Sale of land — Contract — Rescission Land Registration Act 2002 — Sale of registered freehold land on full title basis under general condition 4.3(a) — Special condition requiring purchaser to accept leasehold interest shown in schedule to freehold title determined by surrender — Surrender ineffective owing to pending bankruptcy petition against lessee at relevant time — Whether special condition precluding reliance on continuance of lease as ground for purchaser to rescind contract — Whether lease a technical conveyancing defect insufficient to justify rescission
In January 2008, the respondent contracted to purchase a registered freehold property from the appellant for £400,000; a deposit of £40,000 was paid. The contract included the full title guarantee contained in condition 4.3(a) of the general conditions of sale and provided for vacant possession to be given on completion. The schedule to the freehold title showed the existence of a lease, granted in 2004 for a term of nine years. However, extra special condition 7 (ESC 7) of the contract stated that the lease had determined by operation of law in August 2006 and required the purchaser to accept that position without requiring further proof or raising any objection or requisition in that regard.
The lessee had purportedly surrendered the lease in August 2006. However, the surrender was ineffective, by virtue of section 284 of the Insolvency Act 1986, because of a pending bankruptcy petition against the lessee that had been registered against the leasehold title. The appellant served notice to complete on the respondent in March 2008. The respondent purported to rescind the contract on the ground of the continued existence of the lease. In May 2008, the appellant secured a disclaimer of the lease from the lessee’s trustee in bankruptcy.
Summary judgment was given for the respondent on a claim for the return of his deposit. The judge held that: (i) the appellant had no defence based on section 284(4)(a) of the 1986 Act; (ii) ESC 7 was not an exception to the full title guarantee in general condition 4.3(a) but affirmed it in the particular respect of the lease; and (iii) the continuance of the lease was not a purely technical conveyancing defect: see [2010] 1 EGLR 77; [2010] 10 EG 121. The appellant appealed on the second and third points. The respondent contended that a vendor could not rely on a condition such as ESC 7 if it was misleading or there had been less than full disclosure. He also submitted that ESC 7 was void, under section 42(3) of the Law of Property Act 1925, as a stipulation in a contract for the sale of land to the effect that no objection should be taken on account of an outstanding legal estate.
Held: The appeal was dismissed.
(1) Rather than simply affirming the “full title guarantee” basis of the sale, ESC 7 seemed to be designed to transfer risk to the purchaser in respect of the lease by drawing specific attention to it, expressing the vendor’s position in respect of it and requiring the purchaser to accept that position without objection. Since, by general condition 4.3(a), the purchaser was to be taken to have actual knowledge of inclusions on the register, he could not claim to be unaware of the potential problem created by the bankruptcy petition. The condition requiring vacant possession on sale was general in nature and did not necessarily override the specific provision under ESC 7 in respect of the lease.
(2) A condition that purports to exclude the vendor’s ordinary obligation to give good title will not always be effective to cover the vendor in respect of a defect in title of which it is aware. The knowledge that the vendor’s solicitor should have had, and which the vendor would have had if properly advised, may be treated as equivalent to actual knowledge in that regard. Although ESC 7 drew the respondent’s attention to the potential issue of the lease, it also contained an unqualified assertion that the problem no longer existed. A properly advised vendor would or should have known that this was untrue. It did not assist the appellant that the respondent might also have had the means of knowledge of the bankruptcy petition through his assumed notice of the contents of the register, since knowledge of the petition alone was inconclusive and did not rule out a valid surrender with the court’s consent. By the unqualified terms of the representation, the appellant had impliedly represented that it had taken reasonable steps to confirm its accuracy. (3) The existence of the lease could not be treated as a technical conveyancing defect insufficient to justify rescission. The appellant could not show that, as at the date for completion, there had been no risk of the trustee in bankruptcy successfully asserting that the lease subsisted. To terminate the lease would have required a successful application to the court seeking ratification of the surrender or a successful request to the trustee in bankruptcy to disclaim. The outcome of neither had been a foregone conclusion at the relevant time because neither was in the appellant’s sole control. Thus, the facts and circumstances of the case did not compel the court to conclude beyond reasonable doubt that, at the relevant date, the purchaser had not been at risk of a successful assertion of an incumbrance against him.
Per curiam: It was likely that the reference to “outstanding legal estate” in section 42(3) of the 1925 Act was intended to refer to the quality of the interest to be transferred, rather than to any potential incumbrance. There was no obvious reason, as a matter of legislative policy, for introducing a strict anti-avoidance provision relating only to those incumbrances that were legal estates under the scheme of the 1925 Act.
The following cases are referred to in this report.
Banister, Re; sub nom Broad v Munton (1879) LR 12 Ch D 131, CA
Becker v Partridge [1966] 2 QB 155; [1966] 2 WLR 803; [1966] 2 All ER 266, CA
Cumberland Consolidated Holdings Ltd v Ireland [1946] KB 264; [1946] 1 All ER 284, CA
MEPC Ltd v Christian-Edwards [1981] AC 205; [1979] 3 WLR 713; [1979] 3 All ER 752, HL
Weir v Area Estates Ltd [2010] 1 EGLR 77; [2010] 10 EG 121, Ch
This was an appeal by the appellant, Area Estates Ltd, from a decision of Mr Robin Knowles CBE QC, sitting in the Chancery Division of the |page:92| High Court, giving summary to the respondent, Graham Weir, on a claim for the return of a deposit paid under a contract for the sale and purchase of land.
Mark Loveday (instructed by Romain Coleman) appeared for the appellant; Jane Evans-Gordon (instructed by Tarbox Robinson & Partners, of Northwood) represented the respondent.
Giving judgment, Carnwath LJ said:
[1] Area Estates (the vendor) appeals against the order of Mr Robin Knowles QC, sitting as a deputy High Court judge, dated 18 December 2009, granting Mr Graham Weir (the purchaser) summary judgment on his claim to rescind a contract for the sale of a property at 22-24 St Andrew Street, Hertford (the property).
Factual background
[2] On 29 January 2008, the purchaser contracted with the vendor to purchase the registered freehold property at a price of £400,000 subject to a £40,000 deposit. The property had been subject to a lease in favour of a Mr Airey, granted on 28 April 2004 for a term of nine years. The existence of the lease was apparent from the schedule to the freehold title. However, extra special condition 7 (ESC 7) of the contract of sale provided:
The Lease dated 28 April 2004 and referred to on Title Number HD431124 determined by operation of law on 31 August 2006. The Buyer shall accept the position and shall not be entitled to require any further proof of the determination or raise any objection or requisition with regard thereto.
[3] Unfortunately, the statement that the lease had “determined by operation of law on 31 August 2006” was not correct. What had happened was that the lessee, Mr Airey, had moved out of the property purporting to surrender the lease. However, that purported surrender was ineffective in law because he was at the time subject to a bankruptcy petition, presented on 8 August 2006. The consequence was that any disposition of property was void unless made with the consent of the court: see section 284 of the Insolvency Act 1986 (the 1986 Act). The petition was duly registered against the leasehold title, under section 86 of the Land Registration Act 2002, on 11 August 2006. A bankruptcy order was made on 11 October 2006, and was registered against the leasehold title on 2 November 2006.
[4] Notice to complete was served on 7 March 2008. In response, the purchaser sought to rescind the contract because of the encumbrance in the form of the leasehold interest. On 16 May 2008, the vendor secured a disclaimer of the lease from Mr Airey’s trustee in bankruptcy. By a claim issued on 4 June 2008, the purchaser sought the return of the £40,000 deposit plus interest and by application dated 5 March 2009 applied for summary judgment. The application came before the deputy judge on 22 October 2009.
[5] The vendor advanced in substance three defences:
(i) section 284(4)(a) of the 1986 Act, which provides an exception for property “received before the commencement of the bankruptcy in good faith, for value and without notice that the petition had been presented”;
(ii) condition ESC 7;
(iii) that the defect was a “technical conveyancing defect”.
[6] The judge rejected all three defences and, by an order dated 18 December 2009, ordered the repayment of the deposit with interest and costs. Permission to appeal was granted by Lloyd LJ.
Issues on the appeal
[7] At the start of the hearing, Mr Mark Loveday, for the vendor, indicated that he was no longer pursuing the first issue. This leaves two issues:
(i) whether condition ESC 7 prevents the purchaser from relying on the continued existence of the lease as a ground for rescission; and (ii) if not, whether the existence of the lease should be treated as a “technical conveyancing defect” insufficient to justify rescission.
[8] I remind myself that this is an application for summary judgment and that we must take the facts at their most favourable from the vendor’s point of view. Thus, we must assume that, at the time of the contract, the vendor had acted in good faith and in the belief that the lease had come to an end by operation of law.
Condition ESC 7
Judge
[9] The judge looked at ESC 7 in the context of the other provisions of the contract. He referred in particular to general condition 4.3:
Unless otherwise stated in the special conditions the seller sells with full title guarantee except that:
(a) all matters recorded in registers open to public inspection are to be treated as within the actual knowledge of the buyer…
and ESC 1:
Vacant possession will be given on completion…
[10] He held, in [22]:
(1) On its true construction Special Condition 7 required Mr Weir to accept as factually accurate the proposition that the Lease had determined by operation of law on 31 August 2006.
(2) This requirement was not an exception to the “full title guarantee” basis of the sale, under General Condition 4.3(a). Rather, it was an affirmation of it in this particular.
(3) Consistently with the requirement, Special Condition 7 ruled out Mr Weir’s being entitled to require any further proof of the determination, or to raise any objection or requisition with regards to it.
(4) Although the Land Register and the Land Charges Register (both registers under General Condition 4.3(a)) revealed the Lease and the bankruptcy petition, and did not mention any determination of the Lease, the position remained that Mr Weir was contractually required to accept that there had been a determination. It transpired that there had not.
[11] He rejected an argument that the purchaser (by clause 4.3(a)) was fixed with notice of the bankruptcy petition, and therefore able to work out the true position. He did not see how that could help the vendor on the question of whether it was able “to convey at completion the unencumbered title they had contracted to convey”: see [24].
Submissions
[12] Before us, Mr Loveday argued that the judge’s interpretation of ESC 7 was too narrow. The vendor is permitted to protect itself against the possible uncertainty of the title, particularly with regard to the inevitable uncertainty surrounding the concept of surrender by operation of law. The plain meaning of the condition was that the risk of such uncertainty was transferred to the purchaser, who could not complain about an incumbrance on the title even though the surrender was found to be void.
[13] For the purchaser, Ms Jane Evans-Gordon submitted that the condition did not prevent the purchaser from objecting if, as it emerged, the lease had not in fact been surrendered. Its effect was only that he was not entitled to require further proof from the vendor or to take objection with regard to the lack of such proof. This was confirmed by ESC 1, which required “vacant possession” on completion and was inconsistent with the existence of someone with a better title to immediate occupation.
[14] Further, she submitted, even if the condition would otherwise be construed as the vendor proposes, that construction cannot overcome two obstacles, one derived from statute and one from case law:
(i) section 42(3) of the Law of Property Act 1925 (the 1925 Act), which would make a condition as so construed void; and
(ii) the principle (established by cases such as Re Banister (1879) LR 12 Ch D 131) that such a condition cannot be relied on if it is misleading or there has been less than full disclosure: see Emmet and Farrand on Title (2010), in para 5.008.
Discussion
[15] I have not found this an easy question. I do not share the judge’s confidence that the condition is to be read as simply affirming the “full title guarantee” basis of the sale. I see some force in Mr Loveday’s contention that it is designed to transfer risk to the purchaser: to draw specific attention to the issue of the lease, express the vendor’s position in respect of it and require the purchaser to accept that position without |page:93| objection. Furthermore, since the purchaser was taken to have actual knowledge of anything in the register (condition 4.3(a)), he could not claim to be unaware of the potential problem created by the bankruptcy petition. Although I agree with Ms Evans-Gordon that, taken on its own, the condition requiring “vacant possession” would be inconsistent with the existence of an occupational lease, even if the premises were in fact vacant at the time of sale (see, for example, Cumberland Consolidated Holdings Ltd v Ireland [1946] KB 264, at pp270-271), that general provision does not necessarily override the specific provision made by ESC 7 in respect of the lease.
[16] It is therefore necessary to consider the two points presented by Ms Evans-Gordon as obstacles to the effectiveness of ESC 7. Neither is entirely straightforward. I will deal with the case law principle first, since the ground is much better trodden.
[17] It is well established by authorities going back over a century and a half that a condition that purports to exclude the vendor’s ordinary obligation to give good title may not be always be effective. However, the cases do not speak with one voice as to the test to be applied. The important issue, for present purposes, is the necessary state of mind of the vendor. Does the principle apply only when he had actual knowledge of the defect or is it enough that he had the means of knowledge? Banister, as I read it, was a case in which the representation in the conditions was contradicted by facts of which the vendor had actual knowledge: see at p142, per Sir George Jessel MR:
conditions which… contained representations, either expressed or implied, which are untrue, and were untrue to the knowledge of the vendor at the time those conditions were framed.
[18] The passage in Emmet and Farrand to which Ms Evans-Gordon referred, has some useful illustrations from the authorities. I note the following, commenting on the effect of a condition that the property is sold “subject to any general incumbrances or defects in title which may exist”: see para 5.008:
Further, such a condition will apparently not be sufficient where there are incumbrances or defects of which the vendor ought reasonably to have known (Heywood v Mallalieu (1883) 25 Ch D 357, where the vendor’s solicitor would have discovered the existence of an easement if he had made fuller enquiries into certain claims).
[19] Reference is made in the same passage to Becker v Partridge [1966] 2 QB 155, in which the contract for sale of an underlease provided that the vendor’s title “has been accepted… and the purchaser shall raise no requisition or objection thereon”. This was held to be ineffective when it emerged that there had been breaches of covenant in the superior lease giving grounds for forfeiture. Although the vendor did not have actual knowledge, he was held to have had “constructive notice” because his solicitor had neglected to inspect the superior lease as he would have been entitled to do when taking the underlease.
[20] There is a clear statement of principle to similar effect in para 15-072 of Megarry and Wade: The Law of Real Property (7th ed), commenting on the effect of a general exclusion such as “subject to any existing rights and easements of whatever nature”:
However, it is a fundamental rule of equity that the vendor cannot rely on such a condition to cover a latent defect in title of which he knew or ought to have known.
A number of cases are referred to in the footnote, including Becker. (Reference is also made to an interesting article by Mr Charles Harpum, editor of the current Megarry and Wade, in [1992] CLJ: Exclusion Clauses and Contracts for the Sale of Land.
[21] For present purposes, the proposition as stated by Megarry and Wade seems to me to be sufficiently supported by the decision in Becker, which is binding on us. In that case, as I have said, the exclusion was held not to protect the vendor against defects that his solicitor could and should reasonably have discovered. (I note that the facts and, in particular, the basis of the finding of “constructive notice” are more fully stated in the All England report: [1966] 2 All ER 266, at p269.) However, in holding that the exclusion was ineffective, the judgment was clear: see at pp171G-172A:
There is no doubt that by a clearly drawn condition put in the contract by a vendor who acts in good faith, and disclosing a possible defect in the title, the purchaser may be compelled to accept the title offered by the vendor. But the vendor must have disclosed the defects of which he knew. In this case the vendor did not know of the breaches which would give rise to forfeiture. But he ought to have known that such breaches might exist.
Thus, the knowledge that the vendor’s solicitor should have had, and which the vendor would have had if properly advised, was treated as being equivalent to actual knowledge. The present case seems to me indistinguishable. The vendor, properly advised, could and should have known that the purported surrender, unsupported by any order of court, was ineffective.
[22] I accept that general statements, such as that in Megarry and Wade, need to be read in the context of the particular clause in question. In this case, the exclusion is more specific than those considered in most of the cases, in that it is directed at the particular issue of the lease. However, this works both ways. On the one hand, it may be said to have drawn the purchaser’s attention to the potential issue of the lease. On the other hand, it did not simply alert him to a problem; it contained an unqualified assertion that the problem had ceased to exist. A properly advised vendor would or should have known that the statement was untrue. Nor does it assist the vendor, in my view, that the purchaser may also have had the means of knowledge through his assumed notice of the contents of the register. Mere knowledge of the bankruptcy petition was not conclusive since it did not rule out a valid surrender with consent of the court. In any event, by the unqualified terms of the representation, in my view the vendor impliedly represented that he had taken reasonable steps to confirm its accuracy.
[23] This conclusion makes it unnecessary to reach a firm view of the effect of section 42(3). However, I will comment briefly on what appears to be a surprisingly novel proposition (suggested, it seems, by an enterprising pupil in Ms Evans-Gordon’s chambers). The subsection reads as follows:
A stipulation contained in any contract for the sale or exchange of land made after the commencement of this Act, to the effect that an outstanding legal estate is to be traced or got in by or at the expense of a purchaser or that no objection is to be taken on account of an outstanding legal estate, shall be void.
(Emphasis added.)
Ms Evans-Gordon submitted that, under the second part of the subsection, ESC 7 is ineffective, in so far as it purports to rule out any objection on account of the existence of the lease (being a legal estate).
[24] The subsection has attracted very little attention remarkably little if it has the effect for which she argued. It does not appear to have been cited in any reported cases. It attracts little comment in any of the modern textbooks; it is not even mentioned in the current edition of Megarry and Wade. According to a contemporary textbook (Dart’s Treatise on the Law and Practice relating to Vendors and Purchasers of Real Estate (8th ed) 1929, vol 1, at pp150-151), section 42(3) marked a shift from previous practice:
A condition binding a purchaser, if he considered the legal estate outstanding, to be at the expense of getting it in, was, formerly, not uncommon, and was held to throw on him the risk of making out in whom the legal estate was vested; but by [s 42(3)] such a condition is nugatory.
In Wolstenholme & Cherry (12th ed) 1932) (which is often a useful guide to the thinking of the original draftsmen), there is the following note:
a condition that a legal estate should be left outstanding would have meant that the vendor had a bad title. It does not mean that the vendor cannot sell subject to a legal term, a legal mortgage, a legal rentcharge or a legal easement…
[25] Mr Loveday suggested that the most likely explanation for the provision is that it was related to the simplification of legal and equitable estates that was a central feature of the 1925 Act reforms, but of little practical concern today. He referred by analogy to section 39(2), |page:94| which as part of the elaborate transitional provisions in the first Schedule, provided for the discharging or getting in of “outstanding legal estates”.
[26] Whether or not it is so limited, it seems to me more likely that the reference to an “outstanding legal estate” was intended to refer to the quality of the interest to be transferred, rather than of any potential incumbrance. I find it hard to see any reason, as a matter of legislative policy, for the introduction of a strict avoidance provision relating only to those incumbrances that happen to be “legal estates” under the 1925 Act scheme. That seems to me consistent with the note in Wolstenholme & Cherry. Fortunately, I need not explore this topic further for the purposes of this case.
Technical defect
[27] I can deal with this point shortly, because I agree entirely with the judge. He said:
26. In my judgment this submission is unsustainable. Either a successful application to the Court seeking ratification of the surrender would be required, or a successful request to Mr Airey’s trustee in bankruptcy to disclaim. The outcome of neither can have been a foregone conclusion at the time. Neither was in Area Estates’ sole power, control or grant. Area Estates had no right that would enable it to insist on ratification or disclaimer.
27. Indeed it is hard to see why the Court would have ratified a surrender by Mr Airey when a bankruptcy petition was pending. As for disclaimer, the outcome of the request would depend on the trustee’s assessment at the time whether, in one form or another, there was value to be had for the bankrupt estate from the Lease.
28. Of course a trustee’s assessment will vary from case to case. Even if it is impossible that an assessment by the trustee in the present case would have concluded that there was value, the Property was still subject to a lease and Area Estates had no right to remove it. I cannot treat the presence of a subsisting lease encumbering freehold property sold with vacant possession as a “technical conveyancing defect”.
[28] Mr Loveday sought comfort in the judge’s acknowledgement of the “powerful and… commercially persuasive” picture arising from the facts of the case, in which the premises had stood empty for more than a year with no rent being paid and the trustee would be only too pleased to rid himself of the liability. He also referred to the various cases mentioned in Emmet and Farrand, in para 5.005, which, it is said, have left the test as one of “uncertain degrees”.
[29] However, like the judge, I think that the best guide is to be found in the leading case MEPC Ltd v Christian-Edwards [1981] AC 205, in which Lord Russell of Killowen, at p220C-D said:
[I]f the facts and circumstances of a case are so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of the incumbrance, the court should declare in favour of a good title shown.
[30] The judge commented:
34. There is no prospect in the present case of such a conclusion being appropriate. For all the argument about degree of risk, on which views will differ, Area Estates simply cannot show that as at the date for completion there was no risk of the trustee in bankruptcy asserting successfully that the Lease subsisted. The present case is a far cry from that before the House of Lords, where it was concluded that there was no risk of a claim for specific performance being upheld on the basis of a contract some 70 years old which had been abandoned some 50 years before.
I agree.
[31] For these reasons, I would dismiss the appeal.
Moore-Bick LJ said:
[32] I agree.
Wilson LJ said:
[33] I also agree.
Appeal dismissed.
