Claim by mortgagee for relief — Defence that mortgagee bound to take up lease from mortgagor — Agreement for lease impliedly avoided on refusal of planning permission — Mortgagee need not rely on doctrine of frustration — ‘Classic case for ‘officious bystander’ test’ — Goff, J’s, interesting remarks about ambit of frustration doctrine in cases involving leases
In this adjourned summons, Rom Securities, Ltd, of Alexandra House, Alexandra Terrace, Guildford, Surrey, claimed against the defendants Rogers (Holdings), Ltd, of Chancery House, Chancery Lane, London, WC, a declaration that on the true construction of a legal charge dated May 28, 1964, between the parties, and in the events which had happened, the principal sum owing (£20,000) became payable on November 30, 1966, and interest thereon became payable on October 31, 1965. They sought a further declaration as to the rate of interest, an order for payment of all moneys due under the respective covenants, and delivery up of possession. The defendants, who contended that they were not liable to pay principal or interest until the defendants had taken up a new lease in compliance with the provisions of an agreement preceding the charge, counterclaimed specific performance of that agreement, and arrears of rent.
Mr GBH Dillon, QC, and Mr TLG Cullen (instructed by Messrs Davis & Davis) appeared for the plaintiffs, and Mr Walter Blum (instructed by Messrs Gamlen Bowerman & Forward) represented the defendants.
Giving judgment, GOFF, J, said that the case raised matters of considerable importance, but contained many omissions, ambiguities and inconsistencies. The facts began with an agreement and supplemental agreement, both dated April 28, 1964, whereunder the defendants were called the lessor and the plaintiffs the lessee. The defendants owned property known as 54/6/8 and 64/6, High Street, Weybridge. This was not a complete block, as it excluded Nos 60 and 62, owned by Tyler & Co, who carried on business as wine merchants. The agreement provided by clause 1(i) and (ii) that the plaintiffs should prepare and lodge with the local planning authority all necessary plans, etc, for an application for outline planning permission for development of the site of 54-8 and 64-6, the scheme to include shops and/or flats and/or offices, and petrol station with forecourt and/or garage, and such other development as might be considered suitable to produce the highest possible rack rental value. Clause 3 provided for a survey immediately after the grant of planning permission, and clauses 4 and 5 dealt with demolition and rebuilding, and gave the defendants the right to rescind on default by the plaintiffs. Completion was envisaged in something like 2½ years — six months for approval of plans, and two years for building. Clause 8 (i) provided that in any event by October 31, 1965, the lessor should grant the lessee a lease of the property for 999 years from June 24, 1964, at £5,000 per annum, subject to review. In his (Goff, J’s) judgment, it was impossible to read this agreement without seeing at once that it presupposed that planning permission should have been obtained, and the probability or possibility that it might did not seem to have dawned on anybody.
By the supplemental agreement of the same date, the plaintiffs bound themselves to lend the defendants £20,000 at 4 per cent simple interest, the advance to be made on May 15, 1964, and to be for a period equal to the time taken by the plaintiffs in the redevelopment of the property, and in any event for a period no less than two years, which more or less fitted the timetable of the principal agreement. As before, there was no reference to failure to obtain planning permission, but provision was made by clause 29 in case Tylers should fail to enter into a redevelopment scheme within 12 months, in which event interest on the £20,000 was to be at the rate of 10 per cent as from May 15, 1965. The £20,000 was duly advanced and secured by a legal charge dated May 28, 1964. This recited that by the agreement and supplemental agreement, both dated April 28, 1964, the lender agreed to develop and take a lease in the property described in the schedule thereto. It provided that if the agreement became null and void, interest as from May 15, 1965, should be at 10 per cent instead of 4 per cent, and that it should accrue but not be payable until October 31, 1965.
The plaintiffs approached Tylers, and on the strength of a meeting with them prepared a scheme under clause 1, which they submitted to the local planning authority. On September 14, 1964, planning permission was refused. The reasons were that the scheme failed to provide for comprehensive development with adjoining property; the lay-out was unsatisfactory, in that it failed to provide sufficient space for the filling station and for parking facilities, and access to the rear was unsatisfactory; no amenity area was provided for occupiers of the flats; and the scheme would conflict with the planning authority’s office policy. Apart from the defendants’ property, and Nos 50/52 (in respect of which they had then concluded negotiations to purchase, but had not entered into any binding agreement), and such arrangement as there was with Tylers, the plaintiffs did not own, control, or have any interest in the block. On June 4, 1966, they gave the defendants notice to repay. The defendants contended that they were not liable for principal or interest until the defendants had taken up the new lease. They maintained that defence, and counterclaimed specific performance of the agreement to take the lease, with arrears of rent. The plaintiffs said that Tylers failed to enter into a scheme under clause 29, or alternatively that if the plaintiffs could not obtain planning permission (which they said occurred) they would be discharged from their obligation to take a lease. It was now conceded that the plaintiffs had put these alternatives the wrong way round; they could not put clause 29 first, and then fall back if necessary on an implied term. It was the failure to get planning permission, and not any failure by Tylers, which caused the plaintiffs’ failure to take a lease, and he (his Lordship) had no doubt that a term of the kind proposed by the plaintiffs should be implied. It was a classic case for the ‘officious bystander’ test, and if an officious bystander had asked, ‘You have provided what is to happen if Tylers fail to come in, but what if you fail to get planning permission?’ there could be only one answer: that the deal was off.
Mr Blum had argued that the plaintiffs’ case involved invoking the doctrine of frustration. This did not apply to leases, and Mr Blum contended it did not apply to an agreement for the grant of a lease. He relied on Cheshire and Fifoot (6th edn, p490), which read:
Presumably the objection that the tenant cannot invoke the doctrine [of frustration] since he has obtained the estate, the creation of which was the venture contemplated by the parties, applies equally to the equitable interest that vests in the tenant under an enforceable contract for the grant of a lease, for then he has gone into possession and no lease has been executed. In these circumstances equity applies its principle that what ought to be done is to be regarded as already done, and allows either party to sue for specific performance, and thus to enforce the transfer of the legal estate in accordance with the contract. Broadly speaking, the tenant is in the same posiion as if a lease had been executed in his favour.
Mr Blum further relied on Hillingdon Estates Co v Stonefield Estates, [1952] 1 Ch 627, which concerned a contract for the sale of freehold land. He (his Lordship) was far from satisfied that the doctrine of frustration could not be applied to an agreement for a lease, since that did not create an equitable interest in the land before entry, and still less satisfied that it could not apply to an agreement such as that in the present case, which was not a mere agreement to grant a lease. He could not accept Mr Blum’s further argument that, clause 29 having provided for one frustrating event, it was not possible to contemplate another. There were two entirely different situations. Clause 29 postulated that the plaintiffs had a scheme with which they could proceed, but in which Tylers failed to participate. There was the alternative situation, the absence of a scheme, or at least it |page:428| being not possible to proceed with a scheme, with or without Tylers.
In truth, however, the plaintiffs’ case was not frustration, but supervening events, and the implication inherent in the term proposed was necessary to give the agreement business efficacy. Mr Blum said that the proposed term would be too imprecise, and that in any event the term, even if implied, would not discharge the agreement, because planning permission could be obtained. He relied on four existing consents, which were exhibited. He (his Lordship) felt no difficulty about lack of precision, since the agreement gave the plaintiffs a discretion in respect of the scheme of development, and indicated the kind of works contemplated — ‘a scheme such as the lessee shall consider suitable for development to produce the highest possible rack rental value.’ Moreover, clause 5 of the supplemental agreement indicated that the development was to be something which would so improve the value of the land as to command the improved ground rent of £5,000 per annum under the proposed new lease. He therefore implied a term making the agreement conditional on the plaintiffs being able to obtain planning permission for such reasonable scheme of redevelopment as they should put forward pursuant to clause 1(i) of the agreement. Of course, if the plaintiffs had put forward something ridiculous and quite unsuitable for the site, which no reasonable planning authority could be expected to approve, or if they had simply failed to meet objections in point of detail, it might well be that they could not take advantage of the implied term, or would remain liable for some antecedent breach of their obligation under clause 1(i) to use reasonable diligence. But that was not the case. No real redevelopment was possible, because the planning authority insisted on a comprehensive scheme for the whole block. Three of the existing consents exhibited were all strictly limited, and the fourth again included other properties which the plaintiffs were under no obligation to acquire or bring into their scheme. He (Goff, J) found as facts that planning permission for the scheme was within the contemplation of the parties, that it was not obtained, and that it could not have been obtained within a reasonable time. As for the provision in the supplemental agreement, and subsequently the charge, with regard to payment of interest at an enhanced rate, that again in his view depended on the lease coming into being and must, in the events which had happened, be treated as inoperative. The result was that the plaintiffs were entitled to judgment for recovery of the principal sum of £20,000, with simple interest at 4 per cent from the date of the advance. As legal mortgagees, they were clearly entitled to the order they sought for possession, subject of course to the rights of any prior mortgagees.
On costs, Mr Blum argued that the defendants had not wholly failed, since they had by paragraph 3 of the counterclaim sought a declaration that the rate of interest was, and remained at all times, 4 per cent, whereas the plaintiffs, putting their claim on clause 29, had contended for a rate of 10 per cent. Goff, J, said that nevertheless the defendants’ main contention was that the plaintiffs were not entitled to payment of anything unless and until they performed the agreement from which he (his Lordship) had held them to be released. There was here nothing like misconduct, or separation of issues, which would justify his depriving the plaintiffs of part of their costs, and they would have an order accordingly. The counterclaim would be dismissed, also with costs.
The plaintiffs were granted a stay of execution on terms that £2,000 be paid into court, or into an account in joint names, within 14 days; the balance of the aggregate of principal and interest be paid into court within four weeks; notice of appeal be given within 14 days, and the appeal be prosecuted with all due diligence.
