Sale of land – Respondent purchasing block of flats from appellant – Respondent agreeing to sell long lease of porter’s flat if no longer needed as such and to pay overage to appellant – Sale of porter’s flat prevented by enfranchisement of block under Leasehold Reform, Housing and Urban Development Act 1993 – Whether agreement to be construed so as to require overage payment – Whether agreement frustrated – Appeal dismissed
In March 1986, the appellant sold the freehold of a block of flats to the respondents. All but one of the flats were let on long leases that reserved a service charge and provided for the landlord, at its discretion, to employ a resident porter for the purpose of performing the landlord’s covenants. The remaining flat was occupied by the porter then employed by the appellant. The parties entered into an agreement that should the porter’s flat cease to be needed for a resident porter at any time during the following 21 years, the respondent would sell a new long lease of that flat on the open market, with vacant possession, and pay overage to the appellant of 50% of the net proceeds of sale after the deduction of certain items.
In 2004, following the introduction of the right to collective enfranchisement under the Leasehold Reform, Housing and Urban Development Act 1993, a majority of tenants applied to acquire the freehold of the block. The tenants’ initial notice was duly registered at the Land Registry under section 97(1), with the effect, under section 19(1), that the respondent could no longer sell a long lease of the porter’s flat, which formed part of the common parts that the tenants were entitled to acquire under section 2(1)(b). By 2007, that flat was no longer needed for a resident porter such that the obligation to sell it was otherwise triggered.
The enfranchisement price was subsequently determined; the Lands Tribunal, on appeal from the leasehold valuation tribunal, attributed a value of £200,000 to the porter’s flat.
The appellant asserted that it was entitled to a payment either under the agreement or as damages for its breach. In the county court, the respondent obtained a declaration that the appellant was not entitled to any payment. The appellant appealed. It contended that the court should seek to give effect to the underlying objectives of the overage agreement in the light of the changed circumstances; the sale of the freehold of the block was equivalent to the sale of a long lease of the porter’s flat and the price attributed to that flat should be divided in accordance with the agreement.
Held: The appeal was dismissed.
A certain amount of reconstruction was inevitably involved in imputing an intention to the parties in respect of circumstances they had not foreseen. Any such reconstruction had to be firmly grounded in the words that they had actually used in their original factual matrix. The appellant was asking the court to go several steps too far in its reconstruction of the agreement.
Although, in a general sense, its purpose was to unlock and share the increased capital value of the flat if it were no longer required to accommodate a porter, the steps to be taken in that event were narrowly and prescriptively formulated. They were predicated on the assumption that the flat could be sold on the open market, with a new long lease on the standard form, for a price of which the appellant could approve. A sale of the freehold interest in the flat, as part of the disposal of the entire block, had been outside the parties’ contemplation in 1986. So had the fact that such a disposal was compelled by statute, at a price that was outside the appellant’s control and fell to be ascertained according to the criteria of the 1993 Act, rather than by exposing the flat to a real, as opposed to notional, open market. Moreover, the notice that compelled the transfer of the freehold had been served in 2004, two years before the occurrence of the trigger event under the agreement; there was no causative connection between the vacation of the flat by the porter and the events that led to the enfranchisement of the block. The points of distinction between the agreed steps set out in the agreement and the steps that had led to the respondent receiving £200,000 for the freehold interest in the flat were so numerous and significant that it was impossible to impute a common intention to the parties that the agreement should be modified to accommodate them. It was not possible to construe the agreement in such a way that it applied to the events that had occurred: Bromarin AB v IMD Investments Ltd [1999] STC 301 applied; Casson v Ostley PJ Ltd [2001] EWCA Civ 1013; [2003] BLR 147 considered.
Inall the circumstances, the agreement had been discharged by frustration. The parties could not, in 1986, have envisaged the way in which the 1993 Act would subsequently operate. It would therefore be unreasonable to construe the agreement as imposing an absolute liability on the respondent even when performance became impossible. The correct solution was to treat the contract as having been discharged by frustration without fault on either side: Baily v De Crespigny (1869) LR 4 QB 180 applied.
Alexander Hill-Smith (instructed by John May Law) appeared for the appellant; Stuart Hornett (instructed by Charles Russell LLP, of Cheltenham) appeared for the respondent.
Sally Dobson, barrister
