London Borough Of Barnet v Barnet Football Club Holdings Ltd

LORD JUSTICE PETER GIBSON: This is an appeal by the claimant, the London Borough of Barnet ("the Borough"), from the order made on 13th February 2004 by Mr AG Bompas QC, sitting as a Deputy High Court judge in the Chancery Division. By his order the judge dismissed the Borough's claim for rectification of two instruments. One is a transfer dated 27th March 2002 whereby the Borough transferred a football ground known as Underhill Football Ground ("Underhill") to the defendant, Barnet Football Club Holdings Ltd ("Holdings"). The other is a supplemental deed ("the Deed") also dated 27th March 2002 between the same parties as were parties to the transfer. The appeal is brought with the permission of Jonathan Parker LJ.

The judge in a detailed and meticulously careful judgment, which Mr Grant Crawford for the Borough rightly acknowledged to be very impressive, has set out the facts very fully and they have not been challenged. In the event on this appeal it is only necessary to refer to those facts which are material to the issue on which I would decide this appeal.

Underhill is the ground which prior to the transfer had been occupied by Barnet Football Club Ltd ("the Club") pursuant to a lease ("the Lease") dated 20th August 1986, whereby the Borough had let Underhill to the Club for 99 years from 25th December 1985 at an annual rent of £50 and a premium of £35,000. The Lease restricts the use of Underhill to the playing of Association Football and ancillary activities.

The Club in the 2000/2001 season was in the Third Division of the Football League. Underhill fell short of League requirements in a number of respects. For example, its existing stands could not accommodate with safety the minimum number of spectators, 6,000, required by the League. Further, its pitch has a distinct slope. Its three and a half acre site was too small for the necessary expansion, and to bring it up to League requirements some further adjoining land would have to be acquired. The Club wanted to remain in the League and, following its relegation in May 2001, its ambition has been to return to the League from the Vauxhall Conference League in which it now plays.

Mr AA Kleanthous and his wife held the vast majority of the shares in the Club until 26th February 2002 when their shares were transferred to Holdings, a company which Mr Kleanthous formed in April 2001 and of which he is the sole shareholder and director.

For some time before 2001 the Club had been in discussion with the Borough about its future. The judge described the general picture as being that the Borough was in principle willing to assist the Club to resolve its difficulties with Underhill, provided that the Club remained within Barnet. The Club wanted to purchase the freehold and to assign it to another company (in the event the other company was Holdings) before new restrictions were imposed by the League on the transfer of football grounds. A significant feature of the negotiations was what was to happen after the purchase to the marriage value should the Club relocate to another site within Barnet or, as the Club threatened the Borough, outside Barnet. The marriage value is the value of the marriage of the freehold and leasehold interests, its amount being the difference between the value of the land with vacant possession and the aggregate of the value of each separate interest. If, despite Underhill currently being part of the green belt, planning permission for residential development of Underhill was to be obtained, the value was estimated to be not less than £5 million.

Mr David Stephens, a chartered surveyor, was at the relevant time the Property Services and Valuation Manager for the Borough. As he informed Mr Kleanthous by a fax letter dated 3rd April 2001, he was instructed by the Borough to enter into negotiations with the Club for the sale of the freehold of Underhill. But he made clear that any provisional agreement reached still had to be reported by him to the appropriate committee for approval. One of the matters which the Borough had to bear in mind was the necessity, under section 123 of the Local Government Act 1972, to obtain the best consideration reasonably obtainable in the circumstances, unless it obtained the approval of the Secretary of State.

On 12th April 2001 Mr Stephens met Mr Graham Slyper, another chartered surveyor and a director of the club. Mr Stephens had prepared a paper outlining three options of which the third was the only option discussed. That was for the freehold to be sold, subject to a covenant restricting use of Underhill to Association Football and ancillary activities. I will call such a covenant "the restrictive covenant". Mr Stephens assumed for the purposes of the third option that if Underhill were sold for another purpose, the Borough would be entitled to payment of a sum of over £5 million. On that basis the price for the sale by the Borough of the freehold of Underhill would be £10,000.

Mr Slyper agreed in principle to that price, but he did not accept that the Borough should be entitled to the whole of the marriage value. He wanted that to be shared 50/50. There were further discussions, in particular on the split of the marriage value. Mr Stephens was prepared for the Borough to share the marriage value, if the Club remained within Barnet, but for the Borough to obtain the whole of the marriage value if the Club relocated outside Barnet.

At the end of April 2001 Mr Slyper sent Mr Stephens a draft of a proposed agreement. This contemplated the sale of the freehold for an unspecified price and for a further price to be paid if the Club ceased to use Underhill and the freehold was sold for development, but an unspecified percentage of the development profits was only to be paid to the Borough in the event of the Club relocating outside Barnet.

Mr Stephens supplied the leader of the Borough Council with briefing notes of the progress in the negotiations. One note on 14th June 2001 explained that the following basic principles had been negotiated: the sale of the freehold for £10,000; the Club to have the whole of the development profits if it relocated within Barnet; and if it relocated outside Barnet or left Underhill without relocating, the net proceeds of sale in excess of the original price would be split 60/40 in favour of the Borough. He referred to Mr Kleanthous' proposal that a holding company should be the purchaser, and Holdings was eventually identified as that company.

The Borough has adopted a "Cabinet" system, whereby to a Cabinet of certain elected members of the council a decision-making power is delegated. Alternatively, a delegated powers procedure is available, whereby a proposal can be decided upon by a senior officer if the proposal has been considered and commented upon by senior officers and an elected member has given his agreement. Initially, Mr Stephens expected that the proposal for the sale of Underhill would be decided upon by the Cabinet at a meeting on 16th July 2001. To that end by 2nd July he had prepared a draft report for Cabinet in the form that that report was to be that of the Cabinet member for resources, Councillor Chopra, but contributed to by the Head of Development and Regeneration, Mr Paul Chadwick. The purpose of the report was expressed to be "to approve the sale of the freehold interest in the Underhill Stadium to [the Club] subject to [the Borough] sharing in any future development value." That was an overstatement, as in certain eventualities, as the report indicated, it was contemplated that the Borough would not share in the profits of future development.

The material terms of the provisionally agreed sale were expressed to be as follows. First, by paragraph 8.4.1, the price was £10,000. Second, by paragraph 8.4.2, on the holding company building a new stadium facility within Barnet and the Club moving to that facility as its "permanent" ground (that is, remaining and playing at the new facility for at least 10 years), the full value arising from the sale of Underhill was to be "entirely for the benefit of the holding company". Third, by paragraph 8.4.3:

Forming part of the report was a document called the exempt report, which was not to be made public. It drew attention to paragraph 8.4.3 and to the fact that for the Borough to sanction a 50/50 split of profits rather than 60/40 would contravene section 123.

Mr Stephens sent the draft documents to Mr Slyper. As the judge noted, paragraph 8.4.3 was plainly intended to provide for the Borough to have a share of any development profit on a sale of Underhill in any circumstances other than a permanent relocation within Barnet, and no time limit was suggested for paragraphs 8.4.3 or 8.4.4. The only time limit is that in paragraph 8.4.2 relating to the definition of what is permanent, that is to say a period of 10 years.

Mr Slyper in an exchange of e-mails raised one objection to what he called the 10-year rule which he said had not been raised in discussion. He said that in paragraph 8.4.2 the holding company should get the benefit of the full value if the Club relocated within Barnet more than once in the 10 years. He suggested that in paragraph 8.4.3:

Mr Stephens immediately responded agreeing to those suggestions. As the judge found, by 4th July the main points of the proposed sale were agreed although not binding. On that day Mr Stephens amended the draft report for Cabinet, but did not let Mr Slyper see the amended draft. Paragraph 8.4.3 of the amended report did not reproduce what Mr Slyper had suggested, because the words "within 10 years" were removed from inside the brackets, in which they had stood, to outside the brackets, paragraph 8.4.3 reading:

Other changes made included that in the second sentence of paragraph 8.4.2 after "10 years" there was the addition:

In a section headed "Cabinet member's conclusions and recommendation" this was stated:

The report was not considered at the Cabinet meeting on 16th July. Instead the decision was taken that the matter would proceed through the delegated powers procedure and be put to Councillor Chopra. A draft delegated powers report was then prepared by Mr Stephens and sent to each of Mr Boland, who is the Borough's Chief Executive, the Borough Treasurer and Mr Jeff Lustig, the Borough Solicitor. It was a document largely cut and pasted from the amended draft report to Cabinet. It included in paragraph 3.1 under "Summary" that the purpose was to approve the sale of the freehold interest in Underhill to the Club, subject to the Borough sharing in any future development value, and in paragraph 7.2, under "Resource Implications":

What had been paragraphs 8.4.2 and 8.4.3 became paragraphs 11.4.2 and 11.4.3. The only change to those paragraphs was the addition at the end of paragraph 11.4.3 of what had been in the exempt report relating to the fact that the Club had wanted a 50/50 share of the net proceeds and that, in the officer's opinion, those terms would have contravened section 123. The same conclusions and recommendation were expressed in paragraph 11.6 as had been in paragraph 9.1 of the draft report for Cabinet.

Mr Boland on 23rd July said that he was happy with the draft. There is no evidence of the Borough Treasurer's response. Mr Lustig sent a brief response by e-mail on 30th August 2001, saying that he understood the thrust of the on-sale provision. He asked Mr Stephens whether the key provisions were not that (1) the Club was allowed to play at Underhill for at least 10 years unless it found and moved to another facility during that period and (2) unless it had relocated to another suitable ground within Barnet and the holding company had provided and developed or would provide and develop that other ground that on any sale of Underhill the provision for the division of the sale proceeds would apply.

The finalised delegated powers report contained some modifications of the draft. In paragraph 3.1 was included a reference to the sale as being to a holding company on behalf of the Club, subject to safeguards for the Club having future use of the stadium. Paragraphs 11.4.2 and 11.4.3 were renumbered 11.4.3 and 11.4.4. Paragraph 11.4.2 and 11.4.3 were changed to read:

Paragraph 11.4.4 (previously 11.4.3) commenced with the word "Alternatively" and continued:

Mr Steven Strange in the Borough's legal department was instructed to draft the necessary documents. He read the report as authorising a sale of Underhill under which the right of the Borough to receive a share of the development proceeds would in all circumstances be limited to a 10-year period. He prepared a draft contract in which reference was made to the Deed. He also prepared a draft of the Deed in which he drafted provisions referring to a cut-off period of 10 years, making it clear that the Borough could receive no further payment after that 10-year period and that the agreement would only last 10 years.

On 3rd December 2001 he asked for Mr Stephens' comments on the drafts. Mr Strange also sent his drafts to his superior and team leader in the legal department of the Borough's solicitor, Ms Philomena Jemide. She questioned whether the restrictive covenant as to user of Underhill in clause 13 of the draft contract should not be limited to 10 years only to bring it into line with the time limit in the Deed. Thereby she indicated that she shared Mr Strange's view on what the delegated powers report required. Mr Strange accordingly put that limit in the draft contract.

Mr Stephens on 7th December met Mr Strange. They discussed the draft contract and the draft of the Deed and, as the judge found, Mr Stephens was shown the amendment introducing the 10-year limit to clause 13. But Mr Stephens took no point on it, nor indeed on the 10-year provision in the draft of the Deed.

The draft was sent to solicitors for Holdings on 10th December. They responded by asking for the deletion of clause 13 from the contract. The judge found that that request was on Mr Slyper's instructions to test the water over the 10-year time limit and to ascertain whether or not it was simply a drafting mistake. Mr Strange confirmed the clause, including the 10-year time limit.

On 27th February 2002 the contract was executed in two parts which were exchanged. Mr Lustig had authority to sign and signed one part on behalf of the Borough. The contract contained an agreement for the Borough to sell Underhill to Holdings for £10,000. It provided for the transfer of Underhill to contain the restrictive covenant as to user for 10 years. It also provided for the Deed to be entered into on completion.

On 27th March 2002 the transfer of Underhill was executed under the seal of the Borough, with the Mayor and Mr Lustig signing as witnesses of the affixing of the seal. It contained a restrictive covenant, Holdings covenanting with the Borough that for the period of 10 years from the date thereof Holdings and those deriving title under it would not use Underhill for any purpose other than for the playing of Association Football by the Club and for purposes ancillary thereto. The same day the Deed was executed by the Borough in the same way.

The Deed provided in clause 2:

Various terms were defined: "the Property" as Underhill; "the Initial Price" as £10,000; "the Further Consideration" as the additional consideration calculated in accordance with the Schedule; and "Permanently Relocate", so far as material, as the Club playing its home fixtures at a site other than Underhill for a continuous period in excess of 10 years. "Cut-Off Period" was defined in clause 7.1 in this way:

In paragraph 2.1 of the Schedule, "the Further Consideration" was quantified as 60% of the difference between open market value and the aggregate of £10,000 and any further consideration paid or payable by Holdings to the Borough.

At some stage after that the Borough realised that a mistake had been made. An independent panel was appointed to conduct an inquiry into the sale of Underhill. It duly took evidence and produced a report.

This action was commenced by the Borough in the Chancery Division in January 2003. It pleaded that the transfer and the Deed by mistake did not carry into effect the intention of the parties and that mistake was shared by both parties, or, if it was a unilateral mistake of the Borough, that mistake was known to Holdings which sought to take advantage of it. Common mistake was not pursued before the judge and I need say no more about it.

It was also pleaded that if the Borough was not entitled to rectification, the transfer of Underhill was one which, by virtue of section 123, the Borough had no power to make and would be void. That was pursued before the judge, who held against the Borough. That point is not the subject of an appeal to this court and, again, I say no more about it.

A request by Holdings for particulars elicited from the Borough (1) that the alleged mistake was that the restriction on the use of Underhill for football only was limited to a period of 10 years, instead of being unlimited in time; (2) that the intention was that the use of Underhill should be restricted to football only without limit in time, that if the Club were to relocate within Barnet it would receive the whole of the increased value of the land attributable to its development, but that otherwise the increased value would be shared between the Borough and the Club in 60/40 proportions; (3) that Mr Stephens, and only Mr Stephens, was the natural person having the relevant intention for the Borough; and (4) that Mr Slyper was the natural person identified as having the knowledge by Holdings of the relevant mistake.

The Borough sought rectification by deleting (1) from the restrictive covenant in the transfer the words "for the period of 10 years from the date hereof"; (2) from the Deed (a) the definition of the Cut-Off Period; (b) the opening six words of clause 2.2; (c) the words "at any time during the Cut-Off Period" in clause 2.3; and (d) the whole of clause 7.

The judge in his judgment found that it did not matter that rectification of the contract was not sought. In paragraph 118 the judge set out what he described as six ingredients which the Borough had to establish in order to succeed on its rectification claim. They were as follows:

The judge found that the first ingredient was established, in that there was an accord between Mr Stephens and Mr Slyper in July 2001. He also found that the second ingredient was shown, in that none of the contract, the transfer and the Deed accurately set out the terms of that accord. But the judge said that the fundamental objection to the Borough's rectification claim concerned the third ingredient, because he was not satisfied that the Borough intended any of those instruments to carry out the terms agreed in principle in July 2001.

The judge said this in paragraph 129:

The judge then went on to consider an alternative but unpleaded case, that the state of mind of those whom he called the relevant individuals was the determining criterion. He first considered whether Mr Lustig's state of mind was shown by his e-mail of 30th August 2001 and that he must have understood the draft delegated powers report as seeking approval for a sale on the terms intended by Mr Stephens in July 2001. But the judge found insuperable obstacles to this. He referred to the evidence given by Mr Lustig in 2002 to the inquiry. The judge noted Mr Lustig's evidence that:

The judge concluded from this that when Mr Lustig signed the contract and the transfer and the Deed in 2002, his understanding was that those instruments were in fact in accordance with the finalised delegated powers report. That is now contested by the Borough before us, on the footing that Mr Lustig's intention was as expressed in his 30th August 2001 e-mail. It is said that the instructions to which Mr Lustig referred must have included documentation earlier than the delegated powers report showing Mr Stephens' true intention.

I am not persuaded that that is correct. The e-mail on 30th August 2001 was seven months before the relevant time when Mr Lustig signed the documents. Further, there is simply no evidence that the instructions to which reference is made by Mr Lustig in his evidence to the inquiry included anything other than the delegated powers report. The judge went on to point out that Mr Lustig never gave evidence and that there was no suggestion that he was not available to be called. The judge said that it was impossible to conclude that Mr Lustig understood the finalised report as having any sense other than what he told the panel.

The judge also pointed out that none of Mr Boland, the Borough Treasurer, Councillor Chopra and Mr Chadwick was called. The judge said that how any of them understood the delegated powers report or what they thought was being authorised could only be inferred from the fact that they approved that report. The judge said that the state of mind of the Borough, if required to be ascertained from the state of mind of those individuals, must be assumed to approve whatever the report in fact authorised. The judge explained his reasoning in this way:

The judge said that he had misgivings as to what the report in fact authorised and that it might have been argued that the report did not authorise the sale which was carried out. But he said that that was not argued and that, on the contrary, it was the Borough's position that Mr Stephens' error in drafting what became paragraph 11.4.4 caused the Borough to authorise by mistake a sale of the land subject to a restrictive covenant and right of potential clawback of no more than 10 years' duration.

The judge concluded that the Borough could not succeed in its claim to rectification. The judge went on to consider, if wrong on that, the fourth and fifth ingredients, but held that the fact that Mr Slyper appreciated that the introduction of the 10-year limit was inexplicable save on the ground of some mistake or failure within the Borough was not sufficient by itself to justify a conclusion of sharp practice, so as to require Holdings to be held to a bargain which it did not intend to enter. The judge found the sixth ingredient satisfied. However, for the reasons he had already given, he dismissed the rectification claim.

On 28th August, the day before this hearing was due to commence, an application was made that we should not commence the hearing until today because the Borough, whilst continuing through its solicitor to instruct Mr Crawford, who alone had appeared before the judge, had instructed Mr John Cherryman QC to lead Mr Crawford, and Mr Cherryman had suddenly been taken ill. It was suggested that the 24 hour delay would give Mr Cherryman a chance to recover. I refused that application because of other commitments of members of this court today.

At the start of the hearing yesterday Mr Crawford renewed the application for an adjournment. The present case, we were told, concerned a great deal of money and was politically important. The Borough wanted its chosen leading counsel to conduct the appeal. The application was opposed by Mr Andrew Hunter for Holdings, who pointed out that both parties had agreed that the hearing should be expedited. He said that it was important for the Club that the dispute should be finally resolved speedily so that the Club could plan its future.

We refused the application for an adjournment for reasons which we said we would give when giving judgment on the appeal. My reasons are these. I have much sympathy with Mr Cherryman in his sudden illness, and indeed with Barnet in its misfortune in losing its chosen leading counsel so suddenly and so close to the appeal hearing. However, the court in deciding whether or not to exercise its discretion to adjourn must not only do justice between both parties in accordance with the overriding objective, but also take into account the proper use of the court's time. Mr Crawford is a senior junior who had been in the case from the beginning and had conducted the case below. He had prepared the appellant's notice. He had drafted the skeleton argument, which would appear to have been adopted by his leader without qualification, Mr Cherryman not having notified this court of any further points which he wished to take on this appeal, nor adding any further skeleton argument.

Whilst I do not think that the hearing of the appeal could be regarded as particularly urgent, the delay, if there was to be an adjournment, would be likely to be until at least the start of next term and may well be much longer, so far in advance are the lists in this court fixed. There is no medical report nor prognosis as to when Mr Cherryman is likely to be well again. Holdings and its team of lawyers had come prepared for the hearing and costs would be wasted by an adjournment. All three members of this court had read the papers and yesterday would have been time wasted for the court had there been an adjournment. This constitution is not due to sit together next term and further judicial time would be expended by whichever constitution prepared itself for and heard the appeal if adjourned.

In all the circumstances, I reached the clear conclusion that the appeal must go ahead, confident that no serious injustice would be done to the Borough if its appeal were left in Mr Crawford's capable hands.

In the event, we have heard argument only on the first point on which the judge decided that the rectification claim failed. Mr Crawford submitted that the judge had adopted an over technical and unrealistic approach to the equitable remedy of rectification. He submitted that there was an accord, as the judge found, reached in July between Mr Slyper and Mr Stephens, and he said that it could not seriously be suggested that the Borough intended to depart from that accord.

Although at one stage of his submissions he challenged the judge's finding that Mr Stephens' state of mind was immaterial, Mr Crawford accepted that everything depended on the delegated powers report. He said that that report could not be construed as indicating an intention that there should be a 10-year period governing the ability of the Borough to share in the development value if the Club relocated outside Barnet. He said that that report must be read as a whole and he relied in particular on the contents of paragraphs 3.1, 7.2 and 11.6 as showing an intention to share the development value without any time limits. Some garbled words, he said, in paragraph 11.4.4 which were plainly a mistake could not properly lead to the conclusion that a 10-year cut-off period was intended.

Mr Crawford pointed to the judge's own doubts as to what was the effect of the report and he argued that on no footing could paragraph 11.4.4 be read as intending to subject the condition relating to the Club ceasing to exist to a 10-year period. He argued that it would be perverse to attribute to the Borough an intention to impose a 10-year term which would leave it in breach of section 123 if it carried out the sale.

I am unable to accept these submissions, essentially for the reasons given by the judge and reinforced by the cogent but economical submissions of Mr Hunter. The primary difficulty for Mr Crawford is the judge's findings in paragraphs 21 and 23 of his judgment on the procedures adopted by the Borough on a sale of land. Those findings are not challenged. It is clear that the sale needed to be proposed to and sanctioned by the elected members, by an appropriate organ or individual, and that the sanction, once given, would delegate to some officer the further conduct of the sale authorising that officer to conclude the sale. Mr Stephens' role was merely that of negotiator and preparer of the relevant proposal. Of the two procedures for obtaining the sanction of elected members, the delegated powers procedure was the one adopted and under that, whilst the proposal would be considered and commented on by senior officers and an elected member, with the agreement of the elected member the proposal would then be decided upon by a senior officer. Mr Stephens was not one of the senior officers, nor of course was the elected member concerned. Therefore, Mr Stephens' intention was immaterial, as the judge rightly found in paragraph 129. That was the only case pleaded on behalf of the Borough and with its failure the case for rectification fails.

Of course if Mr Stephens' intention, as the person involved on behalf of the Borough in the accord, had been shared by the persons concerned in the delegated powers procedure to comment on and consent to and to give the sanction for the sale, then his intention might have been relevant in that indirect way. But the Borough would have had to show that that was the intention of those persons. It was never the pleaded case of the Borough that such persons' intentions were relevant. Nor did any of such persons give evidence, although there is nothing to suggest that they were not available to do so.

In these circumstances, apart from the possibility of an argument that Mr Lustig's state of mind in 2002 could be inferred from his 30th August 2001 e-mail, which the judge rightly rejected, the only evidence of the intentions and understanding of Mr Boland, the Borough Treasurer, Councillor Chopra and Mr Chadwick is the delegated powers report, because they must be taken to have intended whatever that report authorised. However, it is quite impossible to find in that report clear irrefragable evidence that no 10-year cut-off period was intended. Paragraph 14.4.4 refers to such a period as applying if the Club permanently relocated to a stadium outside the Borough or left Underhill, and that is not displaced or contradicted with sufficient clarity by the terms of paragraph 3.1 or paragraph 7.2 or paragraph 11.6.3. Indeed, as Mr Hunter pointed out, it was Mr Crawford's case before the judge that paragraph 11.4.4 did have the effect which those drafting the contract, the transfer and the Deed attributed to the report.

Mr Crawford even argued below that the 10-year period applied to the Club ceasing to exist, although before us he has acknowledged that was wrong. However, the fact remains that what he submitted to the judge was in itself an indication that the report did not contain the clear evidence which the Borough had to adduce if it was to succeed on a rectification claim.

Accordingly, even on this unpleaded alternative case, in my judgment the Borough's claim fails.

In the light of those conclusions, it is unnecessary to consider the second ground of appeal relating to whether there was sharp practice sufficient to cause an estoppel to arise from the unilateral mistake.

For these reasons, I have reached the clear conclusion that this appeal must be dismissed.

LORD JUSTICE KEENE: I agree that this appeal should be dismissed. I also agreed that the application for an adjournment should be refused, for the reasons which have been given by my Lord, Lord Justice Peter Gibson.

LORD JUSTICE MAURICE KAY: I also agree.