Sale of land – Unpaid vendor’s lien – Leasehold interest – Agreement for sale of leasehold interest back to freeholder – Agreement requiring freeholder to apply to Land Registry for merger of freehold and leasehold interests on completion – Covenants in agreement for lease to be released – Freeholder going into administration and not completing purchase – Whether unpaid vendor having lien over leasehold interest – Whether entitled to directions for sale of leasehold free from burden of covenants
Pursuant to an agreement for lease, the first appellant granted to the respondent a 150-year lease of part of a development site of which it was the freeholder. The agreement contained potentially onerous covenants on the respondent, guaranteed by its parent company, concerning the construction of an access road and storm drains, applications for planning permission, and the making of overage payments. The agreement was a “collateral agreement”, under section 28(1) of the Landlord and Tenant (Covenants) Act 1995, such that the benefit and burden of the covenants were annexed to the land.
The respondent later agreed to sell its leasehold interest back to the first appellant for £5m by way of surrender of the lease. Under the sale agreement, the parties were to enter into a deed of release on completion, effecting a mutual release of the covenants under the lease and agreement for lease. The appellant was also to apply to the Land Registry for merger of the freehold and leasehold interests. The sale agreement incorporated the standard commercial property conditions (2nd ed), “save in so far as inconsistent with [its] express provisions”. The first appellant paid a deposit of £50,000.
The first appellant subsequently went into administration; the second and third appellants were appointed as its administrators. A claim by the respondent, seeking partial specific performance of the sale agreement, was continued with the permission of the court under Schedule B1 to the Insolvency Act 1986. At a summary judgment hearing, it was declared that the respondent held an unpaid vendor’s lien over the leasehold interest, which would remain in existence until either the balance of the purchase price was paid or the sale agreement was terminated, and that the first appellant was obliged to deliver the deed of release to the respondent as part of the consideration due under the agreement. The judge also gave permission for the respondent to make certain amendments to its particulars of claim. By its amended claim, the respondent sought to establish that the freehold and leasehold interests in the property would not merge until the balance of the purchase price was paid and that it was entitled to directions for the sale of the leasehold interest free from the covenants in the agreement for lease. The appellants appealed.
Held: The appeal was allowed. (1) Whether an unpaid vendor’s lien arises in a particular case will depend on an objective assessment of the parties’ intentions, as expressed in their agreement. The burden lies with the party denying the existence of the lien to prove that the parties intended it to be excluded. In the instant case, the unpaid vendor’s lien was excluded as being inconsistent with the nature of the transaction under the sale agreement. The parties had expressed the intention that merger of the freehold and leasehold interests should follow swiftly on completion. That merger was an essential feature of the transaction. The enforcement of a lien for the unpaid purchase price after completion was inconsistent with the agreement since the lien would give the vendor a beneficial interest in the property, which, unless discharged, would prevent the merger from taking place. (2) Further, even if a lien had arisen, it would not have enabled the respondent to achieve its purpose of selling the leasehold interest with the benefit of a release of the covenants in the agreement for lease, thereby placing itself in its desired position of a “super-secured” creditor. To keep the sale agreement alive for that purpose, the respondent would have to waive its right to receive the sum of £5m in cash on completion and instead accept deferred payment on enforcement of the lien, and pursuant to its claims as an unsecured creditor in the administration. Following completion, and after waiver of the right to receive £5m, the first appellant would be obliged under the terms of the sale agreement to produce the transfer and deed of release and the respondent would simultaneously have to deliver the documents duly executed by it. As soon as that occurred, the first appellant would register the transfer at the Land Registry, merger of the freehold and leasehold interests would take place, and the security for the lien would be gone. The respondent would not longer be in a position to make any sale. That position was not altered by condition 8.5.2 of the standard conditions, relieving the vendor of any obligation to hand over documents of title until the purchaser had complied with all its obligations on completion; that condition did not apply since it was inconsistent with the express provisions in the sale agreement for delivery of documents of title at completion. The court could not give directions for a sale of the property on the terms sought by the respondent. The permission to continue the proceedings was set aside.
This was an appeal by the first appellant, Valley & Vale Properties Ltd, a company in administration, and by its administrators, Andrew Hosking and Martin Ellis, from a decision of HH Judge Purle QC declaring that the respondent, George Wimpey Manchester Ltd, had the benefit of an unpaid vendor’s lien under an agreement for the sale of land and granting permission, under section B1 of the Insolvency Act 1986, for the respondent to continue a claim for partial specific performance.
Edward Pepperall (instructed by Shoosmiths, of Birmingham) appeared for the appellant; Andrew Charman (instructed by Gateley LLP, of Birmingham) represented the respondent.
Giving judgment, Arden LJ said:
1. This is an appeal by Valley and Vale Properties Ltd (“Valley & Vale”) and its administrators, Mr Andrew Hosking and Mr Martin Ellis, against the order dated 8 June 2011 of HH Judge Purle QC. The dispute is whether, in the events which have happened, the respondent (“George Wimpey”) is entitled to an unpaid vendor’s lien over its leasehold interest in Area G, an undeveloped building plot in Salford (“the property”), which it has agreed to sell to Valley & Vale.
Background
2. Valley & Vale is the freehold owner of a building site at Middlewood Locks in Salford, part of which has been developed as flats and sold. Other parts of the site, including the property remain undeveloped.
3. By an agreement for lease dated 23 February 2004, Valley & Vale agreed to grant George Wimpey a lease of the property. By the agreement George Wimpey entered into potentially onerous covenants (“the agreement for lease covenants”) whereby it agreed to build an access road and storm drains, comply with conditions in respect of applications for planning permission, pay any overage achieved on development of the site, and pay a marketing contribution. The agreement for lease covenants have not yet been performed in full.
4. George Wimpey’s parent company (“the guarantor”) agreed to guarantee the performance of the agreement for lease covenants.
5. On 25 August 2004, Valley & Vale granted George Wimpey a 150-year lease of the property. It is common ground that, notwithstanding the lease, the agreement for lease covenants continued to bind the parties, and that, as the judge held, the agreement for lease was a “collateral agreement” within the meaning of section 28(1) of the Landlord & Tenant (Covenants) Act 1995. Accordingly the benefit and burden of the agreement for lease covenants were annexed to the land.
6. By an agreement made on 19 December 2007 (“the sale agreement”) George Wimpey agreed to sell its leasehold interest back to Valley & Vale for £5m. In effect, the sale agreement was an agreement to surrender the leasehold interest. The material provisions of the sale agreement were as follows:
“2.1.1 “Actual completion” means the time at which completion of the sale and purchase of the property actually occurs.
2.1.2 “Completion” means the time at which completion of the sale and purchase of the property is scheduled to take place in accordance with this agreement.
3.1 The seller agrees to sell and the buyer agrees to purchase the property for the unexpired residue of the term created by the lease.
3.2 The buyer is the reversioner and will apply to HM Land Registry in the transfer for the merger of the freehold and leasehold interests in the property in order to effectively release the seller and the guarantor from their obligations in the lease.
5.2 Unless otherwise agreed in writing between the parties’ respective solicitors monies payable at completion shall be paid by telegraphic transfer to the specified bank and actual completion shall not occur until all such monies payable at completion have been received into such account and are available as cleared funds.
13. On completion the parties shall enter into the deed of release ”
7. In addition, the Standard Commercial Property Conditions (2nd ed) (“the SCPC”) were incorporated into the sale agreement “save in so far as inconsistent with [its] express provisions”. Condition 8.5.2 of the SCPC relieved the seller of any obligation to hand over documents of title until the buyer had complied with all its obligations on completion.
8. The deed of release referred to in clause 13 of the sale agreement provided for a mutual release of the landlord, tenant and guarantor under the lease of the property. Crucially, clause 3.4 of the deed of release also provided for a release of the tenant and the guarantor from all outstanding agreement for lease covenants (“the agreement for lease release”). This is of key importance to George Wimpey as it considers that those covenants will depress the price it will obtain for its leasehold interest in the property if the sale agreement does not proceed and the leasehold interest has to be sold on the open market.
9. The sale agreement also provides for the buyer to lodge a form of transfer (“the transfer”) with the Land Registry signed by both George Wimpey and Valley & Vale. This was to request the Chief Land Registrar to merge the leasehold title to the property with the title to the freehold reversion.
10. On 5 November 2009, George Wimpey issued proceedings (“the proceedings”) seeking specific performance of the sale agreement.
11. On 23 February 2010, administrators were appointed in respect of Valley & Vale. Valley & Vale had paid a deposit of £50,000 under the sale agreement, but it is now unable to pay the balance of the purchase monies.
12. Permission of the court is required to commence or continue proceedings against a company in administration: see para 43(6)(b) of schedule B1 to the Insolvency Act 1986. On 5 July 2010, Cooke J granted George Wimpey permission to continue its claim, notwithstanding the appointment of administrators. On 3 August 2010, George Wimpey applied for summary judgment on the basis that it was entitled to partial specific performance of the sale agreement.
13. The summary judgment application came before Judge Purle on 4 May 2011. The judge indicated that he had difficulty with making an order for partial specific performance on the terms sought. The case was adjourned in order for George Wimpey to amend its claim so as to adopt the judge’s suggestion that it might be entitled to obtain its desired release by arguing that it had the benefit of an unpaid vendor’s lien. The hearing resumed on 1 June 2011. The judge gave judgment on 3 June ([2011] EWHC 1833 (Ch)).
The judgment
14. The kernel of the judge’s conclusion was that George Wimpey was entitled to an unpaid vendor’s lien for the purchase price of the property. This was implied into the sale agreement and was not excluded by the fact that the sale agreement provided for merger of the leasehold interest in the property into the freehold interest on completion. Merger was not in point if there was default.
15. Furthermore, the lien arose when the parties entered into the sale agreement. Accordingly, George Wimpey could enforce the unpaid vendor’s lien if, at the time fixed for completion, the price was not paid. Valley & Vale would have to deliver the deed of release to George Wimpey as part of the consideration due under the sale agreement. George Wimpey would execute the transfer in escrow but it would not have to deliver it to Valley & Vale because the price had not been paid in full. Because the price had not been paid in full, George Wimpey could apply to the court for an order for sale of its leasehold interest in the property in the open market in right of its lien.
16. After hearing further argument, the judge made a declaration that George Wimpey has the benefit of an unpaid vendor’s lien over the property. The declaration went on to state (“the declaration tailpiece”) that the lien would remain in existence until the balance of the purchase price due under the sale agreement was paid, or the sale agreement was terminated.
17. With the permission of the judge, George Wimpey amended its particulars of claim. Following the amendment, the relief now sought in the proceedings includes a claim for specific performance of the sale agreement and a further declaration that the freehold and leasehold interests in the property will not merge until the balance of the purchase price due under the sale agreement has been paid, and the unpaid vendor’s lien of George Wimpey has been discharged. George Wimpey also seeks directions for the sale of the property free of any claims by Valley & Vale.
18. Valley & Vale appeals against the declaration made by the judge, and his further order giving George Wimpey permission, pursuant to para 43(6)(b) of Schedule B1 to the Insolvency Act 1986, to continue its amended claim in the proceedings against Valley & Vale.
19. There is a secured creditor (“the bank”) over Valley & Vale’s freehold interest in the property. The judge indicated that he would have granted George Wimpey summary judgment but for the interest of the bank, which has yet to be ascertained. The judge’s order does not bind the bank. The judge intended that the bank should become a party to the proceedings. This judgment is not concerned with the rights of the bank.
Discussion
20. Mr Edward Pepperall, for Valley & Vale and its administrators, submits that the principal issue on this appeal is whether George Wimpey can, using the unpaid vendor’s lien, obtain the right to sell its leasehold interest in the property and proceed to sell it with the benefit of the agreement for lease release. Without these incentives, a party in the position of George Wimpey would choose a more conventional option, such as to accept repudiation by Valley & Vale of the sale agreement and seek damages. Alternatively, it could choose to seek specific performance of the entire sale agreement. To do this, it would have to waive its right to receive the sum of £5m in cash at completion and seek payment of that sum as an unsecured creditor in the administration.
21. Neither of the conventional options would enable George Wimpey to sell the property with the benefit of the agreement for lease release. The judge’s solution gave them that option, subject to any rights of the bank. Using my own words, I would say that George Wimpey thereby potentially became a “super-secured” creditor.
22. Mr Pepperall submits that the judge was wrong in law for three reasons. First, he submits that on the true interpretation of the sale agreement there can be no legal or equitable unpaid vendor’s lien. Secondly, he submits that any such lien would not survive merger pursuant to the transfer. Thirdly, he submits that the unpaid vendor’s lien would be destroyed by the relief which George Wimpey seeks.
23. Unlike an equitable lien, a legal lien cannot survive the delivery of possession on completion. However, on this appeal it is not necessary to draw any distinction between a legal lien and an equitable lien. The court can proceed on the basis that the lien asserted by George Wimpey is the wider form of lien, namely an equitable lien.
24. Mr Pepperall’s primary case is that there is no unpaid vendor’s lien in the present case. He left on one side the possibility that a lien might exist to the extent of giving priority over any intermediate charge or interest created by Valley & Vale in the period between the sale agreement and completion. It is not necessary to consider that possibility.
25. Mr Pepperall submits in the alternative that, if there is an unpaid vendor’s lien, it cannot survive the transfer of the leasehold interest in the property to Valley & Vale in accordance with the sale agreement because the lien could only be over the leasehold interest in the property, which would be destroyed by merger into the freehold interest forthwith upon completion.
26. Mr Pepperall relies on the description of the incidents of a lien given by Millett LJ in Barclays Bank plc v Estates and Commercial Ltd [1997] 1 WLR 415 at pp419H-420F:
“As soon as a binding contract for sale of land is entered into the vendor has a lien on the property for the purchase money and a right to remain in possession of the property until payment is made. The lien does not arise on completion but on exchange of contracts. It is discharged on completion to the extent that the purchase money is paid: In re Birmingham, decd; Savage v Stannard [1959] Ch. 523, cited with approval in London and Cheshire Insurance Co Ltd v Laplagrene Property Co Ltd [1971] Ch 499, 514. Even if the vendor executes an outright conveyance of the legal estate in favour of the purchaser and delivers the title deeds to him, he still retains an equitable lien on the property to secure the payment of any part of the purchase money which remains unpaid. The lien is not excluded by the fact that the conveyance contains an express receipt for the purchase money.
The lien arises by operation of law and independently of the agreement between the parties. It does not depend in any way upon the parties’ subjective intentions. It is excluded where its retention would be inconsistent with the provisions of the contract for sale or with the true nature of the transaction as disclosed by the documents. It is also excluded where, on completion, the vendor receives all that he bargained for: Capital Finance Co Ltd v Stokes [1969] 1 Ch 261 and Congresbury Motors Ltd v Anglo-Belge Finance Co Ltd [1971] Ch 81. In each of those cases the vendor took a legal charge to secure payment. The unpaid vendor’s lien was held to be excluded notwithstanding that the charge later became void for want of registration. In Williams on Vendor and Purchaser (4th ed) 1936, vol 2, p984, there is a passage which deals with the exclusion of the lien:
‘The vendor may, however, waive or abandon his lien for the unpaid purchase-money, and his intention to do so may be either expressed or implied from the circumstances of the case.’
After dealing with express waiver or abandonment the author continues:
‘Where such waiver or abandonment is sought to be implied, the onus lies on those who deny the existence of the lien, which arises by the rule of equity in the absence of stipulation to the contrary; the question is one of the parties’ intention, to be determined by the documents they have executed and the circumstances of the case; and the test is, whether they have in effect agreed that the vendor shall have some other security or mode of payment in substitution for his lien.’
As the authorities demonstrate the test is an objective one. The question is: what intention is to be attributed to the parties from the transaction into which they have entered?”
27. Moreover, Mr Pepperall points out that the effect of the deed of release was that the covenants in the lease would also be extinguished. There would be only a “shell” left, which might well not constitute a lease in law at all.
28. Thus, on his submission, the true interpretation of the sale agreement, which was silent on the possibility of an unpaid vendor’s lien, was that such a lien was excluded by the express provisions of the sale agreement. Alternatively, it was excluded by the nature of the transaction itself. Therefore the judge was wrong to make the declaration that he made, including the declaration tailpiece.
29. Section 185 of the Law of Property Act 1925 prevents merger by operation of law “of any estate the beneficial interest in which would not be deemed to be merged or extinguished in equity”. Mr Pepperall submits that, if there is no lien, this section can have no application: merger will take place. I accept this submission, and vice-versa.
30. Mr Andrew Charman, for George Wimpey, does not accept that there was any exclusion of the unpaid vendor’s lien. The parties intended that the price should be paid and the lien ensures that that happens.
31. Mr Charman contends that the completion arrangements in the sale agreement allow a scintilla of time in which the lien can be properly enforced. The definitions in the sale agreement distinguish between two different types of completion: (i) completion according to the contractual arrangements (“completion”), and (ii) physical completion when the relevant exchange of consideration takes place (“actual completion”). There is, he submits, no obligation on George Wimpey to produce the transfer signed by it until after Valley & Vale has complied with all its obligations: see condition 8.5.2 of the SCPC. The transfer would be a document of title for the purposes of this condition.
32. Accordingly, on Mr Charman’s submission, so long as Valley & Vale is in default, the security provided by the unpaid vendor’s lien will continue to subsist.
33. In addition, George Wimpey will be entitled to apply to the court for an order for sale of the property. Mr Charman submits that in the circumstances of this case it would be properly arguable in the proceedings that the court should make an order freeing the property from the obligations that run with the land so that the best price could be obtained.
34. I reject Mr Charman’s submissions for two reasons.
35. First, in my judgment, an unpaid vendor’s lien is in this case excluded by the nature of the transaction. As Millett LJ explains in the Barclays case in the passage cited by Mr Pepperall, the question whether there is an unpaid vendor’s lien is to be determined by an objective assessment of the parties’ intentions as expressed in their agreement. The party who denies that there is a lien bears the onus of proof.
36. Where the question is whether the unpaid vendor’s lien has been excluded, what has to be shown is that the parties intended that the unpaid vendor’s lien should be excluded. It is clearly easier to show that an unpaid vendor’s lien was intended to be excluded when the vendor is given some other security for the payment of the purchase price. The unpaid vendor’s lien can be excluded by a contractual provision for express security even if, in the event, the security was unenforceable for non-registration under the Companies Acts (see the cases cited by Millett LJ). However, that factual situation is obviously not the only one in which it can be shown that the parties intended a given state of affairs, which meant that they did not intend that there should be an unpaid vendor’s lien.
37. In considering the question of exclusion, it is important to bear in mind that the real purpose of an unpaid vendor’s lien is to secure the payment of the outstanding purchase price due under an agreement for the sale of property. Thus, in my judgment, an unpaid vendor’s lien will be inconsistent with the nature of the transaction if the very notion of outstanding purchase price is inconsistent with any of the important elements of the agreement on which the parties are expressly agreed.
38. In my judgment, on a true interpretation of the sale agreement, the unpaid vendor’s lien is excluded in this case. Any such lien would arise only by implication and it can, therefore, be excluded by other express provisions of the sale agreement. Those express provisions need not refer to a lien.
39. In this case, the exclusion of the lien, in my judgment, stems from the fact that the intention which the parties have expressed is that merger should follow swiftly upon completion. The idea of enforcing a lien for the unpaid purchase price after completion is inconsistent with that agreement. The lien would give the vendor a beneficial interest in the property which, unless discharged, would prevent the merger taking place. Merger is an essential feature of the transaction.
40. In those circumstances, it is not correct to say, as Mr Charman submits, that the unpaid vendor’s lien would only make any difference if there was a default on the part of the purchaser so that the lien became enforceable. The very existence of the lien is inconsistent with the parties’ common intention of achieving a merger of the freehold and leasehold interests in the property on completion.
41. My second reason is that there are, in any event, overwhelming timing difficulties in George Wimpey’s strategy to become (in my words) a “super-secured” creditor. George Wimpey needs for this purpose to keep the sale agreement alive and not to repudiate it. It would, therefore, have to waive its right to receive the sum of £5m in cash on completion and accept deferred payment on enforcement of the lien and pursuant to its claims in the administration as an unsecured creditor. In clause 13, dealing with what actually happens at completion, “completion” must mean “actual completion”.
42. By virtue of clause 13, at completion, following waiver of the immediate right to receive £5m, Valley & Vale’s obligation is to produce the transfer and deed of release. George Wimpey will simultaneously have to deliver the documents duly executed by it.
43. It would be impossible for George Wimpey to sell a leasehold interest in the property pursuant to a power of sale conferred by an unpaid vendor’s lien once that happened. As soon as the transfer is delivered, Valley & Vale will register it at the Land Registry and merger will take place. The result of that is that the security for the lien has gone. George Wimpey is then no longer in a position to make any sale.
44. The position is not altered by condition 8.5.2 of the SCPC. That condition applies only to the extent that it is not inconsistent with the provisions of the sale agreement. The sale agreement makes express provision for delivery of documents of title at completion.
45. I would, therefore, allow the appeal in relation to the declaration, including the tailpiece to the declaration.
46. As to the permission given in relation to the proceedings, in my judgment there is no possibility in any event of the court giving directions for sale on the basis that the release in clause 3.4 of the deed of release had come into effect but that no other provision of that deed applies. It would be wrong to proceed to offer the leasehold interest for sale on this basis since there is no possibility of the court ordering that the deed of release be executed in part only.
47. It follows that I would also set aside the permission given by the judge to continue with the proceedings.
48. For the reasons given above, I would allow this appeal.
Black LJ said:
49. I agree.
Sir John Chadwick said:
50. I also agree.
Appeal allowed.
