Where a power to grant a common parts lease is not exercised in good faith, the transaction is void. The lessee holds the title received on bare trust for the original owner.
The court has considered a series of transactions pursued for personal gain in Oak Forest Partnership Ltd and others v Mercantile Investment Holdings SA and others [2023] EWHC 1903 (Ch).
The case concerned freehold purchases of the Hever Hotel, funded by loans, by the first claimant in August 2011 and of the Needham House Hotel by the second claimant in March 2013. The aim was for the properties to be run as hotels/conference centres and for the rooms to be sold to investors. Both companies went into liquidation in 2017.
Leases for 999 years of the common parts of the hotels were granted in 2013 and 2015 without a premium. The rent under the Needham lease was a peppercorn. The rent provisions in the Hever lease were subsequently reduced to a peppercorn. The defendants were successors in title to the original lessees under the common parts leases.
The properties were the project of Ron Popely, a disqualified director who was neither an officer nor an employee of either claimant. He was the ultimate owner of both lessees and the first defendant, and he was instrumental in setting up the other defendants. His knowledge was attributable to them all. He was a shadow director of the claimants, having assumed the responsibility to act as a director. His son, Darren, an appointed director of both claimant companies at the relevant times, was accustomed to acting on his father’s instructions.
The court concluded that neither lease was granted for a commercial or any other legitimate purpose. In the case of Hever, the grant was to prevent lenders from obtaining security of any value which would benefit Ron Popely’s companies at the expense of the first claimant. In the case of Needham, it was a transaction at a significant undervalue which depleted the second claimant’s asset.
Neither transaction was a proper exercise of power. They were decisions based on self-interest. Consequently, they were void and, although title passed under the provisions of the Land Registration Act 2002, the lessees held the registered titles on trust for the claimants. The remaining defendants were not purchasers for value acting in good faith and without notice of the resulting trust for the claimants. The court ordered the leases to be vested back in the claimants, so merging the leasehold and freehold interests.
Louise Clark is a property law consultant and mediator
