Panayotov v Falmouth House Freehold Co Ltd

Under the Leasehold Reform, Housing and Urban Development Act 1993 (as amended) long leaseholders of flats are given the right to acquire the freehold of the block containing their flats at a price calculated in accordance with the Act. In order to exercise this right, at least half the long leaseholders must join in the claim. These leaseholders are known as participating tenants. Once the right is exercised, the freehold is acquired by a nominee purchaser acting on behalf of the participating tenants. Typically the nominee purchaser is a company specially set up for that purpose and funded by the participating tenants. The freehold must be acquired as a whole, so that the nominee purchaser must buy out the freeholder’s interest in all the flats, whether they are held by participating tenants or not. The ultimate benefit for the participating tenants is that, once the freehold has been acquired and paid for, the nominee purchaser, as the new freeholder, may grant them new and longer leases of their individual flats without further payment. If leaseholders who did not participate in the purchase of the freehold want to acquire longer leases of their own flats, they must pay the nominee purchaser in order to do so. This can be achieved either by negotiation or by the individual tenants exercising their individual rights to an extended lease under the 1993 Act.

Broadly speaking, that is what happened in this case, which involves the acquisition of the freehold of Falmouth House, a block of 40 flats in London near Marble Arch. One of the participating tenants was Mr Panayotov Sr, who lived at Flat 7. Under the terms of the Participation Agreement he made a payment of £111,426 in connection with the acquisition. The payment was made to a newly incorporated company, Falmouth House Freehold Company Limited (the “Company”), which had been set up for that purpose. The issue on this appeal is whether the monies that Mr Panayotov Sr paid were a loan. Unfortunately Mr Panayotov Sr has since died. The appeal is brought by his son, Mr Angel Panayotov.

A question did arise about Mr Angel Panayotov’s standing to bring this appeal. We have been told that he is one of two co-administrators of his late father’s estate; the estate has been fully administered and he is a residuary beneficiary. In those circumstances we were satisfied, bearing in mind that the other co-administrator is a defendant to this appeal, that Mr Angel Panayotov has standing to bring the claim. His Honour Judge Ralls QC, sitting as a judge of the Queen’s Bench Division, held that the monies were not a loan. With the permission of Etherton LJ, Mr Panayotov now appeals.

The documentation created for the purposes of the acquisition was mainly drafted by Boodle Hatfield, a firm of solicitors well known for their expertise in this field. First there was a Participation Agreement made between the Company and each individual participating tenant. This begins with a number of definitions of which the following are relevant:

By clause 2 of the Participation Agreement the leaseholder appointed the Company as the nominee purchaser for the purposes of purchasing the freehold. By the same clause he also authorised the nominee purchaser to grant the new lease to each participating leaseholder.

Clause 3 required the leaseholder to sign the notice required to exercise the right and to pay the sum of £5000 on account. Clause 3.3 required the leaseholder:

By clause 4.1 the Company covenanted to:

Clause 4.3 required the Company:

Clause 5.5 required the Company’s solicitors to hold monies paid by the leaseholder:

Clause 5.6 provides that if, for any reason, the purchase does not take place:

The Participation Agreement was circulated to the leaseholders late in 2002. Mr Panayotov Sr decided to participate. However, not all the leaseholders did. By the time that the statutory notice came to be served in March 2003, some 27 leaseholders out of the 40 had decided to participate. Accordingly, some way had to be found to fund that part of the purchase price of the freehold attributable to the flats held by the non-participating leaseholders and also a porter’s flat.

In October 2003 the price for the freehold was agreed. The Company’s surveyor prepared a spreadsheet apportioning the purchase price and the associated costs among the participating tenants. This was in accordance with clause 3.3.1 of the Participation Agreement, which provided for the price to be paid “as determined conclusively by the Company’s Surveyor”. Mr Panayotov Sr’s share came to £111,426. That was split up into separate elements. The elements included not only the price attributable to his own flat, which was £64,734, but also costs and £34,448 apportioned in relation to non-participating tenants. Mr Panayotov Sr made this payment in about October or November 2003. As Mr Chivers QC points out, this division of the overall payment into its different elements is not explicitly reflected in the terms of the Participation Agreement itself.

In November 2003 the Company’s solicitors advised the Company to delay completion of the purchase until 1 December 2003 when section 74 of the Finance Act 2003 was due to come into force. A change in the law would enable a saving of stamp duty to be made, but it would be necessary to form a new company, limited by guarantee, in order to take advantage of this. The participating tenants at that stage were to be members of the new company and the new company would acquire the freehold. This subsequently changed and the new company became a subsidiary of the original company.

In April 2004 the Company adopted new Articles of Association. Under the terms of those Articles of Association its authorised capital was divided into two classes of shares, A shares and B shares. A shares were only to be issued to participating tenants subject to any resolution passed by the directors. Only the holders of A shares were to be entitled to dividends, but no dividends were to be declared until amounts payable under certain loan notes had been paid in full. The loan notes referred to in the Articles were loan notes issued to participating tenants. Their purpose was to deal with the amounts that the participating tenants had had to pay in respect of that part of the purchase price attributable to the non-participating tenants. The loan notes were to be issued within a reasonable period after the date of completion. They were to be interest-free for six months and then to carry interest at the rate specified in the loan notes. The Company was entitled to redeem the notes on giving not less than 30 days’ notice. It must be stressed that the loan notes were limited to part only of the overall price, namely that part of the price attributable to the non-participating tenants.

Completion of the purchase eventually took place on 21 April 2004. In fact the participating tenants did a very good deal. In due course some of the non-participating tenants decided to extend their respective leases. The Company negotiated substantial premiums with the result that, although the amount attributable to the non-participating tenants’ flats on the original acquisition had been some £835,000, the Company’s receipts from premiums paid for lease extensions fell just short of £2 million.

Mr Panayotov Sr received a number of payments from the Company: £2964 in June 2005; £39,769-odd in June 2006; and £20,000 in October 2007, making £62,733-odd in all. Thus he more than recovered that part of his original payment attributable to the freehold of the non-participating tenants’ flats. Mr Panayotov Sr died on 25 October 2008 and, as I have said, letters of administration were granted to Mr Angel Panayotov and Mr Kennedy. The Particulars of Claim originally drafted by Mr Panayotov asserted that the payment that Mr Panayotov Sr had made in October 2003 was advanced as a loan, of which only part had been repaid. This was denied by the defence. In his reply Mr Panayotov alleged that the amount of the loans given by cheque were to be repaid within a reasonable time.

The starting point for deciding what kind of payment Mr Panayotov made must, in my judgment, be the Participation Agreement under which it was made. The judge said in paragraph 19 of his judgment that, when the monies were held by the Company pending the implementation of the scheme and completion of the purchase, they were “advances by way of loan”. Once the purchase had been completed, the position changed. Mr Chivers criticises the judge for not having explained how the position changed. There is in my judgment some force in this criticism. However, in my judgment the judge’s error, if there was one, was in characterising the initial payment as a loan pending implementation of the scheme. In my judgment it never was a loan. The payment made by Mr Panayotov Sr was the consideration he gave for the promises made to him by the Company. Those promises were to acquire the freehold and to grant him a 99-year lease of his flat. In other words, he exchanged money for a property interest. If and insofar as he made payments before the dates on which the freehold was acquired and the lease granted, they were advance payments on account of what he was going to receive.

During the interval between the making of the payment and completion of the purchase, the Company’s solicitors were obliged to keep the monies in an interest-bearing account. They were to account to Mr. Panayotov in one of two events: first, under clause 5.5 following completion of the purchase; or second, under clause 5.6 if for any reason the purchase did not take place. Both these express terms are inconsistent with the allegation that the monies were a loan repayable within a reasonable time. The first simply provides for repayment of interest on the monies provided for the purchase. The second simply reflects the general position that, if a person makes a contractual payment of money on account of a purchase of land and the purchase does not take place, then unless the payment is a deposit of a reasonable amount he is generally entitled to have his money back. Neither contemplates repayment of anything within a reasonable time. While the purchase was still in prospect the Company would have been entitled to keep the money.

After the purchase was completed, the only obligation was to account for interest. Plainly the contemplation was that the principal would have been spent in acquiring the freehold. In addition the payment is described by clause 3.3 as the leaseholder’s contribution to the price and associated costs. The contribution to the purchase price is not normally described as a loan.

We are, of course, not directly concerned with the interim period between the payment of the monies and completion of the purchase of the freehold, since the completion of the purchase of the freehold has already taken place. However, if one must characterise the monies during that period, Mr Chivers accepted that a form of trust known for short as a Quistclose trust was one possible characterisation. Mr Chivers placed heavy reliance on the Company’s accounts, which show amounts due to creditors within one year as including monies paid under the Participation Agreement. He did not, however, suggest that these accounting entries must have amounted to a subsequent variation of the Participation Agreement but he said they clarified uncertainties in it.

I do not agree. In my judgment the Participation Agreement specifies quite clearly what the money is paid for. As I have said, it was paid in return for the Company’s promises to acquire the freehold and to grant Mr Panayatov a long lease of his flat. Mr Chivers pointed out that the Participation Agreement said that the lease was to be granted for nil consideration, but in context that must mean no additional consideration. The payment itself made under the Participation Agreement was the real consideration for the grant of the lease. Second, I do not see how the Company’s directors could unilaterally have altered the rights and obligations contained in a series of individual, bilateral Agreements between the Company and the individual participating tenants. Third, the Company’s accounts do not in any event describe the amounts in question as loans but as amounts due to creditors. At least until the time when the purchase of the freehold was completed, the participating tenants were contingent creditors in accordance with the terms of the Participation Agreement itself. In short, in my judgment the Participation Agreement expressly deals with the circumstances in which a participating tenant is entitled to payment of any monies. If the purchase goes through, he is entitled to interest only. If it does not, he is entitled to have his money back.

Mr Panayatov’s argument is, in effect, that there are other circumstances in which a participating tenant is entitled to his money back, but as Mr Chivers himself recognised, if a written agreement says nothing about what is to happen the default position is that nothing is to happen. In my judgment the attempt to construct a scenario of additional circumstances in which a participating tenant is entitled to his money back is an attempt to imply a term which is not there. In addition, when the Company formalised the amounts paid on account of the non-participating tenants’ share of the freehold, it was done formally by way of loan note. Nothing similar was done about the part of the freehold price attributable to the participating tenants’ flats. In short, Mr Panayatov Sr got what he paid for: he bargained for a long lease and that is what he acquired. Mr Chivers’ argument is, in my judgment, an attempt to construct an entirely different set of arrangements. They might have been better arrangements, but in my judgment they were not the arrangements that were made. The loan element of the payment made by Mr Panayatov Sr is governed by the loan notes and the loan notes alone. I, therefore, would dismiss the appeal.

I agree.

I also agree. The appeal will be dismissed.