Sale of land – Specific performance – Illegal purpose – Claimants agreeing to purchase property from defendants for £500,000 plus £3,000 for chattels – Another £7,000 payable under prior agreements on condition that defendants selling to claimants – Whether claimants entitled to specific performance of sale contract – Whether arrangements unenforceable as being entered into for illegal purpose of disguising true purchase price and avoiding increased liability for stamp duty – Whether specific performance to be refused on grounds of exceptional hardship – Claim allowed
In 2012, the defendant married couple marketed for sale their freehold, six-bedroom semi-detached house in Kenton, Middlesex. In late 2013, they accepted an offer of £500,000 for the property from the claimants, who were two male cousins, on the usual “subject to contract” basis; however, they later received a higher offer from another prospective purchaser. In January and May 2014, the parties entered into two agreements under which the claimants agreed to pay cash sums of £4,000 and £3,000 respectively to the defendants “on condition that” the property would be sold to them. In late May 2014, the parties entered into a contract for the sale and purchase of the property for £500,000, together with a further £3,000 in respect of chattels, with completion to take place in August 2014. The claimants paid a deposit of £50,000, to be held by the defendants’ conveyancer as stakeholder.
The second defendant died in June 2014. Thereafter, the first defendant was unable to work due to stress and depression. The first defendant wrote to the claimants stating that, in view of her bereavement, she could not complete the sale and requesting that the sale be terminated on the grounds of hardship. The claimants were not willing to terminate the contract.
Completion did not take place either on the contractual date or that specified in a notice to complete served on the first defendant. The claimants brought proceedings for specific performance of the sale contract and/or damages. By her defence, the first defendant asserted that the price to be paid for the chattels, coupled with the £7,000 paid under the additional agreements of January and May 2014, were in reality additional payments for the property, reflecting a true price of £510,000. She claimed that the arrangements between the parties had taken the form they did in order to avoid a liability for stamp duty at the higher rate applicable to transactions in excess of £500,000. She contended that the agreements had therefore been entered into an illegal purpose, with the result that they were not enforceable and moneys already paid pursuant to them were irrecoverable. In the alternative, the first defendant argued that specific performance should be refused on the grounds of exceptional hardship.
The claimants disputed the first defendant’s assertions and claimed that the January and May 2014 agreements were “lock out” agreements providing the claimants with an assurance that the defendants would not sell the property to anyone else. They applied to the court for summary judgment in their favour.
By the date of the hearing, the first defendant had remortgaged another property that she owned, namely a flat that she let out to tenants, and had used the funds thus raised to pay off the mortgage on the Kenton property, where she continued to live with her daughter. She had also carried out works to the Kenton property to separate part of it off into a self-contained flat, which she had also let on an assured shorthold tenancy.
Held: The claim was allowed.
(1) On the evidence, the agreements of January and May 2014 had been made on the basis that the claimants were offering additional payment in order to secure the property for themselves and obtain a promise that it would not be sold elsewhere. Although they were aware that additional stamp duty would be payable on any increase in the purchase price, they had not been aware that a purchase price in excess of £500,000 would place the property in a different and increased stamp duty bracket. Their understanding was that an uplift of the price to £510,000 would result in additional stamp duty of £3000, being 3% of the extra £10,000. In that context, it was implausible that the claimants would have orchestrated the two additional agreements to achieve a tax saving of £300. The proper finding was that the January and May agreements were not “shams” designed to disguise an increased price for the property and evade stamp duty. They were made for the purpose of securing the property; the explanation for the second of the two agreements, under which the overall payment was increased from to £7,000, was that the claimants were prepared, in the circumstances them prevailing, to offer an additional £3,000 in order for the matter to go smoothly and in order to finalise the purchase.
That conclusion stood notwithstanding that the two agreements, as drafted, did not in fact operate as effective “lock out agreements”, precluding the defendants from selling elsewhere, but simply achieved a position where the moneys paid were to be returned in the event that the defendant sold to another purchaser. Neither of the claimants had been aware at the time that the agreements had that more limited effect; their understanding had been that they were securing a promise that the property would be sold to them.
In the light of the above, neither the contract for the sale and purchase of the property, nor the additional agreements of January and May 2014, were entered into for any illegal purpose. It followed that there was an enforceable contract of sale in respect of the property.
(2) There was no discretionary reason why specific performance of the enforceable contract should be refused. The first defendant’s plea of exceptional hardship was not made out on the facts. To compel the first defendant to complete the contract would not inflict a hardship amounting to an injustice.
While the relevant hardship could be personal and did not have to relate to the subject matter of the contract, pecuniary difficulties did not in themselves afford good reason for non-performance. There had to be extraordinary and persuasive circumstances such as to take the case away from the normal situation, in which the contracting parties undertook the risk of such hardship as might arise in the supervening period between exchange and completion. No such circumstances existed in the instant case. It was relevant that the first defendant retained ownership of a valuable flat, from which she received a monthly income, that she also received statutory sick pay and had received a substantial insurance payment on the death of her husband. The completion of the sale of the property, which was now mortgage-free, would give her the greater part of a further £500,000. In short, the first defendant was in a position to move on.
Further, while not undervaluing the psychological impact arising from the first defendant’s removal from a long-standing home, it was relevant that she and her husband had been planning to move in any event and there was no evidence that she would be unable to secure suitable accommodation for herself and her daughter. It followed that the case did not exhibit the extraordinary and persuasive circumstances which were required if the court was to refuse to order specific performance on account of hardship: Patel v Ali [1984] Ch 283 considered.
(3) In addition to an order for specific performance, damages were awarded in respect of: (i) the costs incurred by the claimants on rental accommodation, less the costs that they would have incurred on mortgage payments, for the period after completion should have occurred; (ii) wasted mortgage brokerage fees; (iii) wasted fees paid for post-exchange insurance; (iv) removal fees incurred in moving to temporary accommodation following the initial failure to complete; and (v) the cost of bridging finance which would not have been required had completion taken place when it should.
(4) Per curiam: The better view was that, had the agreements been made for the illegal purpose of avoiding stamp duty, then it would not have been enforceable. The enforcement of the contract would involve the claimants relying on the illegal transaction since they had no title to the property other than that arising under the illegal contract. It was a fundamental principle of the law that the courts would not enforce an illegal contract which had been partially, but not fully, performed. The instant case fell squarely within that principle: Tinsley v Milligan [1994] 1 AC 340; [1993] EGCS 118 and Saunders v Edwards [1987] 1 WLR 1116 applied.
That position was subject to two potential caveats: (i) the claimants might have been able to enforce the sale contract on condition that their return to the Revenue in respect of stamp duty reflected a true purchase price of £510,000, such that the illegal purpose had not in fact been put into effect; and (ii) the claimants might have been able to recover their £50,000 deposit by arguing that, where those moneys had been paid to a stakeholder, title to them had not passed to the defendants but remained with the claimants, who could therefore assert that title independently of the contract of sale.
Pierre Janusz (instructed by Vymans Solicitors, of Harrow) appeared for the claimants; Charles Irvine (instructed by Fisher & Myftari Solicitors) appeared for the defendants.
Sally Dobson, barrister
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