Bristol Alliance Nominee No 1 Ltd & Ors v Bennett & Ors

This appeal is against an order made on 23 July 2012 in the Chancery Division by Mr David Donaldson QC, sitting as a deputy High Court Judge. He was ruling on an application for directions made by Neil Bennett and Alex Cadwallader as joint administrators of A|Wear UK Limited (‘the company’), to which office they had been appointed on 22 December 2011 pursuant to paragraph 14 of Schedule B1 to the Insolvency Act 1986.

The matters on which the administrators sought directions related to two separate, but similar, agreements entered into between the company’s landlords and the company in respect of the company’s leasehold premises in Bristol and Leicester. The issues were (i) whether, in the events that had happened, the landlords were entitled to be paid certain money held by two firms of solicitors in their client accounts; and (ii) if not, whether the landlords should be permitted to bring proceedings for specific performance of the agreements against the company, being proceedings which, if successful, would entitle the landlords to such money. As the company was in administration, no such proceedings could be brought without either the administrators’ consent (which had been refused) or the court’s permission (paragraph 43(6) of Schedule B1).

The judge, in a succinct reserved judgment, answered the first question in the negative and refused permission to bring proceedings. The landlords, represented as below by Mr Lloyd Tamlyn, appeal against his order. On 7 December 2012, the company moved from administration into creditors’ voluntary liquidation, with the joint administrators becoming its joint liquidators; and it was the joint liquidators, by Mr Tom Shepherd, who also appeared below, who presented the argument in support of the judge’s order.

The company was incorporated on 3 April 2008. It is the wholly-owned subsidiary of an Irish company. It traded as ‘A|Wear’, its principal business being women’s high street fashion and accessories, which it retailed through a small network of stores and concessions in the UK.

The company had leasehold stores in Leicester and Bristol. Its Leicester lease, dated 14 October 2008, was between (1) Highcross (No.1) Ltd and Highcross (No.2) Ltd as landlords, (2) the company as tenant, and (3) A Wear Ltd as surety. The term was 10 years from 24 June 2008. The initial rent was a basic annual rent of £210,000 with an upwards only review in 2013. The Highcross companies (together ‘Highcross’) were the third and fourth respondents to the application and are appellants.

The company’s Bristol lease, dated 8 December 2009, was between (1) Bristol Alliance Nominee No. 1 Ltd and Bristol Alliance Nominee No. 2 Ltd as landlords, (2) the company as tenant, and (3) A-Wear Ltd as surety. The term was 15 years from 24 June 2008. The initial rent was a basic yearly rent of £340,000, with upwards only reviews in 2013 and 2018. The two Bristol companies (together ‘Bristol’) were the first and second respondents to the application and are also appellants.

The company traded at a loss from the outset. By January 2010, it was incurring heavy losses. In 2009, the company had asked Bristol to accept a surrender of the Bristol lease for no premium. That was not acceptable to Bristol, but following negotiations the parties to the Bristol lease entered into an ‘Agreement for surrender and deed of variation’ on 12 May 2010. The parties to the Leicester lease later entered into a similar agreement and deed. The argument before the judge and this court turned on the Bristol document and I shall now summarise its principal terms.

By clause 5, the parties varied the terms of the lease in the manner provided in Schedule 3 to the deed. The effect was to release the company from any continuing obligation to pay the basic yearly rent of £340,000 and to substitute in its place a ‘Turnover Rent’ in the terms set out in Schedule 4.

By clause 2.1, the company also agreed to surrender the Bristol lease and Bristol agreed to accept such surrender. The surrender was to be effected by the execution of the transfer (in Form TR1, as amended) annexed to the deed. By clause 2.2, the consideration for the surrender was the payment by the company to Bristol of the ‘Price’ and the release to be given under clause 9.2. The ‘Price’ was defined as £340,000 plus VAT of £59,500; and clause 9.2 provided that ‘on the date of Actual Completion’ Bristol and the company were (subject to an immaterial exception) mutually to release each other from all obligations under the lease in the terms contained in the Form TR1.

Completion of the surrender was dealt with by clause 2.3. Clause 2.3.1 entitled Bristol ‘at any time [to] give [the company] not less than six weeks written notice of the Completion Date’, such notice being irrevocable. The ‘Completion Date’ was defined by the deed as the date so notified. Bristol was required to send the engrossment of the deed of surrender to the company not less than ten working days prior to such date. Clause 2.3.4 provided that completion of the surrender (i) ‘is to take place on the Completion Date’, (ii) ‘is to be completed by [Bristol] and [the company] completing the [Form TR1]’, and (iii) ‘will operate to merge the title to the Lease in [Bristol’s] title to the premises’. Clause 2.4 provided for the surrender to be with vacant possession.

I must say a little more about the ‘Price’. The deed defined the ‘Escrow Amount’ as £340,000; and the ‘Escrow Date’ as the date on which Bristol’s solicitors received the escrow amount into their bank account, which was in fact on 12 May 2010, the date of the deed. Clause 4, headed ‘The Price’, provided so far as material that:

The scheme of the agreement and deed was therefore simple. It changed the nature of the rent payable by the company under the lease. It also included an agreement to surrender the lease, to be completed on a date to be notified by Bristol to the company. Completion was to take place by an execution of the transfer in Form TR1, which contained a mutual release of the obligations imposed by the lease; and on completion, the ‘Price’ payable to Bristol was to be satisfied by (i) the release by Bristol’s solicitors to Bristol of the escrow amount, £340,000; and (ii) the payment by the company of the VAT on that amount, £59,500. The ‘Price’ was, therefore, in the nature of a negative premium payable by the company to Bristol as consideration for a release from its obligations under the lease.

The parties to the Leicester lease entered into a similar ‘Agreement for surrender and deed of variation’ on 11 April 2011. It was on like terms as those of the Bristol surrender agreement. The rent was reduced to £75,000 a year, the ‘Price’ for the surrender was £210,000 (the original basic annual rent) plus VAT. An ‘escrow amount’ of £210,000 was paid into Highcross’s solicitors’ client account.

On 24 November 2011, Highcross served notice on the company requiring completion of the surrender of the Leicester lease on 5 January 2012. Highcross had, by then, found a new tenant for the premises.

On 1 December 2011, Bristol served notice on the company requiring completion of the surrender of the Bristol lease on 17 January 2012 (the notice mistakenly said 2011 and also mistakenly identified the year of the lease as 2011 rather than 2009). The company acknowledged receipt of that notice on 6 December 2011.

The company entered into administration on 22 December 2011.

As the company had entered into administration, the landlords submitted modified forms of the agreed form of transfer that reflected that change. The changes also reflected that, upon completion, only the escrow money would be paid to the landlords towards the ‘Price’: the landlords accepted that, following completion, it would have to prove in the company’s insolvency for the VAT element of the price.

As regards the Leicester lease, the administrators refused to complete the surrender on 5 January 2012. In the event, Highcross and the administrators later agreed a surrender but on terms that were expressly without prejudice to the question as to the beneficial entitlement to the escrow amount of £210,000, that is whether it was payable to Highcross or to the administrators as an asset of the company. It was and is agreed that the answer to that question was destined to, and does, depend upon the determination of the like question arising in relation to the Bristol surrender agreement. As regards that agreement, the company, acting by the administrators, also refused to complete the surrender.

On 6 January 2012, the landlords sought the administrators’ consent to the issue of proceedings against the company for specific performance of the two surrender agreements. That was refused, but the administrators later agreed to seek the court’s directions as to the dispute, as they did on 28 March 2012, by issuing an application in the Companies Court for directions in relation to both surrender agreements. I have, in [2] above, summarised the directions sought.

The judge recorded that he had been asked to deal with the application as if claims by Bristol and Highcross for specific performance were before him: it was agreed that he had all the material with which to decide such claims if permission for their bringing were given. He focussed only on the Bristol surrender agreement, noting that the issues in relation to the Leicester agreement fell to be decided in the same way.

The judge summarised the terms of the Bristol surrender agreement and noted that Bristol’s solicitors (Eversheds LLP) were stakeholders in relation to the £340,000 ‘with an obligation to pay the monies to [Bristol] if and when the Lease is surrendered and otherwise, though not until 2019 [sic: should be 2023, when the term of the lease ended], to the Company’. As to whether Bristol should be permitted to sue for specific performance, the judge said that central to that was ‘the principle of pari passu treatment of unsecured creditors’. He noted that, as regards any claim by Bristol by way of specific performance for an order for the payment by the company of the VAT element of £68,000 on the £340,000, Bristol accepted that such an order would offend the pari passu principle and it was not seeking an order that had that effect. It was simply seeking an order for partial specific performance, under which it was content to accept merely that part of the total ‘Price’ represented by the £340,000 held by Eversheds and to prove in the insolvency for the VAT.

The judge’s reasons for refusing to make the claimed order for specific performance were these:

Mr Tamlyn, for the landlords, submitted that the solicitors held the escrow money either as stakeholders (as the judge held) or, as the money was held in client accounts, on trust. In either case, he said they had to pay the money either to the landlords or to the company, but which it was depended on whether an event had happened that entitled one or other to the payment. By reference to the Bristol agreement, Bristol becomes entitled to the money in the events prescribed by clause 4.4, under which it was so payable ‘… on the Date of Actual Completion in partial satisfaction of the Price …’; and the company becomes entitled to it in the events prescribed by clause 4.6 (see [11] above).

In my view, as the judge held and Mr Shepherd submitted, the correct analysis is that the solicitors hold the escrow money as stakeholders, not as trustees, and they so hold it upon the basis of a tripartite contract between them, the company and Bristol. Pending the arising of an event in which it is payable to one or other of the company and Bristol, the money is held by the solicitors to the order of both and they are bound to pay an equivalent sum to them or as they might jointly direct. The principles were explained by Millett LJ in Manzanilla Limited v. Corton Property and Investments Limited, Court of Appeal, 13 November 1996, unreported:

My conclusion that the solicitors hold the escrow money as stakeholders makes no difference to Mr Tamlyn’s primary submission, which was that the clause 4.4 event had already happened, or must be regarded as having so happened, so as to entitle Bristol to the escrow money. That was because the company was in default of its obligations under the agreement and could not rely upon its own breach in refusing to acknowledge Bristol’s right to payment. Alternatively, Mr Tamlyn submitted that it was an implied term of clause 4.4 that if the company defaulted in its obligations under the agreement, the escrow money fell to be released to Bristol.

Whilst Mr Tamlyn advanced a sustained argument in support of those propositions, I respectfully regard them as obviously wrong. Bristol’s only right to the escrow money was as part of the price for the surrender. That money was therefore only payable to Bristol against the execution of the transfer upon completion. Since the surrender agreement has not been completed (and, failing any order for specific performance, will not be completed), Bristol has acquired no right to the payment.

Faced with the administrators’ refusal to complete the surrender, Bristol’s contractual rights were either (i) to treat such refusal as a repudiation of the agreement and to accept it, so bringing the agreement to an end (it might to that end first have to make time of the essence by serving a notice to complete under clause 8.8 of the Standard Commercial Property Conditions (Second Edition) that, with exceptions, were incorporated into the surrender agreement); or (ii) to seek permission, as it has, to sue for specific performance of the agreement. In the former alternative, Bristol would probably be entitled to forfeit any deposit paid (although in this case there was none and the escrow money was plainly not paid as a deposit) and claim damages for its loss, for which it would have to prove in the company’s insolvency. But Bristol could not claim the escrow money, since upon its acceptance of the repudiation the price would no longer be payable and the event upon which its entitlement to the escrow money would arise could not happen. Nor in my view can it make any sense for Bristol to be entitled to be paid the bulk of the price that was only payable upon a surrender of the lease, and be entitled to regard the lease as still continuing. If, however, Bristol were able to sue for, and obtain an order for, specific performance, then upon the working out of that order, it would be entitled to the escrow money against completion of the transfer. That is because upon such completion the event would occur that entitled it to the escrow money.

If wrong on his primary submission, as I would hold he was, Mr Tamlyn’s alternative submission was that there is anyway no reason why Bristol was and is not entitled to specific performance of the surrender agreement. At the heart of the surrender agreement is an agreement by the company to surrender a lease of land to Bristol; and upon such surrender taking place Bristol’s reversionary interest in the land will become an interest in possession. That is an agreement of a type of which the court will ordinarily order specific performance. Bristol was in principle entitled to such specific performance before the company entered administration and there is no reason why it should not be entitled to it afterwards. In a case in which a price was to be paid by Bristol to the company in exchange for such surrender, an order for specific performance would require Bristol to make such payment, as it would have to do in order to be entitled to the surrender. In the different circumstances of this case, no such price is payable by Bristol, although Bristol does upon completion itself become entitled to the ‘Price’ by way of a negative premium. The bulk of it is held by the solicitors in the escrow account, and upon completion of the surrender Bristol will be entitled, according to the terms of clause 4.4, to give the solicitor a good receipt for that money. The balance is the VAT payable by the company. Mr Tamlyn accepted that Bristol must, upon specific performance being ordered, prove for that amount. Bristol is, however, entitled by way of specific performance to settle for what it can recover, and the fact that the company is in no position to pay the VAT in full upon completion is no reason for not ordering specific performance.

By way of authority supporting Bristol’s right to specific performance, Mr Tamlyn referred us to two authorities. In In re Bastable, Ex parte The Trustee [1901] 2 KB 518, B agreed to sell a leasehold property, subject to a mortgage, to S, who paid a deposit on the signing of the agreement. Before completion, B was adjudicated bankrupt. The trustee purported to disclaim the sale agreement, although not the lease, and invited S to prove for any damages she might sustain by reason of the disclaimer. S sued the trustee for specific performance. Her claim succeeded. Collins LJ said, at 526:

Mr Tamlyn referred us also to Freevale Ltd v. Metrostore (Holdings) Ltd and Another [1984] Ch. 199, a decision of Donald Rattee QC, as he then was, sitting as a Deputy High Court Judge. In that case, the two defendant companies agreed to sell the plaintiff three pieces of land for £300,000. Following the agreement, a debenture holder appointed receivers in respect of two of the companies. The Master refused the plaintiff’s application for a summary order for specific performance under RSC Order 86. The judge allowed the plaintiff’s appeal and ordered specific performance. He applied the like approach as had the Court of Appeal in Bastable’s case. Although neither case concerned a claim for specific performance against a vendor company that had since entered into administration, I consider that it must follow that like principles apply, namely that such a company remains as liable to an order for specific performance as it would were it not in administration.

Mr Shepherd’s response to the submission that specific performance could and should have been ordered was, in part, to raise an argument that there was no valuable consideration moving from Bristol to the company for the surrender agreement, and that therefore it was not an agreement which the court would enforce by way of specific performance. In fairness to Mr Shepherd, I understood him to recognise the frailty of that argument, which I do not think he ultimately pressed. There was obviously valuable consideration moving from Bristol for the surrender agreement. Bristol agreed to grant the company the release and also agreed to change the rent to a turnover rent. These were, on the face of it, of benefit to the company. Mr Shepherd also had some equally frail points that Bristol’s notice requiring the company to complete the contract was defective for the two reasons I referred to in [15] above. There is nothing in this either: they were mere errors of misdescription which confused nobody.

Mr Shepherd’s real point in answer to the specific performance claim was this. He said that immediately before the company’s entry into administration, Bristol had no right to the escrow money. Its only right to such a payment was a contingent right dependent upon the ordering by the court of the specific performance of the surrender obligation. If such an order were made, Bristol’s right to the payment would then arise. He submitted that that was Bristol’s real motive in seeking specific performance: it was not to obtain the surrender, but to achieve the right to the payment, being a right to which it was not entitled immediately before the administration. The judge had, he said, been correct to conclude that the court should exercise its discretion against ordering specific performance and thereby leave Bristol, if it wished, to recover possession of the Bristol premises by taking steps to forfeit the lease. That would mean that the company’s own contingent interest in the payment of the escrow money might then mature into an actual interest, either upon the termination of the contractual term of the lease in 2023; or, if Bristol forfeited the lease, upon the forfeiture taking effect, which would likely also satisfy the contingency entitling the company to the money.

In summary, Mr Shepherd’s submission was that the judge had been right to deny Bristol its prima facie right to an order for specific performance of a contract for the disposition to it of an interest in land. Although the company had no present entitlement to the escrow money, it had a contingent interest in it which would mature in certain events into a present interest; and the court was entitled, in the interests of the company’s creditors, to exercise its discretion adversely to Bristol so as, if possible, to achieve that result.

In my judgment, that argument is wrong. Prior to the administration, Bristol had a right, upon giving appropriate notice, as it did, to compel the company to complete the surrender. If such a claim had come before the court before the company’s entry into administration, there could have been no good reason for the court to refuse to make such an order; and the consequence of doing so would have been to entitle Bristol to the payment of the escrow money. It was manifestly the intention of the parties to the surrender agreement to achieve precisely such a commercial result. The company’s entry into administration cannot have resulted, and did not result, in any material change of circumstances. The principle underlying Bastable’s case shows that Bristol remained as much entitled to an order for specific performance as it had before. The effect of such an order would be to entitle Bristol to the escrow money. It would not thereby entitle Bristol to money that was part of the company’s assets or therefore available for its creditors, and so such an order would not deprive the company of any assets then distributable to such creditors. The order therefore had no impact upon the pari passu principle. It is true that the refusal of an order for specific performance would open up the possibility that the company’s contingent interest in the money might thereafter be realised. I do not, however, understand upon what basis the court could properly consider that an otherwise appropriate order for specific performance ought to be refused so as to open up that possibility. To do so was to promote the interests of the company’s creditors over those of Bristol in circumstances in which there was no sound basis for doing so. Whilst specific performance is a discretionary remedy, I do not understand how a consideration such as this can be a proper basis for refusing it.

The judge approached the case on the basis that a claim for specific performance could and should be treated as before him. On that basis, I consider, with respect, that he was in error in refusing specific performance. I would allow the appeal and, in the case of the Bristol agreement, make an order for specific performance. I would ask counsel to agree a form of order dealing with both the Bristol and the Leicester agreements.

I agree.

I also agree.