Development land — Contract of sale — Vendor granted charge over land — Events triggering vendor’s entitlement to conditional payments — Whether vendor entitled to summary judgment for principal sum — Application dismissed
The first defendant owned a former quarry. The land had development potential but would first require a considerable amount of preparatory work. The first defendant entered into an agreement to sell part of the quarry to S for £7.3m. He received £2.3m on completion and the balance of £5m was paid into a security deposit to be used to defray the costs of the necessary works.
The original agreement was renegotiated by way of a loan agreement, whereby a further £2.5m was paid to the first defendant, which amount was be secured against the remaining area of the quarry. The first defendant would be entitled to any residual amount should the preparatory costs be less than £5m, but he agreed to indemnify S against any excess. A series of related agreements were entered into between the first defendant, S and the second defendant developer (CP), under which the latter who bought the remainder of the quarry land and replaced the first defendant as against S.
By clause 5 of the agreement, the first defendant was entitled to recover £1.5m on completion of the purchase, together with four further sums (totalling £5m) on the grant of various stages of planning permission (the overage payments). By clause 6, the first defendant was granted a charge over the CP land in order to secure CP’s obligations under clause 5, but under clause 8 he retained responsibility to indemnify CP in respect of any payment in excess of £4.5m in relation to S’s preparatory costs. The net effect of clauses 8, 10 and 11 determined, inter alia, that the overage payments would not be payable until the amount of the preparatory work had been ascertained. In July 2001, CP sold to the claimant that area of the land subject to the first defendant’s charge. Between 1999 and 2001, the clause 5 permissions were granted and the first defendant became entitled to a total of £3m.
Faced with CP’s insolvency and the liquidator’s disclaimer on the conditional payments, the first defendant contended that he was entitled to execute his power of sale under the charge. The claimant denied that any sum was secured by the charge, and it sought both a declaration to that effect and the cancellation of the charge. By consent, an order was made, under section 50 of the Law of Property Act 1925, releasing the charge over the relevant land on the payment into court of £3.4m. The first defendant applied for summary judgment for the payment of £3m from that sum.
Held: The application was dismissed.
In law, the first defendant’s entitlement under clause 5 was contingent upon the ascertainment of the preparatory costs in an amount of less than £4.5m, which had not happened. As at the moment of the disclaimer, he had no immediate right to receive any of the overage payments and could not have sued for them. The disclaimer could not give the first defendant a right that he did not enjoy apart from it.
It was necessary to analyse what the real consideration was for the payment in question. In the present case, the agreement provided for the first defendant to receive a net sum that reflected commercial reality; that is, the increased value of the land by reason of the grant of planning permission was conditional upon the development costs remaining within viable limits. If the first defendant were entitled to receive the overage payments without any reference to the level of the preparatory costs, he would be receiving something for which the contract did not provide: Ruddenklau v Charlesworth [1925] NZLR 161 and Hyundai Heavy Industries Ltd v Papadopoulos [1980] 1 WLR 1129 distinguished.
Neil Kitchener (instructed by Lawrence Graham) appeared for the respondent; Alexander Hill-Smith (instructed by DKLL) appeared for the first defendant; the second defendant, Delbrook Properties Ltd, did not appear and was not represented.
Eileen O’Grady, barrister
