Corporate reorganisations are complex and time consuming and, where large numbers of properties are affected, necessitate wide-ranging due diligence and close co-operation between the organisations and the professionals responsible for appraising and valuing the assets. A simple oversight may have an adverse impact on valuation and prejudice business continuity.
The dispute in Crossco No 4 Unlimited v Jolan Ltd [2011] EWCA Civ 1619 arose as a result of a demerger, which resulted in the separation of the property and trading arms of a family business. Following the demerger, the property company became the owner of a building that was let to the trading company under a pre-existing lease. The property company subsequently took advantage of a landlord’s break clause to terminate the lease prematurely and opposed the trading company’s application for a new business lease on the ground that it intended to redevelop the building.
It seems that the trading company were not aware of the existence or significance of the break clause. It argued that the property company was not entitled to exercise its break rights as a result of an estoppel arising out of the negotiations before the demerger or because the parties had shared a common understanding that the trading company would continue to operate an amusement arcade from the premises until its lease expired. It claimed that the property company was, as a result, bound by a constructive trust that prevented it from exercising the break clause. The Court of Appeal rejected both arguments.
The upper floors of the property were in poor repair and had been earmarked for redevelopment. However, the parties had not had time to agree precisely what areas the trading company would occupy following the demerger – and on what terms. Consequently, on completion of the demerger, they adopted the simple and pragmatic solution of transferring the freehold subject to the existing lease to the trading company, on the basis that they would sort this out later.
The court ruled that the property company had not acted unconscionably. The property company was not under any fiduciary duty to the trading company. It had reasonably believed that the trading company had read the lease and had never given any assurance that it would not exercise its break rights. This put paid to any claim to an estoppel and the parties’ agreement that they would continue negotiations after the demerger put paid to the claim to a constructive trust.
The trading company had laboured under a misapprehension. However, the law does not require the courts to deprive innocent parties of their contractual rights in circumstances that arise solely as a result of the carelessness of the other party. To paraphrase Lady Justice Arden, it would inhibit the efficient pursuit of commercial negotiations, which are necessary to entrepreneurial activity, if the law were to provide scope for claims in respect of unsuccessful negotiations that do not result in legally enforceable contracts.
Allyson Colby is a property law consultant
