Le Mesurier and others v Glen International Ltd

Acquisition of freehold — Contract — Frustration — Claimant tenants seeking to acquire freehold — Proceedings compromised on basis of agreement providing for option to purchase — Whether obligation to sell subject to conditions precedent — Whether agreement frustrated — Whether specific performance should be ordered — Claim allowed The claimants held long leases of flats 3, 4 and 5 in a building owned by the defendant. In 1998, they served a notice, under section 13 of the Leasehold Reform, Housing and Urban Development Act 1993, informing the defendant of their wish to acquire the freehold. Thereafter, the defendant took an assignment of the remaining units, flats 1 and 2, and granted a long lease of flat 2 to R, who applied to register her title. The ensuing proceedings, in which the claimants objected to that action and the defendant challenged the validity of the section 13 notice, were compromised by an agreement to which effect was given by a Tomlin-style order. This provided that, within seven days of an expert valuation, the claimants could exercise the option to purchase the freehold at that price, “provided that”: (i) a registered charge in favour of T Ltd, securing the debts of the defendant, was discharged; (ii) the long lease of flat 1 was extinguished; and (iii) flats 1 and 2 were made subject to assured shorthold tenancies. It was understood that the defendant would secure R’s surrender of her long lease. A valuation was obtained on that basis, and the claimants sought to exercise their option to purchase. However, R was unwilling to surrender her lease, and, by March 2001, no sale had taken place. The claimants sought specific performance of the agreement, plus damages. Meanwhile, T Ltd, as mortgagee, granted a long lease of flat 1 to M. The claimants proceeded with their claim on the basis that the price payable for the property would be abated to £7,914 to reflect the fact that flats 1 and 2 were subject to long leases, and not to assured shorthold tenancies, as agreed. However, a further problem arose because T Ltd was unwilling to release its charge unless all sums owing, amounting, at that time, to £10m, were repaid. The defendant argued that no obligation to transfer the freehold had arisen because: (i) the phrase “provided that”, in the agreement, created conditions precedent that had not been fulfilled; and (ii) the contract was frustrated by the impossibility of giving vacant possession of flats 1 and 2 and of discharging the charge. Held: The claim was allowed. 1. There was a clear, unconditional obligation to transfer the property at the agreed price if the option were validly exercised. The phrase “provided that” could mean “if but only if” and could create conditions precedent, as the defendant contended. However, it could also mean simply “on the basis that”, and that was the sense in which it was to be understood in the agreement. The sale was to be of the property subject to the charge, but upon the basis that the charge would thereafter be discharged and the long leases extinguished. The defendant, by entering into the agreement, had undertaken an obligation to secure those matters. It was irrelevant, in relation to flat 2, that the agreement contained no express obligation to extinguish the long lease, as was the case with flat 1. Although the agreement had been badly worded, stating in the present tense that flats 1 and 2 were subject to assured shorthold tenancies, and failing to provide that they should be subject only to such tenancies, it was clear from the surrounding circumstances that the latter was what was intended. That express provision made it strictly unnecessary to imply an additional term that the long leases should be extinguished. However, if that were wrong, such a term could be implied, as necessary, in order to give effect to the agreement, which provided for the calculation of the sale price upon the basis that there was no long lease: Equitable Life Assurance Society v Hyman [2000] 3 All ER 961 applied. 2. The contract had not been frustrated. It had not been the common understanding of the parties that the defendant would give vacant possession of flats 1 and 2. In relation to the charge, since there was an absolute obligation on the defendant to discharge the mortgage, and given that it was in the defendant’s power to do so, even if only by repaying the full £10m, there was no frustration. The case was an appropriate one in which to order specific performance, and an order would be made that the defendant should discharge the charge and transfer the property to the claimants at a price of £7,914. If the claimant could show that that remedy did not provide complete relief, then damages could also be awarded. Stanley Gallagher (instructed by Jennifer Israel & Co) appeared for the claimants; David Holland (instructed by Kotecha & Co, of Harrow) appeared for the defendant. Sally Dobson, barrister