Sale of property – Pre-emption agreement – Interpretation – Appellant company owning and operating commercial marine site – Respondent agreeing to sell shares in appellant – Sale subject to share purchase, pre-emption and overage agreements – Restrictions placed on registered title to ensure compliance with agreements – Appellants transferring property to third party – Appellant seeking to cancel restrictions – Whether sale being disposal triggering pre-emption rights – Whether transfer to third party effective to terminate pre-emption rights – Appeal dismissed
In December 2015, the respondent agreed to sell for £550,000 his 100 shares in the appellant company to the Alfords, who owned the other 100 shares. The appellant’s business was to own and operate Falmouth Wharves, an established deepwater commercial marine site in Falmouth, Cornwall (the property).
The sale of the shares was on terms that: (i) the Alfords could not sell any shares without offering the respondent a right of first refusal; (ii) if, within 15 years, the appellant wished to dispose of the property or part of it, the respondent would have a right of first refusal; and (iii) if, within 15 years, planning permission was obtained, the Alfords would pay the respondent 20% of the net uplift in value of the property above a specified level.
Detailed terms were agreed to protect the respondent’s contingent rights to the shares, the property and the overage set out in: a share purchase agreement (SPA); a pre-emption agreement (PA) and an overage agreement (OA). Restrictions were placed on the registered title to the property, so that a transfer or lease of the property could only be registered if the agreements had been complied with or did not apply.
In May 2018, the appellant executed a transfer of the property in favour of SWL, a company in the same control. The appellant sought cancellation of the restrictions on title on the basis that the respondent’s pre-emption and overage rights had expired. It had offered to sell the property to the respondent but he failed to accept it within the required period.
The respondent opposed the cancellation. The First-tier tribunal (FTT) found that the transfer to SWL was not a “disposal” as defined in the PA, because it was not made to an independent person in an arm’s length transaction. Further, it was not a disposal on terms “no less favourable” to the appellant than those offered by the respondent. The appellant appealed.
Held: The appeal was dismissed.
(1) The court was concerned to identify the intention of the parties by reference to what a reasonable person having all the background knowledge which would have been available to the parties would have understood the language in the contract to mean. The court’s task was to ascertain the objective meaning of the language which the parties had chosen to express their agreement. The interpretative exercise was a unitary one involving an iterative process by which each suggested interpretation was checked against the provisions of the contract and its commercial consequences investigated: Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, Arnold v Britton [2015] AC 1619; [2015] EGLR 53, Wood v Capita Insurance Services Ltd [2017] AC 1173 and EMFC Loan Syndications LLP v The Resort Group plc [2021] EWCA Civ 844; [2022] 1 WLR 717 considered.
(2) The FTT, while right to consider that there was an ambiguity in the language of the definition of “disposal”, accepted too readily the suggestion that the words in dispute were intended to prevent collusive avoidance of the right of pre-emption and therefore the definition was limited to transactions to an independent party at arm’s length.
Given that there was ambiguity, one had to consider the context of the three agreements and the commercial purpose served by the definition in that context, and the consequence of one or other possible interpretation being correct.
The commercial purpose of protecting the respondent’s pre-emption and overage rights was as well if not better served by including related party transactions in the definition of disposal. It could not be said that the commercial purpose of the PA supported the respondent’s interpretation.
The mere fact that the appellant’s interpretation left open the possibility of collusive avoidance did not mean that it was wrong. Because of the proprietary interests involved, it was difficult to draft a wholly watertight contract of this type, protecting a party against fraud and collusion. There was no standard drafting that avoided all risk. Therefore, the sale of the property to SWL was a “disposal” within the meaning of the PA.
(3) Under the standard conditions of the contract with SWL, as in the terms offered to the respondent in the grantor’s notice, a deposit of 10% was payable no later than the date of the contract.
Whereas the respondent would have been required to pay the purchase price on completion, SWL was not required to pay it until its registration as proprietor of the property was confirmed or the parties agreed otherwise. SWL would become the equitable owner of the property on completion, entitled to possession and the income of the property as against the appellant, but would not have to pay for those benefits until its title was registered.
There was necessarily a difference between a contract and completion with the respondent and a contract and completion with another person. Many third-party purchasers would not have been prepared to go as far as SWL went in exchanging contracts and becoming liable to pay a deposit and complete, subject to title matters. However, the relevant comparison was whether the terms agreed with SWL were no less favourable to the appellant than those offered to the respondent.
(4) The same term as to payment on registration could have been offered to the respondent (or the restriction could first have been removed so that the third party would agree to pay on completion). Nor was there any warrant for implying a disregard of differences in the positions of the respondent and any other purchaser.
That being so, the answer to the question whether the terms of the sale to SWL were no less favourable to the appellant than those set out in the grantor’s notice, as defined in the pre-emption agreement, was clear: they were not, because the appellant’s receipt of the purchase price was delayed, there being no certainty about when or if it would be paid. The FTT reached the right conclusion. As a result, the transfer was not a disposal that extinguished the respondent’s pre-emption right and therefore the restriction would remain in place.
Leslie Blohm KC (instructed by Stephens Scown LLP) appeared for the appellant; Adrian Pay (instructed by Freeths LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Fairhaven Shipping Co (UK) Ltd v Munding
