Liability — Property development — Property sold in lots for separate residential units — Management company formed for purpose of managing common parts — Conveyance providing that each purchaser should covenant to pay proportion of cost of maintaining utilities — Whether covenant to pay proportion of amenities also should be implied — Appeal allowed against first instance decision implying covenant on basis of business efficacy
Bratton House at Bratton Seymour, near Wincanton, was sold in 1983 to a development company, Mobile Home Park Ltd (which changed its name to Berkeley Leisure Group Ltd). The developers intended to resell the property in various lots with planning permission for the subdivision of the property further into 24 separate residential units. The common parts of the property, ie the drive, the water supply and drainage system (the utilities) and parts of the gardens and grounds (the amenities) were to be sold to a company formed for the purpose of managing them. The shareholders and directors of the company were restricted to owners and tenants of the residential units. Bratton Seymour Service Co Ltd (“the company”) was incorporated as the management company in August 1984. The share capital comprised 24 £1 shares, to correspond with the 24 residential units intended in due course to be developed. Shares in the company were allotted to the purchasers corresponding to the number of units in respect of which they enjoyed planning permission. The defendant and another were in partnership as builders and purchased Bratton House itself in December 1984. That had planning permission for the development of nine residential units and accordingly they were allotted nine shares in the company. The defendant decided that he and his family would occupy the principal flat and he acquired his partner’s interest in August 1985. Apparently on account of the size of his flat he was allotted two shares in the company. The conveyances to purchasers of the respective lots, including the conveyance to the defendant and his partner, contained covenants on the part of the purchasers to pay to the vendor or its successors in title specified proportions of the costs of maintaining the drive, water supply and drainage system. Those common parts, together with the amenity land, were conveyed to the company in July 1985. The company held meetings at approximately six-monthly intervals and issues concerning the management of the property were discussed. At a meeting of the company on June 18 1986, it was agreed that each shareholder should pay £12 per month to the company to fund its activities. The defendant attended that meeting and reluctantly accepted that, as holder of two shares, he would pay £24 per month. During the coming months, the defendant became increasingly disaffected with the conduct of the company’s affairs. From November 1987, he refused to pay any contribution to the company, other than his proportion of the utility charges payable under the covenant in the conveyance. Both the company and the defendant sought a declaration from the court as to whether the defendant was under an obligation to pay a contribution, determined by the company, towards the cost of maintaining the amenity areas in his capacity as shareholder of the company or as the owner of a residence at Bratton House. The defendant argued that the conveyances clearly limited a resident’s obligation to make payments for utility costs and that he was under no obligation to pay the amenity charge if he did not use the amenity areas. However, the county court accepted the submission of the company that although the company’s articles of association did not expressly provide that shareholders must contribute to the cost of maintaining the amenity areas, an obligation to that effect had to be implied, given the purpose for which the company was formed; and to give business efficacy to the scheme as devised by the company for the management of the property. The defendant appealed to the Court of Appeal.
Held The appeal was allowed.
1. There were insuperable difficulties in the way of the implication made by the judge into the company’s articles of association. The company had argued that the articles constituted a contract between the company and its members and such terms could be implied into it, as into any other contract, to give it business efficacy. However, the articles of association of a company, as a document with statutory force, differed considerably from a normal contract. Once registered, the articles were binding on the company and its members: see Companies Act 1985, section 14(1), and became one of the statutory documents of the company, open for inspection by anyone wishing to take shares in the company.
2. In the case of Scott v Frank F Scott (London) Ltd [1940] Ch 794, it had been established that the court had no jurisdiction to rectify the articles of association of a company, even if they did not accord with the concurrent intention of the signatories to the memorandum at the moment of signature because of the statutory force of the article when registered. If such a situation arose, the articles should be altered by the statutory procedure of a special resolution of an appropriate majority of the members agreed to the alteration.
3. Moreover, a company could not, by altering its articles, impose an extra burden of contribution on a member who did not vote in favour of the amendment: see Companies Act 1985, section 16(2).
4. It was not possible to imply a necessary term into the original articles at the time of incorporation by taking account of the surrounding circumstances, as, for example, the question of amenities of the property in the instant case. Articles of association, once registered, had special features distinguishing them from other contracts in that they could not be challenged on the basis of, for example, undue influence or mistake and were incapable of rectification. Extrinsic evidence could be relied upon only for the limited purpose of identifying persons or the subject-matter of the articles. To admit such evidence to impose additional financial obligations on members far beyond those imposed by the articles read on their own was contrary to law. It would place potential shareholders in an impossible position. They were entitled to rely on the memorandum and articles to determine their future financial obligations from the language used.
Ian Partridge (instructed by Clarke Willmott & Clarke, of Yeovil) appeared for the appellant, Mr Oxborough; and Nicholas Asprey (instructed by Bevan Ashford, of Bristol) appeared for the respondent company.
