The property at the centre of the dispute in Shah v Greening [2016] EWHC 548 (Ch); [2016] PLSCS 178 was the subject of a contract for sale for £500,000. Unfortunately, one of the owners died between exchange and completion and his wife asked the buyers to release her from the contract, citing the hardship that she had suffered as a result of her bereavement. The buyers sympathised, but refused to terminate the agreement and issued proceedings against the surviving seller following her failure to comply with a notice to complete.
One might have thought that the outcome ought to have been a foregone conclusion. After all, the seller was in default. So the buyers should have been confident of securing an order for specific performance and/or damages for breach of contract. However, the buyers had made payments totalling £7,000 pursuant to two separate agreements made with the sellers before exchange of contracts, “on condition that” the property would be sold to them, and had also agreed to buy fixtures and fittings from the sellers for an additional £3,000.
The seller claimed that the additional payments were in fact part of the purchase price and that the buyers were seeking to avoid liability for stamp duty land tax at the higher rate then applicable to transactions in excess of £500,000. She argued that this was illegal, which meant that the agreement for sale was unenforceable and would prevent the buyers from recovering the payments made before exchange of contracts and the buyers’ deposit as well.
The buyers explained that the sellers had been negotiating with another interested party. Consequently, the preliminary payments were “lock out payments”, made in order to secure the property for themselves. They stated that they had not been aware that a purchase price in excess of £500,000 would place the property in a wholly different tax bracket. They believed that an uplift to £510,000 would result in the payment of additional tax at the rate of 3% on the extra £10,000.
The judge accepted their explanations and, in that context, agreed that it was implausible that the buyers would have orchestrated the two additional agreements to achieve a tax saving of £300. He also considered that the payment for fixtures and fittings was genuine. Therefore, none of the agreements had been entered into for an illegal purpose – and the court could and would enforce the contract for sale by granting an order for specific performance.
Practitioners will be interested in the judge’s suggestion that the contract for sale and additional agreements would have been unenforceable, if they had been made for the purpose of avoiding enhanced or uplifted stamp duty. In his view, the case would then have fallen squarely within the principle that the court will not enforce an illegal contract: Tinsley v Milligan [1994] 1 AC 340. But the judge reserved his position on whether, in those circumstances, the seller would have been allowed to retain the deposit, or could have been forced to return it – and added that the court might have been prepared to make an order for specific performance on condition that the buyers’ stamp duty land tax return reflected the true purchase price.
Allyson Colby is a property law consultant
