Sale of land – Specific performance – Appellant claiming specific performance of agreement for sale of pub by acquisition of all shares in its holding company – Court ordering respondents to transfer remaining shares to appellant – Court also ordering appellant to transfer to respondents another pub owned by the same holding company but not included in the agreement – Whether that order failing properly to reflect agreement of parties or terms of relief sought by appellant – Appeal allowed
The appellant proposed to acquire an interest in three public houses in north London by purchasing shares in the three companies that owned them, one of which was the third respondent. All the relevant shares were owned by the first, second and fourth respondents (the vendors); the intention was that they would sell all the shares in the third respondent to the appellant along with 50% of the shares in the other two companies.
The appellant made payments to the vendors totalling £1.572m, in return for which he received a transfer of 50% of the shares in the third respondent and was allowed into possession of the corresponding pub, which he spent large sums in renovating. Relations between the parties then broke down, with each side accusing the other of breach of contract and seeking specific performance. The respondents’ defences were struck out for failure to comply with orders of the court and they were debarred from defending the claims brought against them. By the time the appellant’s claims came to court, he was primarily seeking the transfer to him of the remaining 50% shares in the third respondent. The deputy judge held that the appellant was entitled to an order to that effect and also ordered the vendor to repay to the appellant the sum of £72,000, being the amount by which the appellant’s payments had exceeded the £1.5m purchase price agreed for the third respondent.
However, problems arose because the third respondent also owned a second pub, which was not included in the arrangements between the parties. Both pubs were also subject to a charge granted to a mortgagee by the third respondent to secure indebtedness incurred in their acquisition. The original arrangement had been that the appellant would assume responsibility for the £800,000 indebtedness referable to the pub that he was acquiring, in return for a corresponding abatement in the £1.5m purchase price, while the vendors or their nominee would take a transfer of the second pub and assume responsibility for the £1m indebtedness relating to it. In respect of those further matters, the deputy judge made no adjustment for the indebtedness and simply ordered the appellant to transfer the second pub to the vendors or their nominee: see [2014] EWHC 725 (Ch). The appellant appealed.
Held: The appeal was allowed.
In making the order he did, the deputy judge had attributed to the parties an agreement which they demonstrably had not made. The upshot of his orders was that he had attributed to the appellant an agreement to purchase for £1.5m the shares in a company which, at the time of the agreement, had an indebtedness of £1.8m and assets worth at most £1.5m. There would rarely be any commercial logic in paying £1.5m for a company which had a net liability of £300,000.
The deputy judge had fallen into the error of considering that he was conducting a procedure akin to that adopted in default cases. The court was not discharging a mechanistic, administrative, non-judicial function, in the manner of a “disposal hearing” under CPR 26. The relief requested by the appellant was not obtainable simply by filing a request for judgment but instead required the court to be satisfied, exercising its judicial function, that it was appropriate to grant it. The court could not direct specific performance of an agreement without inquiring into the question of whether the party claiming that relief was entitled to it. Accordingly, a trial was required in order to determine that issue. The appellant was not “entitled” to the relief claimed simply because the respondents had had their defences struck out and been debarred from defending the claims brought against them.
The judge’s error as to the nature of the hearing had led him to look at the particulars of claim in isolation from the other material before him, including the respondents’ defence and the correspondence of the parties’ solicitors. He had also misinterpreted the particulars of claim. Properly understood, the particulars made clear that one pub was to be extricated from the other, together with the borrowing secured on it, and that the appellant was to be given credit against the purchase price for the outstanding indebtedness which would remain with the third respondent on completion of the share transfer. The appellant had not asked for relief in the form ordered by the deputy judge. He had not asked for the shares in the third respondent to be transferred to him without a corresponding payment from the vendors to reflect the liabilities that he was thereby assuming, nor had he asked to be required, without compensatory payment, to transfer the second pub out of the third respondent. To require him to do so meant that not only did the appellant acquire an unintended liability, but he also lost the asset of the third respondent to which it related and on which it was secured.
The order of the deputy judge was therefore set aside and replaced with an order in terms that reflected the agreement between the parties.
Stephen Smith QC and James Bailey (instructed by Olephant Solicitors) appeared for the appellant; Simon Davenport QC and Daniel Lewis (instructed by Moon Beever) appeared for the respondent.
Sally Dobson, barrister
Click here to read transcript: Thevarajah v Riordan and others
