Contract of sale of house in Mornington Terrace–Purchaser subsequently offers to take subject to tenancies at reduced price–Offer held conditional on swift completion, which did not occur–Deposit repayable, and further sum of £2,500 referred to as ‘agreed damages’ for non-completion awarded–An agreed sum of this kind is not a penalty
This was an
action by Babacomp Ltd, of 1-4 Yarmouth Place, Brick Street, London W1, against
Rightside Properties Ltd, of Fitzroy Square, W1 for the return of a deposit of
£2,500 paid under a contract of sale of 52 Mornington Terrace, NW1, dated July
12 1972, and for agreed damages of £2,500 for failure to complete the sale. The
defendants counterclaimed specific performance of an oral agreement for sale
dated October 20 1972, or of the July agreement as varied by the oral
agreement.
Mr M Mark
(instructed by Southall & Co) appeared for the plaintiffs, and Mr R Ellis
(instructed by Michael Freeman & Co) represented the defendants.
Giving
judgment, FOSTER J said: In this action Babacomp Ltd, which I will call the
plaintiff company, seeks an order against Rightside Properties Ltd, the
defendant company, for the repayment of a sum of £2,500 paid as a deposit, and
for £2,500 agreed damages under an agreement dated July 12 1972, which I will
call ‘the July agreement.’ The defendant
company counterclaims specific performance of an oral agreement made on October
24 1972 (‘the oral agreement’) for the sale and purchase of 52 Mornington
Terrace, NW1, or of the July agreement as varied by the oral agreement. No 52
Mornington Terrace is freehold and is registered at Her Majesty’s Land Registry
under the title No LN 455052. At all material times the registered proprietor
has been, and still is, Mrs Rosa Dora Diviani. On July 3 1972 an agreement was
signed by Mrs Diviani and by Mr Moschie on behalf of the defendant company by
which she gave an option to the defendant company to purchase the fee simple of
the property with vacant possession at the price of £20,000, such option to be
exercised within fifteen days. The defendant company gave notice to Mrs Diviani
exercising the option by a letter dated July 6 1972. A great deal of evidence
has been given as to the subsequent events occurring between Mrs Diviani and
the defendant company in regard to the purchase and sale of the property.
However, the last letter which is before me is dated January 7 1974, from
Conway & Conway (Mrs Diviani’s solicitors) to Michael Freeman & Co (the
defendant company’s solicitors), which is in these terms:
We are in
receipt of your letter of the 2nd instant, and in the circumstances are
forthwith instructing counsel to settle the proceedings herein, and will in due
course effect personal service thereof upon your client.
What the exact
form of those proceedings will be, I do not know, but in view of the impending
litigation between the parties in regard to the purchase and sale of the
property, I do not express any view except to notice that litigation is
pending. I turn now to the July agreement. This is in these terms. The first
two recitals read as follows:
Whereas the
vendor is or believes itself to be entitled to an option for the acquisition of
a property shortly known as 52 Mornington Terrace, London NW1, and has served
notice exercising the same, subject as hereinafter mentioned;
And whereas
the vendor has agreed with the purchaser of the said property for sale at the
price of £25,000;
Now therefore
it is hereby agreed as follows:
(1) subject as hereinafter set forth, the vendor
shall sell and the purchaser shall purchase all that the said property for the
said purchase price of £25,000;
(2) the purchaser shall on the execution hereof
pay to the vendor the sum of £2,500 by way of deposit and part payment of the
purchase price.
Paragraph (3)
is in respect of office copies of the entry on the register, and is not
material.
(4) The vendor sells as beneficial owner.
(5) Vacant possession of the property shall be
granted on completion.
(6) Completion of the sale and purchase hereunder
shall take place at the later of the expiration of the period of ninety days
from the date hereof or the period of twenty-eight days from the delivery to
the purchaser or its solicitors of a notice given by or on behalf of the vendor
that it is in a position to complete the contract, and in relation thereto the
following provisions shall apply:
(a) the service of such notice shall amount to a
warranty on the part of the vendor that it will at the expiration of such
notice be in a position to complete this contract;
(b) in the event that such notice shall not be
served within a period of six months from the date hereof this contract shall
be automatically rescinded and the deposit paid shall be returned without
deduction to the purchaser and the vendor shall in addition pay by way of
agreed damages to the purchaser the further sum of £2,500.
The remaining
paragraphs (7) and (8) are not material. I do not think anything turns on when,
where, or how this agreement came into being, though I heard some evidence upon
it, and there was no dispute that paragraph 6 (b) came into effect, since no
notice was ever served by the defendant company, unless the agreement was
subsequently discharged or varied, as is alleged by the defendant company. What
happened was that it became apparent that there were a number of tenants in the
property and that neither Mrs Diviani nor the defendant company would be able
to transfer to the plaintiff company the property with vacant possession. The
plaintiff company and the defendant company were concerned with the purchase
and sale not only of this property, but also of some four or five other
properties, and on
Findlay House, Haymarket. There were present Mr Leslie Ratcliffe, the managing
director of the plaintiff company, Mr Julian Robert Smith, a chartered
surveyor, who was then employed by the plaintiff company, and Mr Gabriel
Moschie, who is the sole director of the defendant company and owns 98 £1
shares of the 100 £1 shares, the issued capital of the defendant company. Both
Mr Ratcliffe and Mr Smith gave evidence that a proposal was put to Mr Moschie
that the plaintiff company would purchase the property subject to the existing
tenancies at a reduced price of £20,000 if completion took place almost
immediately, and that as Mr Ratcliffe rose to leave the meeting Mr Moschie
agreed to that proposal. Mr Moschie in his evidence said that there was an
agreement to reduce the price and make the sale subject to existing tenancies,
but that nothing was said about the completion date.
Before I deal
with the credibility of the witnesses, it is important to consider the
correspondence which ensued. On that same day a letter was written on the
notepaper of a company, Sherwood Securities Ltd, an associate company of the
plaintiff company, to the plaintiff company’s solicitors, Southall & Co. It
was compiled jointly by Mr Ratcliffe and Mr Smith and signed by the latter. It
dealt with the various properties concerned, but the paragraph concerning 52
Mornington Terrace is in these terms:
Rightside
Properties are unable to sell with the benefit of vacant possession, as they
had contracted to do, and they have tried to negotiate a reduced price for the
property, subject to the existing tenancies. We indicated that we were prepared
to do a deal at £20,000, but if they were not able to sell almost immediately
at this figure, we would serve notice on them in order to recover our deposit
and the agreed damages of £2,500.
The last
paragraph reads:
We trust that
the above resume of our meeting will lead to speedy conclusions in these
transactions.
On October 25,
Mr Moschie wrote to the defendant company’s solicitors a letter, the first
paragraph of which reads as follows:
We enclose a
copy of a letter received from Mrs Brittain regarding 52 Mornington Terrace. At
the meeting with Mr Ratcliffe, it was agreed that he would take Mornington
Terrace with the tenant at a reduction of £5,000, and we can accordingly put
the same proposal to Mrs Diviani.
On October 25,
the defendants’ solicitors wrote to the plaintiffs’ solicitors in these terms:
We understand
that our respective clients met and your client stated that he would be
agreeable to purchasing this property subject to the existing tenancy of Mrs
Latham, at a price of £20,000, that is a reduction of £5,000 on the contractual
purchase price.
On October 26,
the plaintiffs’ solicitors wrote to the defendants’ solicitors in these terms:
We refer to
recent correspondence in connection with the sale of the above property to our
clients, and would advise that we have been instructed that our clients are
prepared to complete the purchase of the above property, subject to the
existing tenancies, at £20,000. It is a condition of our clients’ offer that
the matter be completed forthwith. Unless we hear from you in early course, we
are instructed to serve a notice on you requesting the return of the deposit
and the agreed damages of £2,500. We await hearing from you.
And then the
next material letter is one dated November 16 1972 from the defendants’
solicitors to the plaintiffs’ solicitors, which is headed ‘Re 52 Mornington
Terrace,’ and the first paragraph of which reads:
We are very
pleased to be able to report some progress in the matter on the basis of the
suggestion contained in your letter of October 26.
Then there was
a little correspondence ensuing in regard to this, until on December 1 1972 the
plaintiffs’ solicitors wrote to the defendants’ solicitors in these terms:
We enclose
requisitions on title, together with a draft transfer for approval, together
with copies for your use. May we particularly draw your attention to our
requisition requiring vacant possession to be given on completion in accordance
with clause 5 of the contract, as it would appear from your letter of November
21 that the property is not vacant.
The
defendants’ solicitors replied on December 4:
Are your
clients now saying that they are not prepared to complete the purchase subject
to the existing tenancy at the reduced purchase price of £20,000? If so, we must of course seek our clients’
immediate further instructions, and advise them in the light of the position
obtaining under the terms of the contract and read in conjunction with your
aforementioned letter.
The
plaintiffs’ solicitors replied on December 8 in these terms:
In our letter
to you of October 26 we informed you of our clients’ offer to complete this
matter at the reduced price of £20,000 subject to the existing tenancy, but
specifically stated that it was a condition of our clients’ offer that the
matter then be completed forthwith. Since the matter was not then completed
forthwith, we have presumed that our clients’ offer has lapsed, but, as
requested by you, are taking our clients’ further instructions.
On December 18
the plaintiffs’ solicitors again wrote to the defendants’ solicitors in these
terms:
Further to
our letter of December 8, we have now received our clients’ further
instructions in this matter, which are that they require vacant possession to
be given in accordance with the terms of the contract. Please confirm that this
will be given, and let us hear from you on other requisitions on title and the
draft transfer which we sent to you on December 1.
In the letter
of the plaintiff company’s solicitors dated October 26 1972, it was stated, as
I have read, ‘It is a condition of our clients’ offer that the matter be
completed forthwith.’ This was never
objected to by the defendant company or its solicitors, and is in accordance with
the evidence of Mr Ratcliffe and Mr Smith. Further, it is clear from that
letter that if there was not an early completion the plaintiff company would
rely on their rights under clause 6 of the July agreement. In my judgment, Mr
Smith and Mr Ratcliffe were honest and truthful witnesses, and I accept their
evidence that the offer to purchase at a reduced price, but subject to the
tenancies, was subject to a condition that completion should take place almost
immediately. In so far as Mr Moschie’s evidence is in conflict with that
evidence, I reject it. I do not think that Mr Moschie’s evidence can be relied
on as being honest and truthful.
It is not
disputed that completion did not take place within a reasonable time or at all,
but it is submitted on behalf of the defendant company that the effect of the
oral agreement was to discharge by necessary implication the written agreement,
or alternatively that the oral agreement constituted a variation of the written
agreement by deleting clauses 5 and 6 of that agreement. I can find no reason
why either of those submissions can succeed. If those submissions are right,
then there was a new agreement with no completion date agreed at all between
the parties, and the defendant company can even today attempt to get specific
performance of that agreement, as it in fact seeks by its counterclaim. In my
judgment, the effect of the oral agreement was an offer by the plaintiff
company to purchase the property, subject to the tenancies, at a reduced price
if completion took place almost immediately. This offer was accepted by the
defendant company. Completion did not take place. No notice was served by the
defendant company, under clause 6 (b) that is, before January 12 1973, and the
plaintiff company was entitled to treat the contract as rescinded and claim
repayment of the deposit. There is also the question of the further sum of
£2,500, described in the written agreement as ‘by way of agreed
the hearing, amended the statement of claim to add a claim that it was entitled
to that sum, not only by way of agreed damages but also–and I quote from
paragraph 5 of the amended statement of claim–‘or otherwise pursuant to clause
6 of the said agreement.’ For the
defendant company it was submitted (a) that as the contract was to be rescinded,
the effect was to put the parties in their original position, so that the
deposit was returnable, but no claim for damages could be sustained; (b) that
in any event, the parties never agreed that the sum of £2,500 represented the
true amount of the damages, and indeed, the parties never considered the damage
which would ensue if the contract came to an end; and (c) that in any event,
the sum was a penalty, and the defendants heavily relied on Mr Ratcliffe’s
evidence that it was intended to be–and I quote–‘a tough penalty, if Mr Moschie
tried to sell the property elsewhere.’
In regard to
(a), it is of course true that if a contract is rescinded, whether by the
parties to a contract or by the court, the parties must be restored to their
original position, and no question of damages arises. Even if in clause 6 (b)
the word ‘rescinded’ is used in this technical sense, however, I do not see why
the parties cannot agree that even if there is to be restitutio in integrum
a sum should also be paid. Alternatively, in view of the reference to damages,
the word ‘rescinded’ must, I think, be construed as meaning ‘brought to an
end.’ In either event, it follows that
the plaintiff is not debarred from claiming the sum of £2,500. As regards (b),
it is true from the evidence that there was no discussion as to the amount of
the damages which might ensue to the plaintiff company. But though it was never
discussed, it was inserted in the agreement which was signed by both parties,
and as such it was agreed. In my judgment, the claim does not fail because
there was no discussions as to the actual damage which might occur, and, as I
say later, in fact there could be no claim to damages. As regards (c), I have
been referred to a number of cases, most of which are concerned with clauses in
hire purchase agreements giving the hirer an option to terminate the agreement
on payment of a sum of money. In Associated Distributors Ltd v Hall
[1938] 2 KB 83 Slesser LJ at p 88 said this:
He has
exercised an option, and the terms on which he may exercise the option are
those set out in clause (7). The question therefore whether these payments
constitute liquidated damages, or a penalty in the instances mentioned, does
not arise in the present case.
In United
Dominions Trust (Commercial) Ltd v Ennis [1968] 1 QB 54, the Court
of Appeal held that the option had not been exercised. Harman LJ at p 67 said
this:
. . . I do
not think that there can be a penalty without a breach of contract, for which
the penalty may be the result.
In Sterling
Industrial Facilities Ltd v Lydiate Textiles Ltd (1962) 106 SJ 669
Diplock LJ, as he then was, said this:
Here there
was no question of any breach of obligation, but the defendants were sued in
respect of sums payable in a specified eventuality. It had been conceded that
there was no case in which it had been held that a payment to be made in a
specified eventuality was a penalty, or to be treated as such.
He was not
prepared to extend the definition of penalty, and save for certain passages in
the speech of Lord Denning in Bridge v Campbell Discount Company Ltd
[1962] AC 600 there is no authority which suggests that it should be. In the Bridge
case, apart from the passage in Lord Denning’s speech, there are dicta
to the opposite effect (see Lord Morton of Henryton’s speech at p 614). In the
present case, neither side suggested that the defendant company was in breach
of contract by not serving a notice in time. There cannot therefore be any
damages for that breach, however the sum is described. In that event, the sum
payable cannot be a penalty, but it is merely a sum to be paid in a specified
eventuality. In my judgment, the plaintiff company succeeds in its claim to the
second sum of £2,500.
There remains
the counterclaim. Even if I am wrong in the view which I have expressed as to
the effect of the oral agreement, and the true effect of it was to discharge
the written agreement, or at least to vary it by cancelling clauses (5) and (6)
of it, the defendant company cannot get specific performance unless (a) it is
ready, willing and able to complete and perform the agreement (see paragraph 10
of the counterclaim), and (b) there is a sufficient note or memorandum in
writing to satisfy section 40 of the Law of Property Act 1925 of that oral
agreement. As to (a), the defendant company cannot complete the agreement, nor
is it in a position to compel Mrs Diviani to convey without litigation. It is
not now able to perform the contract. As to (b), the defendant company relied
on the letter of October 24 signed by Mr Smith and the letter of October 26
from the plaintiff company’s solicitors, to which I have referred, and on notes
taken by Mr Ratcliffe at the meeting on October 24 1972. As to the notes, Mr
Ratcliffe said that he destroyed them after the letter dated October 24 was
written. As to the two letters, they constitute a note of an agreement which
was subject to completion taking place almost immediately or forthwith. They do
not, in my judgment, constitute a note of the agreement alleged by the defendant
company. For these reasons, in my judgment, the counterclaim fails. I propose
to order that the defendant company repay to the plaintiff company the deposit
of £2,500, and in addition pay the sum of £2,500. Both sums will carry interest
at 10 per cent per annum from January 12 1973. I propose to dismiss the
counterclaim.
An order was
made accordingly.
