Development agreements – Mortgage – Exercise of mortgagee’s power of sale defeating second appellant’s right to leaseback from mortgagor – Whether substantial damages recoverable for mortgagor’s breach of contract – Whether torts of inducing breach of contract or conspiracy to injure by unlawful means made out – Appeal dismissed
The appellants and the respondents were parties to agreements relating to a development of penthouses on the roof of an existing block of flats. Pursuant to those agreements, the second appellant, as the freeholder of the block, granted a development lease of the roof space to the first respondent, a company that had been formed for the purposes of the project by the second respondent, which guaranteed its obligations. The second respondent provided £1m of finance for the development, secured by a charge over the lease. The development works were subject to a contractual timetable. In the event that the first respondent failed to complete them on time, the second appellant was entitled, under a leaseback option, to the grant of a development sublease of the undeveloped part of the demised property. In 1999, the parties executed a deed of priorities, by which they agreed that, upon discharge of a charge in favour of another lender, the second respondent’s charge was to take effect as a first charge.
The development ran into financial difficulties, which the respondents proposed to resolve by means of an arrangement whereby the second respondent would sell the development lease in exercise of its power of sale as mortgagee and the proceeds would be reinvested in the development. A sale was agreed with T, who had already agreed to buy one of the flats and had invested funds in its development. The respondents were advised by their solicitor, erroneously as it turned out, that the second appellant’s rights under the leaseback option would be overreached. An application by the appellants for an injunction to prevent the sale as a breach of contract was refused.
In subsequent proceedings, the appellants sought damages for: (i) breach of contract by the first respondent in failing to complete the development in time or to grant the sublease under the leaseback option; and (ii) the economic torts of inducing breach of contract and/or conspiracy to injure the second appellant by unlawful means. The judge found for the appellants on the first ground, but declined to award substantial damages for breach of the leaseback obligation on the ground that that obligation was alternative, and secondary, to the primary duty to complete on time. He dismissed the claims in respect of the economic torts. The appellants appealed.
Held: The appeal was allowed in part.
(1) The appellants could not, consistently with the 1999 deed of priorities, prevent the second respondent from exercising its rights as a secured creditor, including the power of sale. By that deed, the second appellant had consented to the second respondent’s charge having the status of a first charge, with the attendant right to realise the security to which the charge was attached. The second appellant must therefore be treated as agreeing that the obligation to deliver the development sublease under the leaseback option should be converted into an obligation to pay damages in the event that the second respondent exercised its power of sale. That liability for damages remained, since, on the wording of the leaseback option, the first respondent was liable in damages if it could not discharge its obligations under the leaseback option, whatever the reason.
The appellants were not required to elect between their respective claims in damages. Although the first appellant’s claim depended upon the failure to observe the development timetable, which was the event that triggered the leaseback option in favour of the second appellant, the two remedies were not alternatives: the first and second appellants were separate parties, and nothing prevented both from being enforced at the same time.
(2) Neither the tort of inducing a breach of contract nor the tort of conspiracy to injure by unlawful means were made out on the facts of the case. In respect of the former tort, a distinction was to be made between prevention of performance and inducement not to perform: OBG v Allan [2007] UKHL 21; [2007] WLR 920 applied. In a prevention case, such as the present, it was necessary to show that the preventive means used were independently unlawful. Accordingly, to prove either tort, the second appellant had to show unlawful means. It could not do so since the operative element of the means, namely the exercise of the power of sale, was lawful. The second appellant had agreed to the creation of a contractual structure that gave a charge over the development lease to the second respondent, and it was part and parcel of that structure that the second respondent could take it out of the first respondent’s power to deliver the development sublease. Where a party did something that it was entitled to do because of a contractual right conferred by A, the fact that it resulted in a breach of A’s contract with B could not constitute unlawful means of which A could complain in an action for damages. Further, the second appellant could not show the necessary intention to cause harm for the purposes of either tort, in the light of the legal advice that they had received, and the lack of any intention to prevent performance of any residual liability in damages: Mainstream Properties Ltd v Young [2005] EWCA Civ 861 and Douglas v Hello! Ltd (No 6) [2006] EWCA Civ 595; [2006] QB 125, OBG Ltd applied.
Alan Boyle QC and Pascal Bates (instructed by Goldkorn Mathias Gentle) appeared for the appellants; Timothy Dutton and Ciaran Keller (instructed by Berwin Leighton Paisner LLP) appeared for the second respondent; Michael Pryor (instructed by Bircham Dyson Bell) appeared for the third respondent; the first respondent did not appear and was not represented.
Sally Dobson, barrister
