Hughes v Groveholt Ltd

This an appeal by Mr Alan Hughes, the first defendant in the action, from an order made by Mr Nicholas Underhill QC, sitting as a Deputy High Court Judge in the Chancery Division, on 28 January 2005. By his order, the judge dismissed an application by Mr Hughes for summary judgment against Groveholt Ltd (“Groveholt”), the claimant in the action. The judge also granted declaratory relief. The second defendant in the action, Delbrook Properties Ltd, a company owned and controlled by Mr Hughes, has taken no part in the proceedings.

The action arises out of a scheme for the development of a brownfield site owned by Mr Hughes and known as Cawdor Quarry, Matlock, Cheshire (“the Site”). The Site is situated close to the town centre of Matlock, and the scheme for its development was a complex one, both in physical terms and in terms of the contractual history.

In physical terms, the development of the Site required major infrastructure works to provide access, including the diversion of the A6 trunk road and the construction of a new road bridge across the River Derwent. In addition, in order to enable the Site to be developed certain parcels of land not forming part of the Site itself had to be acquired from third parties (one of whom was Railtrack). This process was referred to as “site assembly”. The costs of the infrastructure works and site assembly (the judge referred to them as “the preparatory costs”, and I adopt that expression) were inevitably going to be very substantial. As such, they were a significant factor affecting the development value of the Site.

As to the contractual history, there was a sequence of contracts relevant to the action, involving (1) Mr Hughes, (2) J Sainsbury plc and/or one of its associated companies (since nothing turns on the identity of the particular company in the Sainsbury group I will refer to each of them as “Sainsbury”), (3) Chelverton Properties Ltd (“Chelverton”) and (4) Groveholt.

The first contract in the sequence was an Agreement (“the Sainsbury Agreement”) dated 23 December 1996 and made between Mr Hughes and Sainsbury whereby Mr Hughes sold part of the Site (“the Sainsbury Land”) to Sainsbury. The Sainsbury Agreement was subsequently varied by a Loan Agreement (“the Loan Agreement”) dated 10 March 1997 and made between Mr Hughes and Sainsbury.

The next relevant contract, and the crucial one for present purposes, was an Agreement (“the Chelverton Agreement”) dated 9 April 1998 and made between Mr Hughes and Chelverton whereby Mr Hughes sold the remainder of the Site (“the Chelverton Land”) to Chelverton. Clauses 5, 6, 8, 10 and 11 of the Chelverton Agreement are central to the present dispute. I shall come to the detail of these clauses in due course, but for the purposes of this introduction the following broad description of their effect will suffice.

Clause 5 of the Chelverton Agreement provided for payments to be made by Chelverton to Mr Hughes by way of addition to the purchase price for the Chelverton Land in the event of certain specified planning consents being granted for its development. Clause 6 provided that Chelverton’s obligations under clause 5 should be secured by a charge over the Chelverton Land. Clauses 8 and 10 provided for payments to be made by Mr Hughes to Chelverton in certain events. Clause 8 provided for Mr Hughes to make a payment to Chelverton should the total of the preparatory costs, when finally ascertained, exceed a specified level. Clause 10 obliged Mr Hughes to contribute to the cost of purchasing the land owned by Railtrack (“the Railtrack Land”). Clause 11 contained a mechanism for setting off any sums due from Mr Hughes to Chelverton under clauses 8 and 10 against any sums due from Chelverton to Mr Hughes under clause 5.

The language of clause 11 has given rise to a question of construction which lies at the heart of the rival contentions advanced by the parties before the judge and in this court. The nature of that question will be apparent when I have completed this brief overview of the contractual structure and referred to certain subsequent events.

On completion of the Chelverton Agreement (on 16 September 1998) Chelverton duly executed a Legal Charge (“the Charge”) over the Chelverton Land pursuant to clause 6 of the Chelverton Agreement.

On the same day, a Deed of Novation (“the Deed of Novation”) was entered into between Mr Hughes, Chelverton and Sainsbury whereby Mr Hughes’ rights and obligations under the Sainsbury Agreement were transferred to Chelverton. In effect, Chelverton stepped into Mr Hughes’ shoes vis-à-vis Sainsbury.

On 4 July 2001 Chelverton sold the Chelverton Land to Groveholt, subject to the Charge. In the meantime, Chelverton had entered into a number of agreements with Sainsbury relating to the development of the Site, the detailed terms of which are not relevant for present purposes.

On 15 October 2002 Chelverton was placed in creditors’ voluntary liquidation. On 11 December 2002 the liquidator, in exercise of the power conferred on him by section 178(2) of the Insolvency Act 1986 (“the 1986 Act”), disclaimed the Chelverton Agreement and the Deed of Novation, thereby determining Chelverton’s rights and obligations thereunder as from the date of the disclaimer.

It is common ground that as at the date of disclaimer planning consents had been granted for the development of the Chelverton Land which (leaving aside clause 11) entitled Mr Hughes to further payments under clause 5 of the Chelverton Agreement amounting to £3M.

So far as the preparatory costs are concerned, it is common ground that as at the date of disclaimer the total amount of the preparatory costs had not as yet been finally ascertained (and it has still not been finally ascertained). On the other hand, there is evidence before the court (which Mr Hughes accepts, albeit only for the purposes of his summary judgment application) that the preparatory costs are currently running at such a level that if there were to be a set off under clause 11 his entitlement to the £3M would be wholly extinguished.

Groveholt contends that on the true construction of clause 11 Mr Hughes is entitled to the £3M under clause 5 only after setting off his liability under clauses 8 and 10, once the total amount of the preparatory costs is finally known; and that it is only that net entitlement which is secured by the Charge. Groveholt further contends, relying on the evidence as to the current level of the preparatory costs, that nothing is or will in the future be secured by the Charge: i.e. that the secured debt is, and will remain, nil.

Accordingly in the action, which was commenced on 12 March 2004, Groveholt seeks a declaration “that no sums are due to Mr Hughes that are secured by the Charge”.

Mr Hughes joins issue with Groveholt’s contentions. He contends that on the true construction of the Chelverton Agreement (and in particular of clauses 5 and 11) his entitlement to £3M under clause 5 was an accrued (i.e. vested) right at the date of disclaimer and as such was not affected by the disclaimer; whereas the disclaimer (alternatively Chelverton’s insolvency) had the effect of bringing to an end its right of deduction under clause 11. Hence, he submits, Chelverton owes him £3M. He further contends that, notwithstanding the disclaimer, the Charge remains on foot as security for that debt. He accordingly applies for summary judgment to that effect as against Groveholt (but subject to a deduction of £250,000 on account of his possible liability under another provision of the Chelverton Agreement as to which there is, as he acknowledges, a triable issue).

On 10 June 2004 an order was made by consent under section 50 of the Law of Property Act 1925 releasing the Charge on the payment into court of £3.4M (representing the £3M to which Mr Hughes claims to be entitled under clause 5, plus interest).

As noted earlier, by his order the judge dismissed Mr Hughes’ application for summary judgment. He went on to make a declaration in the following terms:

“[Mr Hughes] does not, by reason of the disclaimer of the Chelverton Agreement by the liquidator of Chelverton or otherwise, have any right to the payment as debts of the sums of money referred to in clauses 5.1.2, 5.1.3 and 5.1.5 of the Chelverton Agreement [i.e. the £3M] and accordingly such sums are not secured by the Charge.”

The judge refused permission to appeal. However, permission was granted by Jacob LJ on the papers on 4 March 2005.

I can now return to the relevant contracts in more detail.

The price for the Sainsbury land was £7.3M plus VAT. £2.3M of that price was payable (and was paid) on completion of the Sainsbury Agreement, which took place on 30 January 1997. The balance of the purchase price, amounting to £5M, was to be placed by Sainsbury on “security deposit” and applied in defraying the costs of the infrastructure works (which were to be undertaken by Sainsbury, using a suitable contractor). If the total of those costs, when finally ascertained, came to less than the sum on deposit, Mr Hughes would be paid the balance of that sum. In other words, the costs of the infrastructure works (up to £5M) were to come out of the purchase price, and Sainsbury would bear any excess of the costs of the infrastructure works above £5M.

Clause 22.1 of the Sainsbury Agreement contains a confidentiality clause.

By the Loan Agreement Sainsbury lent £2.5M to Mr Hughes. However, the relevance of the Loan Agreement for present purposes is that it amended the Sainsbury Agreement in two respects. First, it cancelled the “security deposit” arrangements in the Sainsbury Agreement; secondly, it obliged Mr Hughes to indemnify Sainsbury in respect of any amount by which the cost of the infrastructure works exceeded £5M..

(References hereafter to the Sainsbury Agreement are references to it as amended by the Loan Agreement.)

Clause 5 of the Chelverton Agreement is in the following terms (so far as material):

“5 Payments to the Vendor

5.1

The Purchaser will make the following payments to the Vendor conditional upon or dependent upon the following events: (and within 14 days thereof save for payment under clause 5.1.1. hereof which shall be paid on the Completion Date)

5.1.1

On completion – £1,500,000 ….

5.1.2

When outline planning consent has obtained for the development of a leisure site within the [Chelverton Land] – … £500,000

5.1.3

On the obtaining of detailed planning consent for residential development in respect of a minimum of 16.8 acres of net developable area within the [Chelverton Land] – … £1,500,000 …

5.1.4

On the obtaining of outline planning consent or local plan inclusion for residential development in respect of a minimum of 25 acres of net developable area within the [Chelverton Land] – … £2,000,000

5.1.5

On the obtaining of outline planning consent for a food store development on the Sainsbury Land which meets the requirements of the Sainsbury Agreement – … £1,000,000

….”

It is common ground that as at the date of disclaimer planning consents had been granted in the terms of clauses 5.1.2, 5.1.3 and 5.1.5. (The planning consents referred to in clauses 5.1.2 and 5.1.5 were granted to Chelverton and Sainsbury respectively; the planning consent referred to in clause 5.1.3 was granted to Groveholt.) Hence, under clause 5 (and leaving out aside clause 11) Mr Hughes was, as at the date of disclaimer, entitled to a further sum of £3M by way of purchase consideration.

Clause 6.1 provides that payments due to Mr Hughes under clause 5 shall be secured by a first charge over the Chelverton Land. Clause 6.2 provides for release from the charge of any part of the Chelverton Land in respect of which a planning consent generating a payment under clause 5 has been granted and the payment so generated has been made. The language of clause 6.2 is not entirely clear, but since both Mr Nicholas Strauss QC (for Groveholt) and Mr Charles Purle QC (leading Mr Alexander Hill-Smith, for Mr Hughes) have referred us to it in the course of argument, I set it out in full:

“6.2

The first charge referred to in 6.1 hereof shall be released by the Vendor from each parcel of land referred to in 5.1 hereof as and when the payment due for that parcel of land is made by the Purchaser to the Vendor or as and when there are no further payments due to the Vendor hereunder PROVIDED THAT if (if either or both) the proviso to clause 5.1 hereof and clause 11 hereof have effect so that the payment which would otherwise be due under clauses 5.1.2 and/or 5.1.3 is not immediately payable then notwithstanding such proviso the Charge over the particular land as identified in clause 5.1.2 and/or 5.1.3 hereof shall be released on the date when such payment would be due in accordance with that particular clause as if the said proviso did not have effect but such payments due under those clauses will be secured by any further charges given to the Vendor hereunder and neither those charges shall be released nor shall any payment be made under clause 8.3.3 hereof until any payments due under clauses 5.1.2 or 5.1.3 hereof (but subject to clause 11 hereof) which have been deferred because of the said proviso (if any) are paid by the Purchaser in accordance with the particular clause.”

Clause 7.1 provides that Chelverton shall use all reasonable endeavours to obtain as soon as possible the planning consents referred to in 5.1.2, 5.1.3 and 5.1.4.

Clause 8 of the Chelverton Agreement deals with the position of Sainsbury and the Sainsbury Land. In clause 8.1 both parties accept the confidentiality clause in the Sainsbury Agreement, which Chelverton has not as yet seen. Clause 8.2.1 recites Sainsbury’s obligation to Mr Hughes to apply up to £5M (i.e. the balance of the purchase price for the Sainsbury Land) in defraying the preparatory costs, and to release any balance of the £5M remaining after so doing to Mr Hughes. By clause 8.2.2 Mr Hughes and Chelverton acknowledge that the anticipated cost of purchasing the Railtrack Land may be included in the preparatory costs notwithstanding the provisions for contribution in clause 10 (to which I shall come in a moment).

Clause 8.3 contains warranties by Mr Hughes. By clause 8.3.1 Mr Hughes warrants that Sainsbury will comply with its obligations under the Sainsbury Agreement in relation to the £5M. Clause 8.3.2 and 8.3.3 are in the following terms:

“8.3.2

The infrastructure Costs and costs of Site Assembly including the costs of the acquisition of the Railtrack Land which is dealt with by Clause 10 hereof shall not exceed Four million five hundred thousand pounds (£4,500,000) and if they do exceed that figure the Vendor will pay or direct to be paid a sum equal to the excess to the Purchaser (it being acknowledged (for the avoidance of doubt) that payment by the Vendor to the Purchaser of any such excess of those costs above Five million pounds (£5,000,000) will meet the obligations of the Vendor to Sainsbury in respect of such excess costs)

8.3.3

Any balancing payment due to be paid to the Vendor out of the sum of Five million pounds (£5,000,000) referred to in Clause 8.2.1 shall be paid to the Purchaser”

Clause 9 deals with the preparatory costs. Clauses 9.1 and 9.3 contain obligations on the part of Chelverton (subsequently disclaimed), as follows:

“9.1

In the event that a planning consent for a food store on the Sainsbury Land which meets the requirements of the Sainsbury Agreement is obtained the provisions of Clauses 8 and 10 hereof shall apply in relation to Infrastructure Costs and the Costs of Site Assembly including dealing with the Railtrack Land and subject thereto the Purchaser will use all reasonable endeavours to agree the Site Assembly Agreements and subject thereto and to clauses 8 and 10 hereof will organise and effect the Infrastructure Works

9.3

The Purchaser agrees to use all reasonable endeavours as soon as reasonably practicable with regard to agreeing all Site Assembly agreements and as to working up agreeing and obtaining all necessary statutory planning and other approvals for the Infrastructure Works and the Vendor will render all reasonably practicable assistance and co-operation to the Purchaser in respect thereof… ”

Clause 10 deals with the Railtrack Land. Clause 10.1 provides that in the event that planning consent is obtained for the construction of a food store on the Sainsbury Land Chelverton shall use all reasonable endeavours to purchase the Railtrack Land. Clause 10.2 provides that Mr Hughes will contribute to up to £600,000 towards the purchase price of the Railtrack Land.

Clause 11 (which, as explained earlier, is central to the issues which arise in this case) is in the following terms:

“11.

Security for Payments to the Purchaser

As security for the provisions within clauses 8 and 10 in so far as they allow for payment by the Vendor to the Purchaser or the procurement of payment from Sainsbury’s (but subject to the provisions of clause 5.1 hereof regarding the payment under clauses 5.1.2 and/or 5.1.3) any payments otherwise due under clauses 5.1.2-5.1.5 hereof shall not be payable until

11.1

the Site Assembly Costs are known and certain by exchange of all the Site Assembly Agreements and the Infrastructure Costs are known and certain to the extent that tenders for the carrying out of the works within a practicable timescale have been received and accepted and the costs thereof (including any fees) thus calculated

11.2

(in the event that clause 10 hereof has effect) the payment due from the Vendor under clause 10.2 is known

and at such time when such costs are so identified and known then any further payments then due and payable to the Vendor under the said clauses 5.1.2-5.1.5 hereof after deducting amounts due to the Purchaser under clause 8.3 and 10 hereof shall be payable to the Vendor such payment being made within ten days thereof”

Finally, so far as the Chelverton Agreement is concerned, clause 21.1 provides that Chelverton may not assign its interest in the Chelverton Agreement without Mr Hughes’ consent (such consent not to be unreasonably withheld in the case of an assignment to a reputable and substantial finance institution for the primary purpose of financing the development of the Chelverton Land).

The Charge recites that under the Chelverton Agreement “certain sums (collectively “the Balance”) as set out in clause 5 of the [Chelverton Agreement] would remain outstanding and be secured by this Charge”; and that the parties (i.e. Mr Hughes and Chelverton) have agreed to enter into the Charge to secure payment of “the Balance”. By clause 2 of the Charge Chelverton charges the Chelverton Land “to secure the payments by [Chelverton] of the Balance”. Clause 3 of the Charge provides that for the purposes of section 101 of the Law of Property Act 1925 any amounts secured by the Charge shall be deemed to have become due “on the date when they are due to be paid to [Mr Hughes] pursuant to Clause 5 of the [Chelverton Agreement]”. Clause 4 of the Charge provides that the statutory powers of sale and of appointing a receiver shall arise on the happening of any of a number of specified events, including (under clause 4.1) Chelverton’s failure “to pay the particular part of the Balance within fourteen days of the date when the same is due under the terms of the [Chelverton Agreement]”, and (under clause 4.2.1) Chelverton becoming unable to pay its debts as they fall due.

By clause 1 of the Deed of Novation Chelverton covenants with Sainsbury to assume all the obligations of Mr Hughes to Sainsbury under the Sainsbury Agreement; Mr Hughes releases and discharges Sainsbury from all its liabilities to him under the Sainsbury Agreement; Sainsbury releases and discharges Mr Hughes from all his outstanding obligations and liabilities to Sainsbury under the Sainsbury Agreement; and Sainsbury covenants with Chelverton to be bound by its (i.e. Sainsbury’s) obligations under the Sainsbury Agreement as if Chelverton had been a party to the Sainsbury Agreement in place of Mr Hughes.

The contractual position in relation to the preparatory costs as between Mr Hughes, Sainsbury and Chelverton following the Chelverton Agreement and the Deed of Novation was as follows:

Section 178 of the 1986 Act contains the power of disclaimer which the liquidator of Chelverton exercised in the instant case. It provides as follows (so far as material):

“178.

(1) This [section applies] to a company that is being wound up in England and Wales.

(2)

Subject as follows, the liquidator may … disclaim any onerous property and may do so notwithstanding that he has taken possession of it, endeavoured to sell it, or otherwise exercised rights of ownership in relation to it.

(3)

The following is onerous property for the purposes of this section –

(a)

any unprofitable contract, and

(b)

…

(4)

A disclaimer under this section –

(a)

operates so as to determine, as from the date of disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed;

(b)

does not, except so far as is necessary for releasing the company from any liability, affect the rights or liabilities of any other person.

(5)

….

(6)

Any person sustaining loss or damage in consequence of the operation of a disclaimer under this section is deemed a creditor of the company to the extent of the loss or damage and accordingly may prove for the loss or damage in the winding up.”

Section 181(2) of the 1986 Act provides that where a liquidator has disclaimed any onerous property under section 178 “any person who is under any liability in respect of the disclaimed property, not being a liability discharged by the disclaimer” may apply to the court for an order vesting the disclaimed property in the applicant on such terms as it thinks fit. Groveholt has indicated that should Mr Hughes’ appeal succeed it will apply for such an order in respect of the Chelverton Agreement and the Deed of Novation.

Section 181(5) provides that the effect of any such vesting order is to be taken into account in assessing any loss and damage for which the applicant for the order may prove under section 178(6).

Having set out the facts and summarised the relevant agreements, the judge (in paragraph 16 of his judgment) identified the essential issue in the case as being what, if any, sum is secured by the Charge. Addressing that issue, the judge said this (in paragraph 17 of his judgment):

“…, the obligation secured by the Charge is the payment of “the Balance”, i.e. the overage payments potentially due under cl. 5.1.2-5. Although the Charge does not expressly refer to cl. 11, it seems plain that it must be construed as referring to cl. 5 as modified by cl. 11: in other words, the liabilities secured are the net liabilities after any deduction that might fall to be made under cls. 8.3 and 10, and which only fall to be paid after the extent of such liabilities has been ascertained .... Indeed this was common ground before me. Mr Kitchener [appearing below], for Groveholt, submits that it follows that no sum is yet due in respect of the cl. 5 permissions which have been granted and the Claimant’s application must accordingly fail. (He also submits, though this goes further than he need at this stage of the argument, that no such sum will ever be payable, since the relevant costs have already exceeded £3m….)”

The judge then turned to the primary submission of Mr Hill-Smith (for Mr Hughes) that the effect of the disclaimer was to discharge both parties to the Chelverton Agreement from any liabilities thereunder which had not accrued as at the date of disclaimer (including Mr Hughes’ liability in respect of the preparatory costs, since as at that date the amount of those costs had not been finally ascertained); but to leave unaffected Mr Hughes entitlement to £3M under clause 5 since that entitlement had already accrued, in the sense that payment of that sum had fallen due (albeit, as Mr Hill-Smith had accepted in the course of his oral submissions, it was not as yet payable).

In paragraph 19 of his judgment the judge rejected that submission, saying this:

“… I do not accept the distinction which Mr. Hill-Smith makes between the overage payments being “due” and their being “payable”. I appreciate that there is a sense in which entitlement to the overage payments could be said to have “accrued”, in that the cl. 5 permissions had been granted and nothing more remained to be done by Mr. Hughes; and that it is possible to characterise cl. 11 as merely “deferring” or “postponing” that “accrued” entitlement in order to give security for any liability under cls. 8.3 and 10 – indeed cl. 11 itself uses the language of “security”. But I do not think that such characterisations are determinative of the issue. In the only sense that matters Mr. Hughes had no accrued rights at the moment of disclaimer. In law his entitlement under cl. 5.1 was contingent on the happening of other events, specifically the ascertainment of the preparatory costs in an amount less than £4.5m. That ascertainment had not (indeed it still has not) occurred. As at the moment of the disclaimer he had no immediate right to payment of any of the overage payments and he could not have sued for them. Despite the introductory words of cl. 5.1 … the clear effect of cl. 11 is that no right to payment of the overage payments arises until after ascertainment of the preparatory costs. The words “any payments otherwise due under clauses 5.1.2 - 5.1.5 hereof shall not be payable until” are quite explicit. That being so, the disclaimer cannot give Mr. Hughes a right which he did not enjoy apart from it: even if the effect of the disclaimer was indeed to preclude any possibility of the cl. 5 sums being reduced, that effect only arose by reason of the disclaimer itself.”

The judge then turned to consider an analogy which Mr Hill-Smith had sought to draw between a disclaimer and a repudiation. Mr Hill-Smith had accepted that on repudiation the innocent party cannot sue in debt for payments which had not accrued due prior to repudiation, but he had submitted that the position is different where the outstanding liability represents the price (or part of the price) for property which had been transferred prior to repudiation and which was not liable to be re-transferred. In such a situation, he submitted, the innocent party may sue in debt for the sum in question, notwithstanding that payment has not yet fallen due.

In support of these submissions, Mr Hill-Smith had cited a passage from the judgment of Dixon J in McDonald v. Lascelles (1933) 48 CLR 457, in which (at p.475) Dixon J cites in turn a passage from the judgment of Salmond J in Ruddenklau v. Charlesworth (1925) NZLR 161 at 164. McDonald v. Lascelles was a case concerning a contract for the sale of land, under which the purchase price was payable by instalments in advance of conveyance of the land: i.e. the instalments were prepayments of the purchase price. The issues in that case were whether, following acceptance by the vendor of the purchaser’s repudiation, the vendor was entitled to retain an instalment of the purchase price paid prior to repudiation and whether he was entitled to sue the guarantors of the purchaser’s obligations for instalments not yet due. The High Court of Australia held that the instalment already paid as at the date of repudiation was repayable to the purchaser, and that the vendor’s acceptance of the purchaser’s repudiation discharged the guarantors from liability for outstanding instalments. Dixon J quoted the passage from Salmond J’s judgment in Ruddenklau v. Charlesworth as authority for the proposition that had the contract remained on foot the instalment already paid would have been recoverable as a debt (“as a sum certain in money”). In the passage in question, Salmond J said this:

“As a general rule, on the failure or refusal of a purchaser to complete an executory contract for the purchase of land the vendor is not entitled to sue for the purchase money as a debt. He is entitled merely to sue for specific performance or for damages for the loss of his bargain. It is only when the contract has been completed by the execution and acceptance of a conveyance that unpaid purchase money may become a debt and can be recovered accordingly.”

Mr Hill-Smith submitted to the judge (and Mr Purle has submitted to us) that the last sentence of the above passage is authority for the proposition that once the land has been conveyed the vendor can sue in debt for the outstanding purchase price: hence (so it is submitted) Mr Hughes was at the date of the disclaimer entitled to sue in debt for the £3M to which he was entitled under clause 5 of the Chelverton Agreement.

The judge rejected that submission, saying this (in paragraph 21 of his judgment):

“I do not accept that that passage assists Mr. Hill-Smith’s submission. The present case is not on all fours with that postulated by Salmond J. Here completion has occurred and the land has been conveyed. The subsequent payments provided for by cl. 5 cannot be treated in isolation as simple unpaid instalments of the purchase price of the land. In every case of this kind it is necessary to analyse carefully what the real consideration for the payment in question is (cf. Hyundai Heavy Industries Ltd. V Papadopoulos [1980] 1 W.L.R. 1129). What the Chelverton Agreement provided for was for Mr. Hughes to receive a net sum calculated by the interaction of cl.5 on the one hand and cl. 8.3 and 10 on the other. The netting off was not a mere matter of convenience. It reflected the commercial reality that the increased value of the land by reason of the grant of planning permission was conditional on the costs of effecting the development remaining within viable limits. If Mr. Hughes were to be entitled to receive the overage payment without any reference to the level of the preparatory costs he would be getting something for which the contract did not provide.”

The judge then considered whether it followed from that conclusion that Mr Hughes had no remedy under the Charge. After referring to section 178(6) of the 1986 Act (see paragraph 39 above) the judge, applying Moschi v. Lep Air Services Ltd [1973] AC 331 (esp. per Lord Diplock at pp.350-351), concluded that the Charge secured not only “the Balance” but also any claim for damages consequent upon a repudiation. The judge continued:

“But in order to ascertain the extent of that claim it is necessary to ascertain what Mr. Hughes has lost by reason of the disclaimer. That requires an assessment of the extent, if any, to which the cl. 5 entitlements (strictly, prima facie entitlements) would have fallen to be reduced by reason of the provisions of cls. 8.3 and 10. The evidence before me is that they would in fact have been extinguished altogether:… But that evidence is not accepted save for the purpose of this application and may at some later stage be disputed. I am not therefore in a position to decide, even if the issue were before me, whether Mr. Hughes could in fact have any claim. The only point which I make is that in principle the Charge is capable of securing Mr. Hughes’s rights to the same extent as he would have enjoyed had Chelverton not become insolvent. That is commercially the fair result, and accordingly that which Mr. Hughes and Chelverton may reasonably be taken to have intended when the Chelverton Agreement and the Charge were executed. By contrast, the result for which Mr. Hughes now contends would put him in a better position than if the Chelverton Agreement had been performed.”

It is convenient at this point to refer to Moschi. In that case a debtor company agreed to pay off a debt by instalments, and its obligation to do so was guaranteed by its managing director. The debtor defaulted. The creditor treated the default as a repudiation of the contract, and accepted the repudiation. The creditor then sued the guarantor for the full amount of the outstanding instalments. The court at first instance held that the guarantor was liable for the outstanding instalments. The guarantor appealed on the ground that his liability was discharged by the creditor’s acceptance of the debtor’s repudiation. The Court of Appeal dismissed the guarantor’s appeal, and its decision was upheld by the House of Lords, albeit for different reasons. In the course of his speech at pp.350-351 (in the passage relied on by the judge in the instant case), Lord Diplock said this:

“Although in the instant appeal the Court of Appeal came to the right decision, I cannot accept entirely that part of their reasoning in support of it in which they suggest that the primary obligation of the debtor to continue to pay the instalments which he had promised under clause (IX) of the contact was not ended by the rescission of the contract but remained in existence although the law no longer permitted him to pay them. A legal obligation to continue to perform is inconsistent with the withdrawal of any legal right to do so. The better explanation is that which I have already given, viz., that upon rescission of the contract the primary obligation of the debtor to pay the instalments was converted by operation of law into a secondary obligation either to pay damages for failure to perform it; or, as these were instalments of a debt existing at the date of the contract, it may be a revived obligation to pay the balance of the whole debt immediately.

The guarantor's obligation under his contract of guarantee does not, as the Court of Appeal appear to suggest, depend upon the debtor's primary obligation continuing to exist after the contract had been rescinded. Nor is it affected by whether the debtor's secondary obligation which was substituted for it by operation of law is classified as an obligation to pay damages or as an obligation to pay the debt. It was the debtor's failure to perform his primary obligation to pay the instalments in circumstances which put an end to it that constituted a failure by the guarantor to perform his own primary obligation to the creditor to see that the instalments were paid by the debtor, and substituted for it a secondary obligation of the guarantor to pay to the creditor a sum of money for the loss he thereby sustained. It is the guarantor's own secondary obligation, not that of the debtor, that the creditor is enforcing in his claim for damages for breach of his contract of guarantee.”

In paragraph 23 of his judgment the judge turned to an alternative argument advanced by Mr Hill-Smith, to the effect that the disclaimer did not affect the Charge, which remains on foot. In support of this submission Mr Hill-Smith relied on Hindcastle Ltd v. Barbara Attenborough Associates Ltd [1997] AC 70.

In Hindcastle a lessee by assignment went into liquidation and the liquidator disclaimed the lease. The lessor claimed arrears of rent against the original lessee (who took no part in the proceedings), an earlier assignee who had entered into a direct covenant with the lessor to pay the rent, and a guarantor of that obligation. The judge at first instance granted the lessor summary judgment for the arrears against the assignee and the guarantor. The Court of Appeal dismissed their appeal, and the House of Lords upheld that decision. In the course of his speech (with which the rest of their Lordships agreed), Lord Nicholls, after referring to sections 178 and 181 of the 1986 Act, said this (at p.86H):

“The fundamental purpose of these provisions is not in doubt. It is to facilitate the winding up of the insolvent’s affairs. There is a further purpose in personal insolvency cases. A bankrupt’s property vests automatically in his trustee. The disclaimer provisions operate to discharge the trustee in bankruptcy from all personal liability in respect of the property: ….

Equally clear is the essential scheme by which the statute seeks to achieve these purposes. Unprofitable contracts can be ended, and property burdened with onerous obligations disowned. The company is to be freed from all liabilities in respect of the property. Conversely, and hardly surprisingly, the company is no longer to have any rights in respect of the property. The company could not fairly keep the property and yet be freed from its liabilities.

Disclaimer will, inevitably, have an adverse impact on others: those with whom the contracts were made, and those who have rights and liabilities in respect of the property. The rights and obligations of these other persons are to be affected as little as possible. They are to be affected only to the extent necessary to achieve the primary object: the release of the company from all liability. Those who are prejudiced by the loss of their rights are entitled to prove in the winding up of the company as though they were creditors.”

Later in his speech, Lord Nicholls considered the effect of section 178(4)(b) on third parties having liabilities in respect of the lease, and in particular the interrelation between section paragraphs (a) and (b) of section 178(4). At p.88C he said this:

“[T]here is a recondite point which must be faced and resolved here as part of the process of interpreting the sections as a whole. It concerns what happens to the lease in this tripartite situation. The point may be stated shortly. A lease either exists, or it does not. If disclaimer has the effect of ending the lease, no further rent can become due, and so the guarantor and original tenant cannot be called upon. It is a contradiction in terms for rent to accrue for a period after the lease has ended. If, however, disclaimer does not end the lease, so that rent continues to accrue, what happens to the lease, bearing in mind that the insolvent’s interest in the property has been ended? Possibilities are that the lease vests in the Crown as bona vacantia, or that it remains in being but without an owner, or that it remains vested in the tenant but in an emasculated form. Each of these possibilities raises its own problems.

The starting point for attempting to solve this puzzling conundrum is to note that the Act clearly envisages that a person may be liable to perform the tenant’s covenants even after the lease has been disclaimed. A vesting order may be made in favour of such a person: see s 182(3), and see also s 181(2)(b). The proper legal analysis has to be able to accommodate this conclusion. The search, therefore, is for an interpretation of the legislation which will enable this to be achieved as well as fulfilling the primary purpose of freeing the insolvent from all liability while, overall, doing the minimum violence to accepted property law principles.

If the problem is approached in this way, the best answer seems to be that the statute takes effect as a deeming provision so far as other persons’ preserved rights and obligations are concerned. A deeming provision is a commonplace statutory technique. The statute provides that a disclaimer operates to determine the interest of the tenant in the disclaimed property but not so as to affect the rights or liabilities of any other person. Thus when the lease is disclaimed it is determined and the reversion accelerated but the rights and liabilities of others, such as guarantors and original tenants, are to remain as though the lease had continued and not been determined. In this way the determination of the lease is not permitted to affect the rights or liabilities of other persons. Statute has so provided.”

In paragraph 23 of his judgment, the judge rejected Mr Hill-Smith’s submissions based on Hindcastle, saying this:

“I accept, of course, that a disclaimer has as such no direct effect on the rights and obligations of third parties. But in the present case the rights secured by the Charge are, precisely, Mr Hughes’s rights deriving from the contract (both his primary rights under the Chelverton Agreement and the secondary rights created by the breach, as explained by Lord Diplock in [Moschi] (loc cit.)). That is an essentially different situation from that considered by the House of Lords in Hindcastle, which concerned the obligations of third parties who had entered into free-standing contractual obligations distinct from the disclaimed contract.”

As I read that passage in the judge’s judgment, he distinguished Hindcastle on the ground that in the instant case the Charge could have no existence separate from Mr Hughes’ contractual rights under the Chelverton Agreement (those rights being the subject-matter of the Charge), and that the termination of those rights by the disclaimer inevitably meant that the Charge also ceased to exist since, as a result of the disclaimer, there was no longer any secured debt.

The judge accordingly dismissed Mr Hughes’ application for summary judgment, and went on to make the declaration quoted in paragraph 16 above.

By his grounds of appeal, Mr Hughes contends that the judge erred in law “in finding that debts charged on land pursuant to the terms of the charge ceased to be charged as debts following the disclaimer of the Chelverton Agreement; and that he ought to have found “that the effect of the disclaimer was that the debts, the payment of which was secured by the charge, became immediately payable on disclaimer without any deduction, save as to the sum of £250,000, the deduction of which is agreed to be arguable”. For those reasons, Mr Hughes contends that the judge ought to have given summary judgment for £2.75M with interest to be assessed.

By a Respondent’s Notice Groveholt puts forward five additional (albeit alternative) grounds for upholding the judge’s decision.

The first ground is that if (contrary to the judge’s decision) the Charge did not come to an end on the disclaimer, all that survived the disclaimer was Mr Hughes’ right to the payment of the net sum (if any) resulting from the operation of clause 11 of the Chelverton Agreement; and that on the evidence such sum will inevitably be nil.

The second ground is that any sums due to Mr Hughes must be reduced to the extent the amount of the preparatory costs had been ascertained within the meaning of clause 11 of the Chelverton Agreement before the date of the disclaimer.

The third ground is that section 178 of the 1986 Act requires the court to assume that, as between Mr Hughes and Groveholt, all the provisions of the Chelverton Agreement remain in force.

The fourth ground is that Mr Hughes is in breach of his obligation under clause 6.1 of the Chelverton Agreement in failing to release parts of the Chelverton Land from the Charge, and ought not to be allowed to take advantage of that breach by enforcing the Charge.

The fifth and final ground is that if Mr Hughes’ appeal succeeds, judgment should not in any event be entered against Groveholt until it has had the opportunity to apply under section 181(2) of the 1986 Act (see paragraph 40 above) for a vesting order in respect of the Chelverton Agreement and the Deed of Novation.

I agree.

I also agree that the appeal should be dismissed for the reasons given by Lord Justice Jonathan Parker.