Archive for the ‘Uncategorized’ Category

Fundamental importance of the right to apply for relief from forfeiture: Golding v Martin

June 22, 2019

In Golding v Martin ([2019] EWCA Civ 446), the tenant of a long lease of a flat failed to pay a service charge reserved as rent. The landlord brought forfeiture proceedings and was awarded possession. The landlord gave the flat to his daughter and she sold it. The tenant, who lived in Spain, found out what had happened and sought to have the order set aside. The Court of Appeal set the order aside on the grounds that the County Court did not have power to make the order in the terms in which it had been made.

Section 138(3) of the County Courts Act 1984 specifies the form of the order that the County Court can make. The order for possession may not take effect within four weeks from the date of the order nor may it be unconditional. The order made in the present case was an immediate unconditional order.

The point was raised for the first time on appeal but this was one of those exceptional cases in which this was permissible since it went to the jurisdiction of the County Court (Pittalis v Grant [1989] QB 605).

The point was ‘no mere technicality’ since, ‘Where the forfeiture of a long (and potentially valuable) lease is in issue it is plainly of the utmost importance that the lessee be given the right to pay.’ ([20]).

The landlord argued for an alternative interpretation of section 138 which would have meant that the County Court had no right to grant relief from forfeiture in cases of non-payment of rent.

The Court of Appeal rejected this argument, emphasising the fundamental importance of the right to grant relief:

‘it is in our judgment inconceivable to imagine that Parliament could have intended that an important safeguard for tenants should be completely by-passed in the event of a sumamry disposal of a claim to forfeit on the ground of non-payment of rent. To attribute such an intention to Parliament would be to attribute to it an intention to legislate for an irrational scheme.‘ ([31]) (emphasis added).

Michael Lower

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Forfeiture: is immoral user by a sub-tenant always an irremediable breach of a head-lease covenant?

June 13, 2019

Introduction

When, and how, should a tenant’s rights be affected if a subtenant uses the property for immoral purposes in breach of a head-lease covenant? These were the questions considered by the Court in Patel v K&J Restaurants Ltd ([2010] EWCA Civ 1211).

Forfeiture and irremediable breaches

A lease that contains an appropriately worded forfeiture clause can be brought to an end in the event of a tenant’s breach by following the appropriate procedure. The procedure for breaches other than non-payment of rent is laid down in section 58 of the Conveyancing and Property Ordinance (which follows section 146 of the English Law of Property Act 1925).

Section 58 requires the landlord to serve a notice (‘the section 58 notice’) on the tenant specifying the breach complained of and ‘if the breach is capable of remedy, requiring the lessee to remedy the breach’ (emphasis added).

This phraseology suggests that there are irremediable breaches, breaches that are not capable of remedy and that there is no need for the notice to require the lessee to remedy the breach in such a case.

Where the breach is capable of remedy, the section 58 notice has to specify the reasonable period within which the breach must be remedied. Where the breach is irremediable then the notice can specify a very short period. At the end of that period, the landlord can take steps (proceedings or peaceable re-entry) to recover possession.

Is breach of a prohibition on immoral use irremediable?

Breach of a covenant against immoral user has been held to be irremediable. In Rugby School (Governors) v Tannahill ([1935] 1 KB 87) a tenant allowed a house to be used as a brothel in breach of the covenant prohibiting immoral user. The English Court of Appeal held that this breach was irremediable.

In Glass v Kencakes Ltd ([1966] 1 QB 611), however, it was decided that a sub-tenant’s use of the property for immoral purposes was not an irremediable breach of the head-lease where the head-lease tenant neither knew nor had reason to know that the property was being used for immoral purposes.

A tenant who knows, or has reason to know, about a sub-tenant’s breach of a prohibition on immoral use has to take immediate steps to bring the use to an end and to forfeit the sub-lease.

Patel v K&J Restaurants

In Patel v K&J Restaurants, the English Court of Appeal had to consider whether the head-lease tenant satisfied the Glass v Kencakes requirements.

K&J Restaurants were tenants under a head-lease which contained a covenant against immoral use. A sub-tenant used her flat for prostitution. Was this an irremediable breach of the head-lease covenant?

The problem was that K&J Restaurants was informed of the problem by police but took no action for a while though, after some delay, it did evict the sub-tenant. This delay was enough to render the breach irremediable.

When does a tenant ‘know’ of an immoral use?

The first instance judge in Patel put forward this proposition that:

‘”Known”, as in “so soon as the user is known”, must mean exactly that. No court expects a tenant to act on mere suspicion. However, if there are reasonable grounds for suspicion the tenant should make enquiries. He cannot turn a blind eye. The question, therefore, whether breaches are remediable depends on the facts of the individual case.’

In the Court of Appeal, Lloyd LJ agreed with this approach but with one clarification:

‘It seems to me that the tenant must take some action when he has either knowledge or, at least, reasonable grounds for suspicion.’ ([28]).

Why had the tenant in Patel not done enough?

The tenant was informed of the immoral use in a telephone call from a police officer. The tenant took no action at that time, claiming that the police officer had promised to write to him with further details. This call was enough at least to raise a reasonable suspicion that the sub-let flat was being used for immoral purposes. He should at least have made enquiries but did not do so. Three months later, the tenant brought the sub-lease to an end.

This failure to act promptly on the reasonable suspicion of breach meant that the breach was irremediable, not immediately after the phone call but well before the service of the s. 146 (CPO. s58) notice ([32]).

Relief from forfeiture

Even though the breach was irremediable, the Court of Appeal agreed with the decision of the first instance judge to grant relief from forfeiture.

In Ropemaker Properties Ltd v Noonhaven Ltd ([1989] 2 EGLR 50), Millett J. said that where the breach involved immoral user, the courts would only grant relief in the rarest cases.

The first instance judge, however, decided that no stigma attached to the property as a result of the immoral use. The problem use was ended and the character of the area in which the property was located meant that it was difficult for stigma to attach to any particular property.

While it was unusual to grant relief in this class of case, there was no reason to disturb the finding that relief should be awarded given the lack of stigma.

Michael Lower

 

 

 

Estoppel where the family home is owned by a company

April 26, 2019

 

The inference of a trust when the family home is owned by a company controlled by a spouse
In Prest v Petrodel Resources Ltd the UK Supreme Court established that English family law (specifically section 24 of the Matrimonial Causes Act) does not give the court any special power to pierce the corporate veil in the case of disputes concerning the family home owned by a company controlled by one of the spouses.

In an important passage of his judgment, however, Lord Sumption suggested that, ‘in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company.’ This beneficial interest would count among the spouse’s assets when dealing with ancillary relief.

Other forms of equitable intervention
There might be cases, though, where the courts do not feel able to infer the existence of a trust but where the spouse (or co-habitee) who owned and controlled the company has assured the other that they have or will have an interest in the family home.

On the face of it, the person giving the assurance has no legal or equitable interest in the property. It would seem to follow that there is no basis on which the recipient of the assurance can claim an interest in the family home.

How might equity intervene to protect the expectations of the recipient of the assurance in these circumstances? In 2008, in Luo Xing Juan v Hui Shui See, the Hong Kong Court of Final Appeal considered this question.

The facts in Luo Xing Juan v Hui Shui See

Luo Xing Juan (‘L’) and Hui Shui See (‘H’) co-habited in a property owned by Glory Rise Ltd (‘Glory Rise’). Glory Rise had acquired the property as an investment. The company had two shareholders when incorporated but subsequently H became the sole shareholder and director.

H asked L to marry him and she agreed. H assured L that he would give her a 35% interest in the property when he was in a position to do so. In the meantime, he transferred a 35% shareholding in Glory Rise to L.

H died before he was in a position to give effect to his promise to make L a co-owner of the property. H’s estate sought to revoke L’s licence to occupy the property. L responded with claims to an interest in the property based on the common intention constructive trust and proprietary estoppel.

The corporate veil rules out the use of the common intention constructive trust and proprietary estoppel

L’s claims failed because there was no reason to pierce the corporate veil: H had given an assurance about property owned not by him but by a third party, Glory Rise. Unlike Prest, it could not plausibly be suggested that the company held the property as trustee for H.

Promissory estoppel as the solution
L successfully resisted the company’s attempt to evict her by relying on promissory estoppel. H’s assurance was re-interpreted so that it related to the exercise of his powers as controlling shareholder of Glory Rise.

In effect, H had assured L that he would not allow his powers as controlling shareholder to be used to evict her until she had received the 35% beneficial interest in the property that she had been promised.

The Court of Final Appeal ordered that Glory Rise should be wound up on the just and equitable ground. The property was to be sold and L was to vacate it once a buyer had been found. L would then receive 35% of the net sale proceeds.

This solution has the clear merit of both respecting the corporate veil and of giving practical (and just) effect to H’s assurance and L’s detrimental reliance on it.

Promissory estoppel: no proprietary effect

Ribeiro PJ, in the main judgment in Luo Xing Juan, emphasised that promissory estoppel was a mere equity; it was not proprietary. It conditioned H’s exercise of the voting power connected with his controlling stake in Glory Rise and, indirectly, deferred Glory Rise’s ability to evict L.

The blurring of the distinction between proprietary and promissory estoppel

It is not surprising that promissory estoppel should be invoked so as to defer a licensor’s right to evict a licensee. Maharaj v Chand had already shown the way on this; promissory estoppel was used to prevent the man who was the legal owner of the family home from evicting his wife.

On the other hand, it is very noticeable that, in considering the relief to be granted, the Court of Final Appeal was guided by the classic English proprietary estoppel authorities (Crabb v Arun District Council; Pascoe v Turner; Gillett v Holt; Campbell v Griffin and Jennings v Rice). The Court of Final Appeal clearly intended that L’s relief should be designed with the exercise of the proprietary estoppel remedial discretion in mind.

Promissory estoppel was used, in effect, to protect L’s expectation of a 35% interest in Glory Rise’s property. This is surprising because it seems to contradict the proposition in Coombe v Coombe that promissory estoppel cannot be used as a cause of action.

The interplay between promissory estoppel and winding up on the just and equitable ground

The order was that Glory Rise should be wound up on the just and equitable ground. The substratum of Glory Rise was as ‘the intended vehicle for holding the Property as the matrimonial and family home of the deceased, Miss Luo and [Miss Luo’s daughter]’ (Ribeiro PJ at [74]). This substratum disappeared with H’s death.

This prompts the reflection that where, like L, the plaintiff is a shareholder in the company then a winding up petition (or, perhaps, unfair prejudice proceedings) are an option. Further, they represent an option which is available independently of any estoppel claim.

Limited to cases where the recipient of the assurance is a shareholder?

The Luo Xing Juan promissory estoppel approach is available even in cases where the recipient of the assurance is not a shareholder in the company that holds the property. Thus, in Hong Kong Hua Qiao Co Ltd v Cham Ka Tai (later upheld by the Hong Kong Court of Appeal), the Luo Xing Juan approach was adopted in a case with similar facts.

L and C began to co-habit in a property owned by a company in which L was effectively the sole shareholder. Each was already married when the relationship began.

L assured C that she would be able to live in the property for the rest of her life. L and C co-habited for five years before L died intestate. His wife and son sought to evict C from the property.

C was not a shareholder in the company that owned the family home, although the assurance concerned both the family home and shares in the company that owned it. Winding up would have been of no use to the recipient in this case.

Deputy Judge Saunders, relying on Luo Xing Juan, decided that L’s promises that C could live in the property for the rest of her life were ‘enforceable by way of promissory estoppel’ ([115]).

On relief, Deputy Judge Saunders, relying on Luo Xing Juan, said that C was entitled to an order transferring the legal title of the property to her ([118]). Again, this seems to have been a proprietary estoppel case in all but name.

Limited to family home cases?
Luo Xing Juan and Hong Kong Hua Qiao each concerned the use of promissory estoppel to establish a claim to the family home.

In Hong Kong Hua Qiao, Deputy Judge Saunders drew attention to the fact that both cases involved couples living together as man and wife ([93]) without explaining the significance of this fact. In Chan Sung Lai v Chan Sung Lim Paul, Deputy Judge Saunders (at [128]) expressed his uncertainty as to whether the doctrine could apply as between father and son.

Clearly, the distinction drawn in Thorner v Major between this context and the commercial context is likely to be relevant if there is any dispute as to the meaning of any words or conduct said to constitute an assurance.

Luo Xing Juan and Hong Kong Hia Qiao, however, were not concerned with questions of interpretation. If context was relevant it was for some other reason.

Deputy Judge Saunders may have intended to indicate that this approach to promissory estoppel was more likely to be used in the family home or ‘domestic’ context.

It may be that the Luo Xing Juan promissory estoppel will turn out to be confined to cases with the very specific features of these cases; it may be limited to cases where a couple are living together as man and wife (whether or not they are married) in a property owned by a company controlled by one of them (who gives the relevant assurance).

Limited to company owned by a single shareholder?

In both Luo Xing Juan and Hong Kong Hia Qiao, the company that owned the family home was solely owned by the maker of the relevant assurance. In Luo Xing Juan, H bought out his sister’s 20% minority stake around the same time as he transferred the 35% shareholding to L.

This raises the question as to whether the doctrine can only operate where the maker of the assurance is the sole shareholder. There are arguments in principle in favour of either possible answer to this question.

On the one hand, the relevant assurance is an assurance as to the exercise of voting control. There is no need for a shareholder to own all of the shares in a company to have the power to dictate the outcome of the board decision on any question.

On the other hand, if there are minority shareholders, other than the recipient of the assurance, then the effect of the use of the doctrine on their interests would need to be taken into consideration. They may view the property as an investment and in some market conditions might prefer the company to retain ownership.

This may seem a purely theoretical question but in Luo Xing Juan, H’s sister retained a 20% stake in the company for a few months after the transfer of the 35% shareholding to L. Had H died during those few months then this question would have had practical importance.

Limited to cases where the recipient of the assurance is in occupation of the relevant property at the time of the proceedings?

In Luo Xing Juan and Hong Kong Hia Qiao, the company that owned the family home sought to evict the recipient of the assurance who was in occupation of the property. Promissory estoppel is invoked, in the first place, as a defence against this attempted eviction.

Is this an essential element of the Luo Xing Juan doctrine? The company’s right to possession is not taken away but is conditioned by the estoppel. This accords with a traditional understanding of promissory estoppel and, as noted earlier, suggests a continuity with Maharaj v Chand.

Limiting the Luo Xing Juan approach to cases like this would be consistent with the idea, just discussed, that its use might be limited to family home cases.

A more general relaxation of the distinction between promissory and proprietary estoppel?

The approach in Luo Xing Juan challenges what had seemed to be a well-established distinction between proprietary and promissory estoppel in ways that I have indicated.

I have considered the possibility that the Luo Xing Juan approach is only intended to take effect in certain circumstances. I have considered what those circumstances might be.

It is possible, however, that the Court of Final Appeal intended to establish a more general proposition; it may be that the judgment intended to minimise or even abolish altogether the distinction between proprietary and promissory estoppel. This would explain why proprietary estoppel principles and authorities were applied so readily.

On the other hand, there is no express indication in any of the judgments to indicate that this was the intention; one would have expected that an intention to restructure the law in this way would be clearly flagged up and that some justification would be offered for it.

In paragraph [54] of his judgment, Ribeiro PJ raises the question of the relationship between promissory and proprietary estoppel:

‘The doctrine of estoppel continues to represent a developing area of the law and aspects of the applicable principles are subject to debate. Thus, there is discussion as to the extent to which promissory estoppel and proprietary estoppel overlap, with a body of opinion inclining towards the view that there is no real difference between them. In the present context, proprietary estoppel is inapplicable because the deceased, not being the owner of the Property, was not in a position to confer on Miss Luo a proprietary interest in it. However, as Maharaj v Chand establishes, this does not prevent recourse to promissory estoppel. The doctrines therefore differ at least to that extent. However, it is at the same time clear that many of the constituent elements of the two forms of estoppel are shared and where that is so, authorities on proprietary estoppel provide guidance in cases involving promissory estoppel.’

This passage leaves the question in the balance: there is substantial overlap but some (unspecified) difference. There is no suggestion here of an intention to effect radical change in the law.

Conclusion
When a limited company holds the title to the family home, assurances concerning ownership of the home given by a director or shareholder cannot directly limit the rights of the company nor give rise to a common intention constructive trust or proprietary estoppel claim.

Luo Xing Juan created the possibility that such an assurance could condition the exercise of that shareholder’s voting rights so that they could not be exercised in a way that is inconsistent with the assurance that has been given. This limitation is presented as a form of promissory estoppel.

The Court of Final Appeal went further when it decided that the effect of the estoppel was, in effect, to require the company to make good on the assurance given by the controlling shareholder.

It is not clear whether this promissory estoppel has general application or applies only in limited circumstances. If the latter, the circumstances in which the estoppel applies are not clearly defined.

Michael Lower

Frustration of leases: Brexit and illegality

April 23, 2019

Introduction

This is the second post about Canary Wharf (BP4) T1 Ltd v European Medicines Agency ([2019] EWHC 335) in which Marcus Smith J considered the claim of the European Medicines Agency (‘the EMA’) that Brexit (should it occur) would be an event that would frustrate the EMA’s lease of its office premises in Canary Wharf.

The first post outlined the facts and Marcus Smith J’s account of the doctrine of frustration. This post looks at the EMA’s argument that performing its obligations under the lease would be illegal after Brexit and that the lease was frustrated on that account.

The EMA’s argument on illegality

Marcus Smith J explained that:

‘The EMA’s contention that the Lease was frustrated by supervening illegality, taken at its highest, involved the proposition that, after withdrawal of the United Kingdom from the European Union, it would no longer be lawful for the EMA to pay rent to CW pursuant to the Lease. The payment of rent would be unlawful because the EMA would – in paying rent – be acting ultra vires or without capacity’ ([96]).

Essential points about supervening illegality

The earlier post outlined Marcus Smith J’s account of the law on supervening illegality. Briefly:

  • illegality arising under foreign law does not frustrate a contract;
  • ‘for supervening illegality to frustrate, it must remove all or substantially all of the benefit that one party receives from the contract.’ ([195])
  • the frustration must not be self-induced.

Assumptions favourable to the EMA’s case

Marcus Smith J. assessed the EMA’s case on the following assumptions:

  • that illegality under foreign law was relevant to frustration under English law;
  • that, following Brexit, it was ultra vires the EMA, and therefore illegal, for it to continue to perform its obligations under the lease.

London and Northern Estates Company v. Schlesinger

Marcus Smith J referred to the Court of Appeal decision in London and Northern Estates Company v. Schlesinger ([1916] 1 KB 20) where an Austrian subject took a lease of a flat. When war broke out, restrictions were introduced prohibiting enemy aliens from living in the area in which the flat was located. The Court of Appeal held that this supervening illegality did not frustrate the lease.

Marcus Smith J commented:

‘the primary basis for the decisions of Avory and Lush JJ is illuminating: for supervening illegality to frustrate, it must remove all or substantially all of the benefit that one party receives from the contract. Thus, Avory and Lush JJ both stressed that not only did the lease continue, but also that the defendant was entitled to sub-let or indeed lend the flat to his friends. In short, the fact that the defendant was himself precluded from occupying the flat was not nearly enough to render the lease frustrated.’ ([195])

Application to this case

If it were accepted that the supervening illegality deprived the EMA of any ability to use the premises then the lease would be frustrated. For this to be true, it would need to be the case that it was ultra vires the EMA to occupy, assign, sub-let or share possession of the property ([198] – [199]). The lease would also be frustrated if it were assumed that EMA’s payment of the rent was ultra vires ([200]). Making these assumptions (and that illegality under foreign law is relevant) then Brexit did frustrate the lease.

Self-induced frustration

Even if the supervening illegality did frustrate the lease it is still relevant to ask whether the frustration is self-induced.

Marcus Smith J explained:

‘When considering whether there has been a frustrating event, it is quite clear that the courts consider the conduct of the party alleging frustration broadly and ask the broad question of whether the supervening event was something beyond that party’s control or within it. “Self-induced frustration” is something of a misnomer. It is simply a reference to post-contractual events and actions which indicate that certain options – that might have ameliorated the frustrating event – have been closed off by the acts or omissions of the party claiming frustration.’ ([206])

Here the frustration was self-induced:

‘(3) The fact is – as evidenced by the provisions of the Withdrawal Agreement – that the European Union could have done more than simply baldly ordering the relocation of the EMA (by way of the 2018 Regulation) and focussing only on the progress of the establishment of the EMA’s new headquarters in Amsterdam (which is what the 2018 Regulation does). The 2018 Regulation could have gone further, regarding the winding down of the EMA’s position in the United Kingdom. It could, for example, have included provisions along the lines of Article 119 of the Withdrawal Agreement.’ ([206])

The EU’s failure to confer capacity on the EMA to make use of the right to assign or sub-let the lease was a choice that it had made. It was this choice that gave rise to such illegality as existed. The lease is not frustrated by this illegality ([207]).

Michael Lower

 

 

 

 

Brexit and the doctrine of frustration

March 31, 2019

Introduction

In Canary Wharf (BP4) T1 Ltd v European Medicines Agency ([2019] EWHC 335) Marcus Smith J considered the claim of the European Medicines Agency (‘the EMA’) that Brexit (should it occur) would be an event that would frustrate the EMA’s lease of its office premises in Canary Wharf.

Marcus Smith J first considered the juridical basis of the doctrine of frustration. He then  considered whether either a ‘No Deal Brexit’ or Brexit under the terms of the Withdrawal Agreement negotiated between the British Government and the European Union would frustrate the lease.

This blog post outlines the general discussion of the law of frustration. A second blog post will look at how Marcus Smith J. applied the law to the facts of this case.

Brief outline of the facts of the case

Canary Wharf granted EMA a lease of office premises in Canary Wharf (‘the premises’) for a term of 25 years from 21 October 2014. The EMA could assign or sub-let the premises, subject to compliance with the provisions in the alienation clause in the lease.

The EMA wrote to Canary Wharf on 2 August 2017 informing Canary Wharf that, ‘when Brexit occurs, we will be treating the event as a frustration of the lease’. Canary Wharf sought a declaration that Brexit (the withdrawal of the United Kingdom from the European Union) would not cause the lease to be frustrated.

The doctrine of frustration

‘The doctrine of frustration operates to bring a contract prospectively to an end because of the effect of a supervening event’ ([21]).

While there is no numerus clausus of frustrating event, they include:

  • frustration of a common purpose; and
  • subsequent legal changes and supervening illegality ([41])

Frustration of a common purpose

The essence of the doctrine is that a contract is frustrated when performance would be ‘radically different’ from what the parties had envisaged ([27]; Davis Contractors v Fareham UDCNational Carriers v Panalpina).

The search then is for what the parties have promised and whether performance would fall within the scope of their promises. Contractual interpretation is highly relevant to the question of whether a supervening event means that performance goes beyond what has been promised. Many disputes will turn out to be about contractual interpretation.

In frustration cases, however, the search is for ‘something much more elemental’ which can be described as the parties’ ‘common purpose’ ([29]).

In Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd
(The “Sea Angel”),
Rix LJ said:

‘In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances    …. there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances’ ([111]).

This multi-factor approach (in particular the third factor) goes beyond what would be relevant if the question were purely one of contractual interpretation.

Marcus Smith J. refers to Krell v Henry to illustrate the sort of case in which the parties could have been said to have a common purpose underlying their contract:

‘Their common purpose was just that: whilst the parties surely would have been in opposition in bargaining on price, the thing that they were bargaining about was predicated on the procession taking place. Matters would have been very different had the room been a hotel room charging a higher rate because of the higher demand for rooms on that particular day due to the Coronation.’ ([37]).

The ‘demands of justice’ are a factor:

‘If the provisions of a contract in their literal sense are to make way for the absolving effect of frustration, then that must, in my judgment, be in the interests of justice and not against those interests’ (Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The “Sea Angel”) at [112]).

Subsequent legal changes and supervening illegality

Marcus Smith J explained that:

‘The EMA’s contention that the Lease was frustrated by supervening illegality, taken at its highest, involved the proposition that, after withdrawal of the United Kingdom from the European Union, it would no longer be lawful for the EMA to pay rent to CW pursuant to the Lease. The payment of rent would be unlawful because the EMA would – in paying rent – be acting ultra vires or without capacity’ ([96]).

Outlining the relevant law, he noted that:

‘Supervening illegality means more than simply Patel v. Mirza type illegality: it can arise where the performance of a contract becomes unlawful for one party by reason of a supervening change in law or by reason of a supervening change of circumstance rendering that which was previously lawful unlawful’ ([170]).

Where the illegality is the result of a foreign law

Marcus Smith J. considered the EMA’s case on the assumption that it had made out its case that the payment of rent would be ultra vires the EMA. This illegality would arise from EU law:

‘This is a case where the supervening illegality arises under a foreign law that is not the applicable law. Generally speaking, the validity and enforceability of a contract governed by English law is not as a general rule affected by the question whether the contract would be regarded as valid or whether its performance would be lawful according to the law of another country. The English law of frustration discounts illegality arising under a foreign law, save for certain limited exceptions.’ ([187])

Thus:

‘The question, then, is whether – assuming that the EMA is right as regards the points it makes on vires – these are relevant for the purpose of frustration by way of supervening illegality. The question is whether the English law of frustration, which has regard to questions of legality where the performance of the contract would be unlawful according to the law of the place of performance, should also have regard to the law of incorporation, at least where this affects the capacity of a party to continue to perform obligations under a transaction lawfully entered into by it.’ ([188])

Marcus Smith J. declined to extend English law in this way ([189]).

What if performance was ultra vires and this was relevant in English law?

Even if the EMA had succeeded on supervening illegality thus far, that would not be the end of the analysis:

‘for supervening illegality to frustrate, it must remove all or substantially all of the benefit that one party receives from the contract.’ ([195])

Self-induced frustration

‘Self-induced frustration’ does not frustrate the contract:

’43 Of the five propositions identified by Bingham LJ in The Super Servant Two as not open to question, two might be said to relate to self-induced frustration:
(1) Proposition 4, that frustration should not be due to the act or election of the party seeking to rely on it; and
(2) Proposition 5, that the frustrating event must take place without blame or fault on the side of the party seeking to rely upon it.

44 Whether frustration is self-induced does not turn on technical questions of duty of care or fault.’

Marcus Smith J. said:

‘When considering whether there has been a frustrating event, it is quite clear that the courts consider the conduct of the party alleging frustration broadly and ask the broad question of whether the supervening event was something beyond that party’s control or within it. “Self-induced frustration” is something of a misnomer. It is simply a reference to post-contractual events and actions which indicate that certain options – that might have ameliorated the frustrating event – have been closed off by the acts or omissions of the party claiming frustration.’ ([206]).

Next posts

The judgment in this case is long, detailed and closely-argued. This post describes the relevant legal principles as articulated in the judgment. Subsequent posts will describe how the law was applied to the facts of this case.

Michael Lower

 

Regency Villas: the validity of a recreational easement

February 22, 2019

The issue

In Regency Villas Title Ltd v Diamond Resorts (Europe) Ltd ([2018] UKSC 57) the UK Supreme Court had to consider the validity of a recreational easement. The question was whether the right of timeshare owners to enjoy ‘the free use of sporting and recreational facilities provided in a country club environment’ was capable of being an easement (Lord Briggs at ([1]).

The transfer of a timeshare apartment building contained a right for the timeshare owners:

‘to use the swimming pool, golf course, squash courts, tennis courts, the ground and basement floor of the Broome Park Mansion House, gardens and any other sporting or recreational facilities on the Transferor’s adjoining estate.’

The facilities included a restaurant, gymnasium and sauna. After the transfer, there were changes to the facilities provided.

Lord Briggs gave a judgment with which the majority of the other members of the Supreme Court agreed.

Interpretation of the right granted

Lord Briggs reached the following conclusions as to the construction of the relevant terms of the transfer:

  1. the parties intended to create an easement, not a purely personal right ([25]);
  2. the right granted was ‘a single comprehensive right to use a complex of facilities’ including not only the facilities as they existed at the time of the transfer but also any later replacements or additions ([26]);
  3. the grant was not conditional on the grantees making a financial contribution to the operating, maintenance or updating of the facilities ([30]).

The essential characteristics of an easement

In re Ellenborough Park, the English Court of Appeal accepted that easements must have the following characteristics:

  1. there must be a dominant and a servient tenement;
  2. an easement must accommodate the dominant tenement;
  3. the dominant and servient owners must be different persons; and
  4. a right over land cannot amount to an easement unless it is capable of forming the subject matter of  grant.

Did the rights to use the sporting and recreational facilities accommodate the dominant tenement?

Lord Briggs noted that the dominant tenement in this case was a development of timeshare apartments, typically used for holidays. The grant of rights to use the neighbouring facilities was, ‘of service, utility and benefit to the timeshare apartments as such’ ([53]).

Were the rights capable of forming the subject matter of a grant?

Step-in rights and the ouster principle

If the rights granted were an easement the dominant owner would have the right to enter the servient land to maintain the facilities so that they were capable of use if the servient owner failed to do so (‘the step-in right’).

The argument was that the exercise of the step-in right would deprive the servient owner of lawful possession and control of the servient land and so infringe the ouster principle.

The ouster principle was explained in these terms (referring to the speech of Lord Scott in Moncrieff v Jamieson):

‘the ouster principle rejects as an easement the grant of rights which, on one view, deprive the servient owner of reasonable beneficial use of the servient tenement or, on the other view, deprive the servient owner of lawful possession and control of it’ ([61]).

Lord Briggs rejected the proposition that the exercise of the step-in rights would amount to an ouster:

  1. the question was whether the grant itself (not the step-in right) would be an ouster ([64]);
  2. in any event, the step-in right allowed the dominant owner to do no more than what was sufficient to enable the rights granted to be exercised ([65]).

An easement can only demand ‘mere passivity’ on the part of the servient owner

An easement cannot require the servient owner to take positive action (Moncrieff v Jamieson at [47]). This principle was not infringed; although there was a commercial expectation that the servient owner would maintain the facilities there was no obligation to do so. The continued, meaningful use of the rights did not depend on the servient owner carrying out works of management, maintenance, repair and renewal ([71]).

Lord Carnwath’s dissent concerning the ‘mere passivity’ point

In his dissenting judgment, Lord Carnwath argued that the enjoyment of the right to use the facilities required the servient owner to manage and maintain them ([95]). The right claimed ‘is not a simple property right, but permanent membership of a country club ([96]).

Should these recreational rights be accepted as easements?

The easement claimed was, ‘a recreational right pure and simple’ ([75]). It went beyond Re Ellenborough; should the right be accepted as an easement provided that the Re Ellenborough criteria were satisfied ([74])?

Lord Briggs thought that it should be:

‘Where the actual or intended use of the dominant tenement is itself recreational, as will generally be the case for holiday timeshare developments, the accommodation condition will generally be satisfied.’ ([81]).

Michael Lower

 

 

 

 

 

Right of way and lost modern grant

February 7, 2019

Introduction

In Yik Wai Pong v Yick Pak Kin the Court of First Instance was asked to consider whether the plaintiff had acquired a right of way over an access road on the defendant’s land under the doctrine of lost modern grant.

Facts

The plaintiff and defendant were relatives and owned neighbouring areas of land. The plaintiff claimed to have acquired a right of way over an access road on the defendant’s land leading to the public highway.

The law

Wilson Chan J. summarised the relevant principles:

‘(1) If the owner of land uses a road as a means of access to, and egress from, his land for more than 20 years “as of right”, then, at least in the absence of special circumstances, he will obtain a right of way over the land for the benefit of his land.
(2) Whether the use is “as of right” depends on the claimant showing that it had been nec vi (without force), nec clam (without stealth) and nec precario (without permission from the owner).’ (at [73])

Reasons for the failure of the claim

Failure to establish user for a 20 year period

The plaintiff lived in the UK until 2002, only visiting the property for a week or so every few years. This was not sufficient user of the road to count for this purpose. The relevant use only began in 2002 and so the twenty year period had not been completed.

User with consent

It was doubtful whether even the post 2002 use was ‘as of right’. There was an implicit permission given the family relationship between the plaintiff and defendant ([79]).

The defendant gave the plaintiff a key so that the plaintiff could use the access road. In providing this key, the defendant could be said to be giving express permission for the plaintiff to use the road ([79]).

Michael Lower

 

Satisfying the equity in proprietary estoppel

January 12, 2019

Moore v Moore

In Moore v Moore ([2018] EWCA Civ 2669) a father (Roger) and son (Stephen) carried on a farming business in partnership; each owned one half of the business. Roger assured Stephen that Stephen would inherit Roger’s share in the business. Relations between the two broke down and Roger sought to dissolve the partnership.

In the ensuing litigation, Stephen relied on proprietary estoppel. He was able to establish the elements of a proprietary estoppel claim. The question then arose as to the approach to be taken to the relief to be granted.

Relief in proprietary estoppel: expectations, detriment or somewhere in between?

When the elements of a proprietary estoppel claim are established, deciding how to satisfy the equity ‘is a retrospective exercise looking backwards from the moment when the promise falls due to be performed’ (Davies v Davies [2016] EWCA Civ 463 at [38] per Lewison J). There is debate as to whether expectations or detriment ought to provide the measure for relief in proprietary estoppel cases (Davies v Davies at [39]) and often each of these factors will have a part to play.

In Jennings v Rice ([2002] EWCA Civ 159) Robert Walker LJ referred to a category of cases where ‘the assurances, and the claimant’s reliance on them, have a consensual character falling not far short of an enforceable contract’. Here, expectations are more likely to set the measure of equitable relief (Jennings v Rice at [45]). These cases are referred to below as ‘consensus’ cases).

Where, however, expectations are uncertain or incommensurate with the assurances given then expectations are no more than a starting point and the court is more likely to search for ‘the minimum equity to do justice to the plaintiff’ (Crabb v Arun District Council [1976] Ch. 179 at 198 per Scarman LJ).

In an important passage in Jennings v Rice, Robert Walker LJ said:

‘It would be unwise to attempt any comprehensive enumeration of the factors relevant to the exercise of the court’s discretion, or to suggest any hierarchy of factors. In my view they include, but are not limited to… misconduct of the claimant… or particularly oppressive conduct on the part of the defendant… To these can safely be added the court’s recognition that it cannot compel people who have fallen out to live peaceably together, so that there may be a need for a clean break; alterations in the benefactor’s assets and circumstances, especially where the benefactor’s assurances have been given, and the claimant’s detriment has been suffered, over a long period of years; the likely effect of taxation; and (to a limited degree) the other claims (legal or moral) on the benefactor or his or her estate. No doubt there are many other factors which it may be right for the court to take into account in particular factual situations.’ (Jennings v Rice at [52])

Application of the principles to Moore v Moore

At first instance

The first instance judge decided that the right approach was for Stephen to take over the farming business and assets (including houses on the farm) immediately. This would give effect to the clear intention that Stephen should be sole owner of the farm on his father’s death (to keep the farm in family ownership). He thought this meant that Roger and his wife should continue to receive what they had expected to receive from the farm during their lifetimes.

Specifically:

  1. Roger’s interest in the farm was to be transferred to Stephen immediately;
  2. Roger and his wife were to be granted irrevocable licences to live free of charge in one of the houses on the farm for the rest of their lives;
  3. Stephen was to make a weekly payment of GBP200 to Roger and his wife for the rest of their lives;
  4.  Stephen was to pay the reasonable costs of residential care for Roger and / or his wife should the need arise.

In the English Court of Appeal

Henderson LJ, with whom the other members of the English Court of Appeal agreed, thought that there were serious difficulties both with the first instance approach and with the scheme to which it gave rise ([90]):

  1. Roger (as Stephen must have appreciated) intended his wife to be the beneficial owner of his half share in the farm, with access to capital and income, during her life ([91]);
  2. Roger’s assurances to Stephen assumed that the partnership between them would remain a harmonious relationship. This was no longer the case so that the need for a ‘clean break’ became a paramount consideration. The first instance order, however, created an ongoing state of financial dependence on Stephen ([93]);
  3. It was a dangerous over-simplification to regard this case as a paradigmatic example of a consensus case. Referring back to paragraph 52 of Jennings v Rice (see above), there had been ‘alterations in the benefactor’s assets and circumstances’. The personal and commercial relationship had broken down. Roger’s health had broken down; he had Alzheimer’s disease and lived in a care home ([94]);
  4. The first instance judge had taken a minimalist view as to the provision to be made for Roger and his wife. The judge should, rather, have considered the minimum award to satisfy the equity. The decision to order an immediate transfer to Stephen made it all the more important ‘to provide full and generous protection for Roger and Pamela during the remainder of their lives, and to reflect as far as possible the provision that Roger would have wished to make for Pamela on his death’ ([95]);
  5. The judge had also failed to take account of ‘the likely effect of taxation’ (Jennings v Rice [52]). The first instance judge had been provided with no guidance on this issue: ‘this should be as unacceptable in a substantial proprietary estoppel
    case as it would be in a big money divorce case’ ([96]). The order made at first instance would have seriously adverse taxation consequences.
  6. The judge had failed to consider the effect of any costs order on the financial arrangements he had provided for. Where, for example, was Roger to find the money to meet any such order once he had transferred his assets to Stephen and had only the weekly payment from Stephen to call on ([97]).

The order made at first instance could not stand and the case was remitted for a further hearing as to how the equity was to be satisfied with the benefit of the Court of Appeal’s guidance ([101] – [108]). While the order for an immediate transfer to Stephen should stand, there should be more generous provision for Roger and his wife (both in terms of capital and income) to allow for a clean break.

To this end, the order should require Stephen to pay a considerable (GBP 1 million – 2 million) lump sum to Roger and his wife. While Stephen should assume responsibility for his father’s health costs, the lump sum would allow his wife to pay for her own health care needs.

Comment

Moore v Moore offers detailed guidance as to how the court should approach equitable relief and the requirement to ‘satisfy the equity’. Paragraph [52] in Jennings v Rice emerges as a significant source detailing the factors to be borne in mind.

Moore v Moore illustrates the need for careful consideration of the nature of the expectations generated by the assurances given, the context in which they were given and any changes in that context at the time when effect is to be given to the assurance.

In general it illustrates the potential for proprietary estoppel to combine remedial flexibility with a degree of predictability as to the factors that the court will take into account when granting relief.

This approach might well, in time, give proprietary estoppel the edge over the common intention constructive trust when dealing with the property and financial aspects of a relationship breakdown. Crucially, it is possible to have regard to the state of the relationship between the parties and their circumstances both at the time that the order is made and thereafter.

Michael Lower

 

 

 

 

Misrepresentation: misleading descriptions of a flat

December 10, 2018

A contract can be set aside if the purchaser was induced to enter into it by a misleading description of the property to be sold. The false statement may be made either by the seller or the seller’s agent. The false ‘statement’ may be a series of statements which cumulatively convey a misleading impression of the property.

Facts

In Joytex Development Ltd v Super Homes Ltd ([2018] HKCFI 2286) C acquired Joytex as the vehicle for the purchase of a flat in Conduit Road, Mid-Levels from its developer Super Homes Ltd (‘SHL’).

Joytex alleged that its purchase of the flat was the result of representations (which proved to be false) that the flat would have an open kitchen layout and that all necessary government approvals for implementing this layout had been, or would be, obtained.

The sales agent’s statements

W worked for the estate agent appointed as sole sales agent by SHL. W gave C a brochure. W also told C that the flat would have an open kitchen layout. C was buying the flat as an investment. W told C that the likely category of tenant for the flat would find the open kitchen layout attractive.

The floor plan in the sales brochure

The floor plans for the flat in the brochure showed an open kitchen layout but there was qualifying wording to the effect that they were ‘only for reference’. SHL had approved the contents of the brochure. C noted the floor plan but did not read the brochure in detail and did not notice the qualifying words.

The 2009 side letter (signed at the time of the provisional sale and purchase agreement)

C signed a side letter (about fixtures and fittings to be installed in the flat). The attached plans showed both open and closed kitchen designs.

The solicitor’s statement

C agreed to instruct SHL’s solicitors to act for him in the purchase. A conveyancing clerk, L, handled the transaction. The plan attached to the sale and purchase agreement did not show an open kitchen. L assured C that SHL would change the kitchen to an open kitchen layout. The assignment, like the agreement, showed a closed kitchen layout.

No approval for the open kitchen layout

It later turned out that there was no Government approval for the kitchen layout and no likelihood that such an approval would be obtained. C sought the rescission of the contract and damages on the grounds that he had entered into the contract in reliance on SHL’s misrepresentation.

The legal issues

Whether SHL made representations that the flat would have an open kitchen layout

SHL had made representations. The court could have regard to the cumulative effect of a series of events ([80]). The representation in the floor plan in the brochure was not enough since there was a statement qualifying the plan (it was for reference only) ([84] on the legal effect of qualifying statements).

On the other hand, the 2009 side letter conveyed the impression that the flat could have an open kitchen layout ([87]). SHL approved its terms ([89]). W’s statements were representations that the flat would have an open kitchen layout. The fact that her employers were the sole sales agents of SHL was relevant  ([96] – [97]). While W may have exceeded her actual authority in some of the statements she made, she was acting within the scope of her ostensible authority ([100] – [101]). L was acting within the scope of his authority when he made the relevant representations to C.

The cumulative effect of all of the factors in the previous paragraph was that SHL had represented to C that the flat would have an open kitchen layout ([110]).

Reliance

Although C was an experienced and successful businessman, he had relied on SHL’s representations. Deputy Judge Stock SC said, ‘if the effect of a contract has been misrepresented, it is not necessarily an answer to say that had the representee read the contract, he or she would have discovered the true position’ ([116]).

The qualifying words ‘in rather small print’ in the brochure were not sufficient to defeat the claim ([117]).

Falsity

The representations were false. Joytex could not establish that the misrepresentations were fraudulent.

Remedies

Joytex was entitled to rescind the contract and to recover the price paid with interest on assigning the flat to SHL.

Joytex was entitled to damages for non-fraudulent misrepresentation. The aim is to put the purchaser in the position it would have been had the contract not been made. SHL was not able to show that it had reasonable grounds for believing, and that it did believe, in the truth of the representations.

Joytex was not entitled to damages for the alleged loss of profit from an alternative investment. This required the plaintiff, ‘to show on a balance of probabilities that it would have entered into the alternative and more profitable transaction, and a real and substantial chance (as opposed to a speculative one) that the relevant third party would have transacted.’ ([151]). Joytex was unable to meet this requirement; there was no evidence to show that it viewed any other property or that it would have retained such a property had it done so ([160]).

Joytex was, however, entitled to damages to cover, for example, legal costs and stamp duty and the management fees it had paid as the owner of the property.

Michael Lower

Family home legally owned by company controlled by one of the spouses

November 18, 2018

Introduction

Section 6 of the Matrimonial Proceedings and Property Ordinance (‘MPPO’) empowers the court, in divorce proceedings, to require the transfer  of the property of one party (A) to the other (B). This order can only relate to property to which A ‘is entitled, either in possession or reversion’.

How does this operate with regard to property legally owned by a company controlled by A? Does section 6 empower the court to order the company to transfer the property to B? If so, on what basis?

This was the question considered by the UK Supreme Court in Prest v Petrodel Resources Ltd ([2013] UKSC 34).  It is of considerable practical importance to B, especially where much of A’s wealth is tied up in the company. It is true that the court could order A to transfer the shares in the company to B but, as Lord Sumption observed, ‘ this will not always be possible, particularly in cases like this one where the shareholder and the company are both resident abroad in places which may not give direct effect to the orders of the English court.’ ([40]).

Thus, the court has to confront the important legal question as to whether it is entitled to pierce the corporate veil and whether there is any special jurisdiction to pierce the corporate veil in matrimonial proceedings.

No special jurisdiction to pierce the corporate veil in matrimonial proceedings

The UK Supreme Court laid to rest the idea that England’s family law courts had any special power to pierce the corporate veil. The English equivalent to section 6 of the MPPO (which is in identical terms to the Hong Kong provision) was not open to this interpretation ([37] – [42] Lord Sumption).

If the courts have the power to order the transfer of the property to B it will either be because: (i) the company holds the property on trust for A so that the order can relate to A’s equitable interest; or (ii) the case is one where it is appropriate, applying general principles, to pierce the corporate veil.

Where the company is trustee for A

In Prest, there were several properties which A had either transferred to a company controlled by him for no consideration or where A had supplied the company with the funds to make the purchase and there was no evidence that this was by way of loan or in return for shares in the company. Thus, on general equitable principles, the company held the properties on trust for A. A could be, and was, ordered to exercise his control over the company to procure the transfer of the legal title to the properties to B.

In an important passage, Lord Sumption said:

‘Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts. But I venture to suggest, however tentatively, that in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company. In many, perhaps most cases, the occupation of the company’s property as the matrimonial home of its controller will not be easily justified in the company’s interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company’s beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But where, say, the terms of acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole effective agent of the company (or someone else acting at his direction), judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband’s beneficial ownership’ ([52] emphasis added).

Similarly, Lady Hale said that the power in section 6 MPPO  ‘is a very specific statutory power to order one spouse to transfer property to which he is legally entitled to the other spouse. The argument is that that is a power which can, because the husband owns and controls these companies, be exercised against the companies themselves. I find it difficult to understand how that can be done unless the company is a mere nominee holding the property on trust for the husband, as we have found to be the case with the properties in issue here. I would be surprised if that were not often the case ([93] emphasis added).

Piercing the corporate veil

The Supreme Court rejected the idea that the English equivalent of section 6 of the MPPO created a right to pierce the corporate veil. The court could only pierce the corporate veil if there were some general principle that allowed it to do so. Lord Sumption thought that such a principle did exist:

‘I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality ([35]).

This principle did not come into play here. There was nothing on the facts of Prest that allowed the court to invoke this principle.

Michael Lower