The High Court recently considered whether the seller of a development site had validly assigned its obligations and liabilities under a contract for the sale and leaseback of the development site and, if so, whether this amounted to a repudiatory breach of that contract.

Background 

The dispute concerned the question of who would be entitled to enjoy long leasehold interests in the ground floor commercial space of a tower of 298 flats on a development site close to the new Olympic Park in Stratford, East London (the “Site”). By an agreement dated 4 March 2005 (the “Agreement”) Quest Advisors Limited (“Quest”) agreed to sell the Site to the First Defendant, Mr Thomas McFeely. To acquire the site Mr Thomas McFeely agreed to pay £12,745,000 and also to grant to Quest “or as it directs”, long leases (999 years per lease) of the ground floor commercial space at peppercorn rents. Originally the Site was conveyed into the name of Mr Thomas McFeely alone, however, at some point it was conveyed into the joint names of Mr Thomas McFeely and his brother Mr Conal McFeely, the Second Defendant.

Under the Agreement Quest agreed to pay, or to procure to be paid by the appropriate lessee, a contribution towards the building costs of the Development on or before completion of the Development by Mr Thomas McFeely or his successor in title. The Agreement incorporated the Standard Conditions of Sale (Fourth Edition) (“SCS”). The SCS are generally used in residential property transactions, however, they can also be used in uncomplicated commercial transactions. SCS 1.5 states that the buyer is not entitled to transfer the benefit of the contract. Further, SCS 8.2.1 and 8.2.2 relate to a contract to grant a new lease and define a ‘seller’ as the proposed landlord and the ‘buyer’ as the proposed tenant.

By a deed dated 3 October 2006 (the “Deed”), Quest assigned the benefit of the Agreement to the second Claimant, Sharriba Limited. The terms of the Deed provided that Quest “assigned absolutely” not only benefit of the Agreement but all “obligations and liabilities pertaining thereto and contained therein”. The Deed was then followed by a notice of assignment (the “Notice”) which stated that “all…obligations and liabilities” had been assigned to Sharriba Limited. The register of title of the development showed a unilateral notice in respect of the Deed, which described the Deed as an “assignment” of the Agreement which contained “leaseback provisions”. The beneficiary of the unilateral notice was Sharriba Limited. The Defendants claimed that Quest was not entitled to assign the benefit of the Agreement and so Quest sought a declaration as to their entitlement to assign the benefit of the Agreement.

Alleged assignment of benefit by the Deed

The Defendants challenged Quest’s claim that it assigned the benefit of the Agreement to Sharriba Limited by the Deed. They argued that: (a) the Agreement is an agreement to grant new leases; (b) the Agreement incorporated the SCS; (c) by clauses 1.5, 8.2.1 and 8.2.2 of the SCS Quest was not entitled to transfer the benefit of the Agreement; (d) the benefit of the Agreement includes the right under clause 17 of the Agreement to require that the leases be granted to someone other than Quest if Quest so directs; and (e) the Deed purports to assign the benefit (i.e. to grant to Sharriba the right to require the leases be granted to someone other than Quest or itself).

Alleged repudiatory breach of the Agreement

The Deed and the Notice purported to assign Quest’s obligations to Sharriba. The Defendants, therefore, argued that the Deed and the Notice showed that the intention of Quest was that it was no longer bound by the Agreement. The Defendants contended that this was a repudiation of the Agreement, which the Defendants accepted by letter on 8 September 2008, and so the Agreement was at an end.

Availability of relief against the Second Defendant
 
The Claimants sought declarations that “on or before completion of the Development the Defendants [were] obliged to grant“ the leases of the ground floor commercial space to Sharriba or as it may direct, or to Quest or as it may direct. The Defendants contended that the obligation in the Agreement to grant the leases of the ground floor commercial space was not an obligation that Mr Conal McFeely owed as he was not party to the Agreement and so was not bound by the obligations under it.

The Decision

With regard to the alleged assignment it was held by Robin Knowles QC, sitting a Deputy Judge of the High Court, that the Agreement was both a contract to sell the Site and a contract to grant new leases. For the purposes of the contract to grant a new lease, SCS 8.2.1 and 8.2.2 apply SCS 1.5 so that Quest (the proposed tenant) was not entitled to transfer the benefit of the contract with regard to the grant of new leases. Therefore, when applying the SCS, Quest were not entitled to assign to Sharriba the right to require the leases to be granted to someone other than Quest. However, this did not affect Quest’s right to assign the benefit of the Agreement in relation to the contract to sell the Site, nor did it affect Quest’s right to require the leases be granted to someone other than itself and to exercise that right in whatever way Sharriba might wish.

In law the transfer of the obligations owed under a contract cannot be achieved by the act of one party who owes those obligations by assigning them to another without the agreement of the party to whom those obligations are owed; this is typically done using a novation agreement. Therefore, it was held that the Deed could not validly assign the obligations owed by Quest to Sharriba and so Quest remained under those obligations and any liabilities arsing from the Agreement. However, the Judge stated that it was plain that Quest did not think that it was acting contrary to the Agreement and that it sent the Notice because it considered the Deed was effective to transfer its obligations and liabilities to Sharriba who would then perform those obligations; even though this was an honest yet mistaken belief. Further, there was nothing to suggest that Quest would refuse to perform its obligations under the Agreement if it was held that Quest would continue to be bound by it. It was adjudged that Quest’s conduct did not amount to a repudiatory breach of the Agreement.

It was further held that both Mr Thomas McFeely and his brother had at all material times known of the agreement to grant the leases of the commercial space. There had been no valuable consideration on the disposition of the freehold interest from Mr Thomas McFeely to himself and his brother which did not, therefore, affect the beneficial ownership of the Site. As a matter of construction, the Judge held that the parties to the Agreement expressly contemplated that Mr Thomas McFeely, or his successor in title, would carry out the construction of the Site and so must have impliedly contemplated that Mr Thomas McFeely, or his successor in title, might grant the leases. For these reasons the Judge agreed that Quest was entitled to a declaration to the effect that on or before completion of the development of the Site the Defendants were obliged to grant the leases of the ground floor commercial space to Quest or as it may direct, provided that on or before the grant of each lease the lessee paid the Defendants the required contribution towards the building costs of the development of the Site.

Comment

Whilst this case does not change the law in this area, it highlights the importance of ensuring that agreements are clearly and unambiguously drafted. Where an agreement purports to act as a contract for sale and leaseback, or indeed any commercial agreement whether or not it relates to property, it is of paramount importance that clear definitions are used. The parties, including any successors in title, should be sufficiently identified and referred to throughout the agreement and care should be taken to ensure that clauses do not conflict with each other, especially when any form of standard conditions are incorporated into that agreement. Such consideration will help to prevent future disputes and avoid litigation as a result of “…simply poor drafting”.

For further information please contact Owen Rafferty or the Partner with whom you usually deal