidiary of TWP are to be disregarded on this ground.
This is not a case falling within section 736(1)(c) because there was no
shareholders’ agreement. Both the issued shares in Jaguar were held by TWD so
Jaguar would qualify as a subsidiary of TWD, and therefore also TWP, by virtue
of either or both of section 736(1)(a) — holding a majority of the voting
rights — and section 736(1)(b) — being a member (ie holding the shares) and
having the right to appoint or remove a majority of the board of directors.
Although I have not seen the memorandum and articles of association of Jaguar I
must assume that TWD as holder of all the issued shares held all the voting
rights and had the right to appoint and remove any or all of the directors.
Thus it is the voting rights attaching to the shares which Mr Mowbray has to
show were held in a fiduciary capacity.
He says that that follows because if the
shares are held on trust for a purchaser, so also are all the incidents
attaching to the shares including the voting rights. In the case of an ordinary
trust that would of course be so: rights attaching to shares held in the trust
fund of a discretionary or other family settlement, or a pension or charitable
trust, are held on the same trusts as the shares. But this is not an ordinary
trust, and there is authority that, even where shares are the subject of an
uncompleted, unconditional contract (as here), it is the vendor who can decide
how to cast the relevant votes and he is not subject in this respect to any
direction from the purchaser: Musselwhite v CH Musselwhite & Son
Ltd [1962] Ch 964. It was argued in that case that the vendor, in
exercising its voting powers in respect of the shares at any general meeting
was, by virtue of the beneficial ownership of the purchaser in the shares,
bound to comply with the directions of the purchaser as to how to vote, except
in respect of a direction which would affect the value of the lien of the
unpaid vendor, so that the vendor was (apart from that exception) in the same
position as a bare trustee. At p987 Russell J rejected this argument and held
that the unpaid vendor of the shares remaining on the register after the
contract retains vis-à-vis the purchaser the prima facie right to
vote in respect of those shares. He could no doubt be restrained by injunction,
or made liable after the event in damages, if the right were exercised in a
manner inconsistent with the contract. But it seems to me that it is impossible
to say, in those circumstances, that he holds the voting rights in a fiduciary
capacity for the purchaser even if, because of the doctrines of equity, he
holds the shares themselves in a fiduciary capacity. This is consistent with
the proposition that the vendor’s trusteeship of the property agreed to be sold
does not extend to the pre-completion fruits of the property, or give the
purchaser a right to possession. For that reason, it seems to me, Mr Mowbray
cannot establish that the terms and circumstances of the contracts have the
result that, at the time when the transfer of the building was executed unconditionally,
Jaguar was other than a subsidiary of TWP.
It is a somewhat curious position
because, as it seems to me from reading the original version of section 736 in
the Companies Act 1985,
from section 17 of the Interpretation Act 1978 that, as regards this
transaction, reference is to be made to the amended text.
The change is thus a seemingly fortuitous
result of an amendment of the law designed to harmonise the rules about consolidation
of group accounts prevailing in the various member States of the European
Communities.
It might fairly be said that the scheme
used by Taylor Woodrow and Frogmore is one which takes a perfectly genuine and
sensible exception in the Act and turns it into a gaping loophole, and that on
that footing the court should not be astute to find that the exception is of
wider application than it needs to be. It might then be said that, on the basis
of what I have already said, the transaction only just succeeds in getting into
the loophole, and that it might not be difficult to construe the provisions
more narrowly so that this particular transaction would not be within the
exception. However, the question does inevitably turn on issues of statutory
construction on sections of the Companies Act 1985 of a technical nature and of
wide application. I should not read those provisions in a way which does not
give them their proper scope, whatever that may be, even if it results,
incidentally, in what may be an unexpected, and from some points of view
unsatisfactory, conclusion as the amended definitions in the Companies Act have
their impact on Part I of the 1987 Act: cf Belvedere Court Management Ltd
v Frogmore Developments Ltd [1996] 3 WLR 1008* at p1022.
*Editor’s note: Also reported at [1996] 1
EGLR 59
I therefore hold that, at the time of the
transfer of the building to the defendant, it and TWP (and also TWD) were
associated companies, and therefore that the disposal to the defendant was not
a relevant disposal. It follows that the action fails. However. since the
points under section 11 have been fully argued, as has the estoppel sought to
be raised by the defendant, I will deal with these and make such findings of
fact as might be relevant in case I am wrong on the fundamental point.
Was the tenants’ notice validly served
under section 11?
On the assumption that the disposal to
the defendant was a relevant disposal (contrary to my decision) it is accepted
that two of the conditions for the service of a notice under section 11 by the
requisite majority of qualifying tenants would have been satisfied on May 24
1993, and it is accepted that the notice actually served on that date was
served on the part of the requisite majority of the then qualifying tenants.
However it has also to be shown that, at that date, the premises were still
premises to which Part I of the 1987 Act applied: section 11(1)(c). As I have
said it is admitted that those provisions applied to the building on March 25
1993, but I cannot assume from this that the position was the same two months
later.
Part I of the Act applies to premises,
under section 1(2), if (ignoring points which either are clearly satisfied or
are irrelevant) the number of flats held by qualifying tenants exceeds 50% of
the number of flats contained in the premises. Qualifying tenants are defined
by section 3: relevantly it is to be noted that they do not include assured
tenancies, nor tenancies within Part II of the Landlord and Tenant Act 1954,
and there are some special rules in subsections (2) and (3). Both a statutory
tenant and a tenant within Part I of the 1954 Act are qualifying tenants.
I have no clear evidence as to the number
of flats contained in the building. Two internal documents of Frogmore dated
May 25 and 26 1993 are the plaintiffs’ best evidence on this point. On May 25
1993 Titmuss Sainer & Webb had a consultation with Mr Lewison on behalf of
Frogmore and the note of that consultation includes the following passage:
PD said that ME had carried out an
analysis of the premises available, and estimated that there were 99 units. The
allegedly ‘qualifying units’ included some company lets. At the present time 52
units were perceived to be qualifying and 47 non-qualifying, although in a few
cases there was room for argument.
PD was Mr Philip Davies of Frogmore and
ME Mr Martin Eve of White Druce & Brown the managing agents. On the
following day Mr Davies sent an internal memorandum to Mr DJ Cope, the non-executive
chairman of Frogmore, in which he referred to the possibility that if the
number of qualifying units could be reduced to 50% or less the tenants would
have no right to proceed. In his memorandum he refers to the total number of
flats as 99 and says: ‘Our present calculation is that there are only 52 or
possibly 53 qualifying units’.
Mr Michaels produced a tenancy schedule
annexed to his witness statement. However, he had not prepared it nor did he
know for certain the date of its preparation, which he believed was during
March 1993. It does list 99 flat numbers. But it seems to me that it is
strictly inadmissible, and is in any event of no assistance since it does not
even profess to show the position at the relevant date. Nor would it be
possible to determine from it, even if it is accurate so far as it goes, which
of the flats let were, and which were not, let to qualifying tenants. Thus the
only admissible evidence on the point is Frogmore’s internal documents which at
least have the merit of dating from about the relevant date. However, given the
closeness of the numbers indicated and the element of doubt and estimation
apparent from the terms of those documents as to the precise accuracy of the
number of flats and of qualifying tenants, and their context, I am not prepared
to regard these documents as admissions proving that which the plaintiffs have
to demonstrate in this respect. Accordingly I hold that, even if section
11(1)(a) had been satisfied, section 11(l)(c) has not been shown to have been on
May 24 1993, so that the notice under section 11 was not validly served.
Section 17(6) makes it unnecessary and irrelevant, in some circumstances, to
investigate the question of whether Part I of the Act still applies to relevant
premises, but Mr Lewison points out that this subsection only applies if a
valid notice has first been served under section 11 or section 12. It therefore
cannot be used to help validate a notice under section 11 itself.
If the section 11 notice was validly
served, was it properly answered?
The information which can be required to
be furnished under section 11 is:
particulars of the terms on which the
original disposal was made (including those relating to the consideration
payable) and the date on which it was made.
The actual request was for:
particulars of the terms on which the
property known as ‘Harley House’ was transferred to Jaguar and the shares in
that company were transferred to Frogmore Estates Plc including the
consideration paid and the date or dates on which the transfers were completed.
It is common ground that the terms on
which the shares in Jaguar were transferred are outside the scope of section
11. The answer, so far as section 11 is concerned, was in para 1 of the letter
from Titmuss Sainer & Webb to Miss Banse, the nominated person, dated May
26 1993, as follows:
On 25th March 1993 Harley House was
transferred by way of subsale from TWP through 7WD to Jaguar at a price of
£15,750,000 the consideration being satisfied by the issue of 15.75 million
pounds of loan notes.
Other information was given in relation
to the corporate structure and the transfer of the shares and loan notes. All
the information given was without admission as to the validity of the section
11 notices and without prejudice to the defendant’s belief that the
transactions described did not contravene the provisions of the 1987 Act.
This answer is said to be defective in a
number of respects. In the plaintiffs’ notice under section 19(2), which is a
pre-condition of the action, the defect is said to be not giving the
information requested in DJ Freeman’s letter of December 3 1993. This requested
five items of information:
(a) The date of the transfer of the
building to the defendant: this had already been supplied.
(b) The date of the issue to TWD of the
loan notes: this was clearly irrelevant to section 11.
(c) The terms of the loan notes: I deal
with this below.
(d) The date of the contract for the sale
of the shares in the defendant and its completion: this is irrelevant to
section 11.
(e) The details of the consideration paid
by Frogmore for the shares and other related matters: this is also irrelevant
to section 11.
Subject to the question of the loan
notes, which I will discuss below, it is clear that none of this is information
which could legitimately be claimed under section 11. I will revert later to
the consequences of this in the context of section 19.
In the points of claim, the deficiencies
were said to be: (1) the omission of details of the loan notes which were
needed to assess their value; and (2) incorrect statements about the defendant
being a wholly owned subsidiary and about the purchase of the shares. The
latter are clearly not matters within the scope of section 11, so that the only
complaint left concerns the loan notes.
In submission Mr Mowbray added a further
default, namely information concerning the transaction between TWP and TWD.
More generally he submitted that the only fully satisfactory way of satisfying
the obligation under section 11 is to supply the contract and all documents
executed on completion pursuant to it.
The reason why the tenants need to know
the terms on which the disposal was made is that those were the terms on which
they may be entitled to require the new landlord to sell to them under section
12(1), although events after the original disposal may also lead to adjustments
of the price under section 12, and the leasehold valuation tribunal has power
to review and rule on the terms on which, if the right to buy is pursued, the
new landlord is to enter into a contract with the nominated person. The Act
does not deal in terms with the case, as here, where the relevant disposal is
the transfer by A to C, but A is a vendor to B under an uncompleted contract
and B is the vendor to C. Nevertheless, it seems to me that, at least in the
present case, where A’s contract with B had already been completed by payment,
although not by transfer of the legal estate, the terms on which the disposal
was made are the terms agreed between B and C, as a result of which B directed
A (as it was entitled to) to convey to C. The terms of the transaction between
A and B could have no relevance to C, who would not necessarily even know what
they were, and could not therefore be expected to furnish details of them.
Equally it would be nonsense to regard them as part of the terms on which the
tenants could require C to sell the property to them under section 12. I
therefore reject Mr Mowbray’s contention as to the need to furnish particulars
of the transaction between TWP and TWD.
I also cannot accept Mr Mowbray’s
submission that the terms of the loan notes were among the terms on which the
disposal was made. The disposal was made in consideration of the payment of
£15.750m by Jaguar to TWD. In fact Jaguar obtained that money by borrowing from
TWD on the terms of the loan notes. But that is a matter distinct from the
purchase. Jaguar might in other circumstances have secured the funds by
borrowing from a third party. The inquiry is understandable because of the
terms of the response in the letter of May 26 but it seems to me that this
answer was inaccurate: the consideration was not satisfied by the issue of the
notes but by the use of money lent to Jaguar as recorded in the loan notes. I
do not overlook the fact that provision is made for the loan and the loan notes
in the share sale agreement. It seems to me that that is collateral and that
the terms of the loan notes are not part of the terms on which the disposal was
made. The consideration was £15.750m not the loan notes. This is of particular
importance because there is only limited scope for reviewing the consideration
payable on a purchase under section 12, which starts with the consideration
actually paid by the new landlord. In my judgment, if rights under section 12
could have been, and in fact had been, exercised the starting point as regards
the consideration payable by the nominated person would have to have been
£15.750m rather than the loan notes or their value as determined in some
hypothetical manner. I should mention that I heard expert evidence as to how
the loan notes could be valued. The experts were agreed that the terms of the
loan notes were only appropriate for a situation in which the notes would be
owned by the person who also controlled the company. They would not in any
sense be appropriate for notes that were intended to be sold separately. I
accept the evidence of Mr Collins, called on behalf of the defendant, that, as
between parent and subsidiary, the value of the loan notes was par, and that in
any other context it is impossible to put any sensible value on the loan notes.
There are however further points raised
by Mr Mowbray’s submissions although they were not identified in the notice
under section 19(2) or the pleadings. Because these emerged at a late stage,
and because their implications may therefore not have been fully argued, and
because it is not necessary to my decision in the case as a whole, I will deal
with these points only briefly and without expressing firm conclusions. They
are points of law on which no facts need to be found.
On completion of the purchase of the
building, Jaguar entered into a deed of indemnity in favour of TWD. In an
ordinary case, not involving a subsale, this might have been incorporated into
the transfer and indeed it could have been so documented in this case. It seems
to me well arguable that the undertaking by the transferee of these obligations
is one of the terms on which the disposal was made. Of course it was not in
favour of the transferor, but then nor was the payment of the price. It was
required by clause of the property sale agreement as one of the things to be
done on completion. Mr Lewison accepted that on a normal disposal by A to B, an
indemnity given by B to A would be one of the terms of the transfer even if set
out in a separate deed. I incline to the view that this deed was one of the
terms on which the disposal was made in this case, in which case the response
under section 11 ought to have mentioned it.
More generally, as regards the terms of
the contract, the leasehold valuation tribunal has power to determine what are
to be the terms of the contract on which, if the nominated person wishes to
buy, he may do so: see section 12(3)(b) and section 13(1)(a) and (b). (A
limited time is allowed for the contract to be entered into, or an application
made to the tribunal to decide its terms: see section 17(4).) It seems that, in
general, the terms of the original disposal must be the starting point for deciding
the terms of the new contract, though they may be varied according to what is
appropriate: Cousins v Metropolitan Guarantee Ltd [1989] 2 EGLR
223, 30 Upperton Gardens Management Ltd v Akano [1990] 2 EGLR
232, (where the tribunal considered the original contract in detail and set out
at length its reasons for deleting some of the provisions and modifying
others), and Norman v Kay [1991] 2 EGLR 237. By contrast, as
mentioned above, the tribunal cannot modify the price payable except under
section 12(3)(a), section 12(4) or section 12(6).
If the right to buy is to be pursued, the
nominated person will need to enter into a contract with the new landlord. The
terms of the contract for the disposal to the new landlord would be at least
influential in determining the terms of that new contract, and might indeed
have a bearing in some cases on the appropriateness of the consideration.
Accordingly, I can see a good deal of force in the proposition that the
qualifying tenants need to know not just the terms of the transfer and other
matters passing on completion, such as, here, the deed of indemnity, but also
the terms of the contract. In the present case, apart from points already
mentioned and normal conveyancing provisions, the contract deals with arrears
of rent (clause 12), apportionment of management costs (clause 25) and rent
deposits (clause 31), with the transfer to the purchaser of the contracts of
employment of relevant staff under the Transfer of Undertakings (Protection of
Employment) Regulations 1981 (clause 21) and also with management pending
completion (clause 23) and pending proceedings under the Landlord and Tenant
Act 1954 and for the registration of rents and the like (clause 24), as well as
various provisions about outstanding matters on a number of particular flats
(clause 26). Some of these would need to be modified on a purchase by the
nominated person, but it seems at least arguable that, in the light of those
considerations, proper compliance with section 11 requires particulars of the
terms of contract (in practice best provided by disclosing the document, rather
than by attempting to summarise it) as well as the terms of the transfer itself
in any event and probably such a document as the deed of indemnity.
Such a conclusion would not, however,
lead me to take a different view on the facts of this case as regards the loan
notes which were covered by the letter agreement of February 25 1993. Although
if a provision is really a term on which the transfer is made it could not be
removed from the ambit of section 11 by being hived off into a separate
collateral document, I am satisfied that the agreement by TWD to lend the money
to Jaguar necessary for completion, although clearly part of the transaction as
a whole, was not, as a matter of fact, one of the terms on which the original
disposal to Jaguar was made.
Plaintiffs’ notice under section 19
Section 19 allows any person interested
to apply to the court for an order requiring a person who has made default in
complying with any duty imposed on him by any provision of Part I to make good
the default within a time specified in the order. Here Mr Mowbray would say, if
he had persuaded me on the points covered already, that the defendant had made
default in complying with its duty under section 11(3), and should be ordered
to make good that default. It is a prerequisite that notice has first been
served on the person in question requiring him to make good the default and 14
days has gone by without his having done so: section 19(2).
Such a notice was served by Merriman
White on behalf on the plaintiffs on December 1 1995 complaining of a default
in complying with the section 11(3) duty by not giving the information sought
by DJ Freeman’s letter of December 3 1993. Unless I am wrong about the loan
notes, it is not arguable that any of that information was within the ambit of
section 11(3). That letter does not for example ask for the terms of the
contract for the sale of the building. Of course, the tenants’ position would
necessarily be that there is information which has not been disclosed to them,
and they would not necessarily know even the general nature of what has been
withheld, so it might be prudent to complain of a default in general terms.
However, it seems to me that it might be argued that if the notice under
section 19 identifies the alleged default in specific terms, it is only that
default (if such it be) that can be put in issue in the proceedings. This might
follow from the two references to the default in section 19(1) and
(2)(a), which at first sight mean the same default. However, I did not hear
argument on this point and would not have decided against the plaintiffs on
that ground without giving counsel the opportunity to make further submissions
on the point.
Estoppel
If Mr Mowbray had succeeded on all the
points I have mentioned so far, Mr Lewison would nevertheless argue that the
plaintiffs are estopped from asserting any entitlement to join in serving a
notice under section 12 in future, by virtue of not having done so for a period
of more than three years during which the defendant was undertaking extensive
work to the building. In case I am wrong in the conclusions which I have come
to on the points already covered, I must make findings of fact as relevant to
this aspect of the case and say what my conclusion would have been if this had
arisen.
Mr and Mrs Michaels are tenants of one of
the numerous flats now let to qualifying tenants. They cannot initiate the
section 12 procedure themselves but they can join with others in doing so, if
so entitled. Estoppel cannot be established against the fluctuating class of
qualifying tenants, still less the even more uncertain class of the requisite
majority of qualifying tenants. But it can, in principle, be established
against individuals who are, for the time being, qualifying tenants, so as to
preclude them from asserting rights, or joining with others to exercise rights,
to which they would otherwise be entitled. It can certainly be set up against
the plaintiffs as a bar to their right, if it were otherwise shown, to the
relief sought in this action. But clearly this has to be on the basis of their
actions, or inaction, and their knowledge, not that of anyone else.
Mr Mowbray pointed to the fact that the
purchaser could have protected itself by serving notice under section 18 of the
Act, by which advance clearance can be obtained before completion. The
existence of this possible course of action does not seem to me to exclude the
possibility of estoppel based on subsequent events.
The facts relevant to the plea, as I find
them, are as follows. On March 25 1993 the defendant informed all the tenants,
including the plaintiffs, of their purchase and of their proposals for
refurbishment. By the time of the tenants’ notice on May 24 1993, the defendant
had embarked on preparatory work, but no more, and it did not undertake any
actual refurbishment work until the autumn of 1993. On May 24 1993 the
defendant’s intention was to carry on with its preparatory work even though the
tenants were asserting rights under the Act and to proceed with all haste as
regards planning applications and other preparations, though continuing to
review the position as necessary. The defendant prepared a display in a vacant
ground-floor flat, no 70, to show the proposals and notified all tenants of
this at the end of May and the beginning of June 1993, and added further
details as regards the proposals in relation to the roof at the end of June
1993. The plaintiffs were aware of this display but did not choose to look at
it. It remained available from June until the end of the year. On July 15 the
residents’ association issued a newsletter reporting on the response to the
section 11 notice and referring to it as ‘a reply giving us the information we
sought’. It said that, ‘although Frogmore and Taylor Woodrow evaded the Act,
what they did is by no means invulnerable to legal attack.’ It made reference
to the possibility of a notice under section 12. This was not of course
addressed to the defendant although a copy came into its possession. The
plaintiffs received this newsletter as they had received a copy of the Titmuss
Sainer & Webb letter of May 26. On July 28 the defendant wrote to all
tenants encouraging them to provide further comments on the display and
enclosing a questionnaire to make it easier to provide such comments. On August
13 1993 the defendant wrote to Miss Banse a very firm letter, having heard of
an intention to serve a section 12 notice. Mr Davies, on behalf of the
defendant, expressed his view in that letter that to serve such a notice would
be vexatious and would have no prospect whatsoever of success. He said that if
such a notice were served the landlord would immediately institute proceedings
against the residents’ association or individual signatories for a declaration
that the notice is invalid, that they would seek to progress those proceedings
as fast as possible on the basis that the notice is vexatious and that they
would seek costs on a full indemnity basis from the defendant to the
proceedings. He asked that the association should reconsider the action that
they were proposing to take and accept his earlier invitation to discuss the
refurbishment proposals and the possibility of the sale of flats to existing
tenants at discounted prices. This rather firm line, to say the least, is
consistent with what had been said at the end of the letter of May 26 1993,
that if the association were to take any action on the basis that the Act did
apply to the disposal, it would not succeed and the defendant would strenuously,
vigorously and expeditiously oppose any such action, and that any such
proceedings would inevitably be time consuming and costly and the defendant
would seek to recover all costs and damages which it might suffer which are
likely to be substantial and would additionally seek security for costs in
relation to any such proceedings — the last of course an empty threat except in
relation to any corporate plaintiff. It is not clear whether the letter of
August 13 was circulated to the plaintiffs or other tenants but it does
indicate the defendant’s attitude manifested to tenants generally. Of course
the tenants did not serve a section 12 notice within the three months following
the May 26 letter.
I should also mention that the apparent
loophole provided by section 4(2)(l), and indeed the particular case of the
sale of Harley House, was brought to the attention of Parliament itself when on
May 20 1993 Lord Coleraine moved an amendment to the Leasehold Reform, Housing
and Urban Development Bill which was intended to provide that the disposal of a
controlling interest in the landlord would be a relevant disposal unless it was
itself disposed of to an associated company, and to give three years’
retrospective effect to this new provision. The amendment was not passed.
On September 16 Mr Davies wrote an
internal memorandum to Mr Cope and others summarising what had happened and
noting that no
‘I hope this brings to end any further discussion on the subject’. He then went
on to deal with the applications for planning permission that had been made or
were pending and described in a general way the plans for the building. In
about October 1993 work on the exterior of the building was begun and, probably
at about the beginning of 1994, work on the internal common parts and then work
to refurbish vacant flats. Later the work commenced to add the sixth-floor
penthouses. As I have mentioned, on December 3 1993 DJ Freeman, acting ‘on
behalf of various tenants of Harley House’ who had served section 11 notices,
asked for further information on the basis that the answer given on May 26 had
been inadequate. I have already summarised the information requested. Titmuss
Sainer & Webb replied on December 6 that they considered that the
information was not something to which DJ Freeman’s clients were entitled and
not providing any further information. On December 22 1993 White Druce &
Brown, the managing agents, wrote to all tenants, referring to the external building
repairs, phase 1 of the works, which had begun and were due to be completed in
June 1994 in accordance, they said, with a schedule of phasing which had been
previously circulated to all tenants. They then described phases 2 and 3 which
were to be embarked upon and invited lessees to attend a meeting to discuss
these proposed works on the evening of January 25 1994. The plaintiffs were
notified of this meeting, but did not attend. Mr Michaels was away. Mrs
Michaels told me in evidence that she normally left such matters to him and
further that she would have needed a babysitter. In addition she said that she
felt that the defendant ‘was not our landlord’, but she did not express this
view to the defendant at the time or any representative of it. Presumably what
she meant was that the defendant was not entitled to be the landlord, but the
fact was that it was the landlord and would remain so unless and until rights
were exercised under section 12 or there was some other disposal.
Following the meeting in January 1994 the
defendant embarked on the later phases of the work and has now carried out very
substantial works, costing the best part of £20m, of which only a small part
would be attributable to work which it was required to undertake by virtue of its
covenants as landlord under the leases. I was told that there is some £5m worth
of work outstanding on contracts which are planned but which have been held up
because of the commencement of these proceedings.
The plaintiffs have been all too well
aware of the work undertaken from the very start, and they knew that it was far
more extensive than could be explained by reference to the landlord’s
obligations to the tenants; indeed they complained bitterly as to how it was
carried out, and complained that some of the work which was or may have been
within the scope of the landlord’s repairing obligations was undertaken
unnecessarily. Mr Michaels said that he did not accept that the response under
section 11 was adequate but that he relied at first on the residents’
association to deal with the matter properly. He seems only to have protested
as to what the residents’ association were doing in January 1994 (by a letter
which was confusingly and mistakenly dated 1993). At that stage, he told me in
evidence, he did not think the residents’ association would achieve anything
but it was only later in 1994 that he got the idea that he and his wife were in
a position to take any action on their own. He applied for legal aid in 1995
which was granted to him, it seems, in September 1995. The first thing that was
done, so far as the defendant was concerned, was the letter from Merriman White
of December 1 1995 that I have already referred to with its notice under
section 19(2). He did nothing more, and the defendant heard nothing more from
him, until October 1996. He explained that this was partly in order not to
jeopardise the resolution of a claim that he had against the defendant
concerning flood damage to his flat which was suffered in December 1995. At no
stage before the letter of December 1 1995, or after that until October 1996,
did the plaintiffs assert a continuing right to join with other qualifying
tenants in forcing the defendant to sell the freehold despite what had already
happened.
On those facts Mr Lewison says that the
plaintiffs are estopped by their acquiescence or by their silence, giving rise
to a reasonable assumption by the defendant that the plaintiffs did not have,
or if they had were not intending to exercise, any right to seek further
information under section 11 with a view to asserting, late, a claim to acquire
the freehold under section 12. He relies on the broad formulation of the
principle of estoppel by Oliver J in Taylors Fashions Ltd v Liverpool
Victoria Trustees Co Ltd [1982] QB 133* at pp151–2 and 155. In this case
the premise is that the defendant believed (wrongly) that it had complied fully
with section 11(3), and that the plaintiffs were not intending to assert the
contrary or to claim that they had the right to proceed under section 12 after
the three-month period had expired in August 1993. In that belief the defendant
undertook major works and incurred substantial expenditure which it would not
have done but for that belief. The plaintiffs knew they were intending to
undertake, and in due course actually carrying out, the work. Not having served
a section 12 notice by August 26 1993, nor asserted any right to do so later,
they must be taken to have known that the defendant believed that the tenants
either had no remaining rights under sections 11 and 12 or were not intending
to exercise them.
*Editor’s note: Also reported at [1979] 2
EGLR 54
It is irrelevant that the defendant was
entitled to carry out these works on its own premises and that the plaintiffs
could not have required them to stop. If the plaintiffs and others had asserted
statutory rights to which they were entitled, the premises would have been the
defendant’s own property, but it would have been subject to rights of compulsory
purchase on behalf of the qualifying tenants on terms to be fixed under the Act
so that the defendant’s ownership rights would have been heavily qualified. No
landlord would embark on work of this scale and nature in the face of such a
claim by the tenants even if the landlord considered it to be unjustified. It
is plain from the defendant’s documents, and I find from those and the evidence
of Mr Paul White, a director, that if there had been a serious assertion by or
on behalf of the plaintiffs or any other qualifying tenants that there had been
a default under section 11, so that the position remained open under section
12, the defendant would have started and pursued with speed proceedings to
resolve the position, and would not have undertaken any expenditure or
disposals which they were not obliged to undertake, until the proceedings had
been resolved. Of course DJ Freeman did assert a default by their letter of
December 3 1993 but they did not pursue the matter at all in face of Titmuss
Sainer & Webb brushing the letter aside. The same is true of Merriman
White’s letter of December 1995 which was not followed up in any way until
October 1996. The facts are, indeed, not altogether dissimilar in this respect
from Taylors Fashions itself, in which one of the two plaintiff tenants,
Old & Campbell Ltd, had carried out improvements which they were clearly
entitled to carry out but had done so in the belief that they were entitled to
the benefit of an option to renew their lease which was in fact void for
non-registration under the Land Charges Act.
Mr Mowbray’s principal response to this
was that the defendant had not in any sense acted to its detriment, but on the
contrary to its substantial profit. The figures were not explored in any great
detail in evidence but Mr Paul White was prepared to admit that the operation
so far had shown a substantial profit. In rough terms, about £19m or so had
been spent, of which a small part would be attributable to the landlord’s
obligations under the leases and should therefore be disregarded. Sales of 39
or 40 flats and three penthouses had produced proceeds of some £23m.
It is relevant to note in this context
what would be the basis of the purchase, if one could be enforced under section
12. The starting point would be the consideration of £15.750m. New leases
granted to purchasers of flats and penthouses would prima facie be
effective as encumbrances under section 12(4)(b) and the consideration would be
reduced by the amount by which the existence of the leases reduces the value of
the property, presumably as at the date of the determination not of the
creation of the lease. If the property has increased in value
12(6), but only to ‘the amount that might reasonably have been obtained on a
corresponding disposal made on the open market at the time of the original
disposal if the change in circumstances [that is to say the improvements] had
already taken place’. Thus the landlord would get a 1993 increase of value, not
a 1997 increase in value, on the basis of work done at building costs of 1994
to 1996. The defendant would keep the rents received in the meantime and the
proceeds of the sales of flats, but its ultimate financial outcome would be
determined by (a) the extent of the adjustment upwards at 1993 values under
section 12(6), and (b) the extent of the reduction at 1997 figures under
section 12(4)(b). I have no evidence of how those calculations would work out,
but given the disparity intrinsic in that exercise in a case, such as the
present would be, where a substantial period has elapsed between the original
disposal and the purchase pursuant to a section 12 notice and where a great
deal has changed in the meantime, I am not prepared to accept that the
defendant has acted in such a way as only to improve its position, so that it
cannot make out the basis of the estoppel. In the circumstances which I have
described, I consider that it would be unconscionable for the plaintiffs to be
permitted to assert that they have and can exercise a continuing right to
complain of a default by the defendant in complying with the section 11 notice,
and then seek to join with others in proceeding under section 12, in
circumstances in which the defendant has been allowed by the plaintiffs’
silence and acquiescence from the end of August 1993 until October 1996 to
assume that the plaintiffs had no such right or, if they had it, were not
intending to exercise it. I do not consider that DJ Freeman’s letter of
December 3 1993 or Merriman White’s letter of December 1 1995, neither of them
followed up after a brush-off response, put the defendant on notice that it
should not make this assumption. Even if the latter had done so, the period of
over two years’ silence and acquiescence up to then would be sufficient to
entitle the defendant to raise an estoppel against the plaintiffs and thereby
defeat the claim, if otherwise justified. Accordingly, if I had reached this
point as a matter of decision I would have held that the plaintiffs were
estopped and I would have dismissed the action on this ground.
Discretion as to order
If, however, I had otherwise found in
favour of the plaintiffs, I would not have withheld an order to remedy the
default under section 19(1) on the basis that the plaintiffs have had all the
relevant information on discovery. The defendants would be obliged to furnish
that information to the nominated person for the benefit of all the qualifying
tenants and could only do so by supplying it formally under section 11(3).
Conclusion
As it is, however, I find that:
(1) The transfer by TWP to Jaguar was not
a relevant disposal;
(2) The requirements of section 1 l(l)(c)
were not satisfied on May 24 1993 so that the notice under section 11 was not
validly served in any event;
(3) The terms of the transaction between
TWP and TWD and the terms of the loan notes issued by the defendant to TWD were
not terms on which the original disposal was made, even if there may arguably
have been some respects in which, if the section 11 notice had been valid, it
was not fully complied with;
(4) The plaintiffs’ notice under section
19(2) may not have been adequate to entitle them to complain of any default
other than that as regards the terms of the loan notes;
(5) If the plaintiffs had otherwise been
entitled to succeed, they would be estopped from asserting that the defendant
is in default and thereby claiming relief designed to entitle them to join with
other qualifying tenants in serving a section 12 notice.
I therefore dismiss the action.
Action dismissed.
