Red River (UK) Ltd & Anor v Sheikh & Anor

This is my judgment on the claimants’ application dated 23 December 2008, on which I heard argument on 2 March 2009. Where it is unnecessary to differentiate between them, I will refer to the claimants together as “Red River”, and to the defendants as “the Sheikhs”.

The history of this litigation is long and complex, and it has already been before the courts on numerous occasions. A brief account of the main features of the case relevant to the present application may be found in paragraphs 5 to 28 of the transcript of the reserved judgment which I delivered on 21 May 2008, [2008] EWHC 1380 (Ch). Those paragraphs should be treated as incorporated herein, and I will adopt the same references to “the property” and “the settlement agreement”.

The immediate background to this application is that Red River has now abandoned its efforts to refinance the development of the property and has instead decided to sell it. Accordingly to Mr Dogan, in the current adverse financial climate a sale offers the only prospect of discharging the existing first mortgage in favour of the Bank of Scotland (now HBOS), and if Red River cannot sell the property itself in the near future the bank is likely to take immediate steps to enforce its security by foreclosing and selling the property as mortgagee.

To this end, Red River (UK) Limited has entered into an agreement by deed dated 19 December 2008 with a publicly funded entity for the sale and development of the property, subject to satisfaction of various conditions. In view of the difficulties which Miss Sheikh has caused in the past, Mr Dogan does not name the purchaser in his witness statement in support of the application dated 23 December 2008, and the exhibited copy of the sale agreement (as I shall call it) has been redacted accordingly. It is fairly clear that the purchaser is in fact a housing association or similar entity.

In broad terms, the sale agreement provides for the property to be sold to the purchaser for a site price of £2.1 million payable on a completion date which is defined as 10 working days after completion by Red River of the foundation works and further works up to and including the first floor slab (“the DPC Works”) for the construction of either 33 or 32 dwellings on the site in accordance with annexed specifications. An initial 10% deposit of £210,000 was payable to Red River’s solicitors as stakeholders on the date of the agreement, and has presumably been paid although Mr Dogan says in his statement that Red River will receive it only when the contract becomes unconditional.

It is important to note that the agreement for sale of the site in clause 2.1 of the sale agreement is itself subject to the satisfaction of a number of conditions precedent, including removal by court order or by agreement of the two restrictions on the title in favour of the Sheikhs and the unilateral notice entered on the title by Miss Sheikh’s mother, and the grant of a satisfactory planning permission. These conditions must be satisfied before a cut off date 10 months from the date of the sale agreement, i.e. by no later than 19 October 2009. Furthermore, assuming the agreement to become unconditional, there is no provision for release of any part of the £2.1 million purchase price for the site to Red River before the completion date, which (as I have explained) is itself dependent on Red River completing at its own expense the initial phase of the development up to the base of the first floor.

The sale agreement also provides for a lease back to Red River in the form set out in a schedule. None of the schedules to the agreement are included in the exhibit to Mr Dogan’s statement, but according to his evidence the effect will be to lease the ground floor commercial area of the development back to Red River for a term of 999 years at no premium on the completion date, and Red River will then build and realise six commercial units. Following completion, the purchaser will fund the remaining stages of the residential development on the upper floors of the site by means of stage payments to be drawn down by Red River as the development proceeds. Mr Dogan says that the six commercial units are “valued conservatively at £900,000”, and that Red River hopes to make a profit of approximately £445,000 on the residential part of the development. However, no supporting evidence is provided to substantiate these figures.

Since Red River will receive nothing under the sale agreement until the relatively distant completion date, and since Red River has no assets apart from its interest in the property, it is clear that the proposed development will only be viable if Red River is able to obtain finance from a commercial lender. According to Mr Dogan, finance from a “major clearing bank” has been offered and accepted in the sum of £2.032 million. Again, the name of the lender is not disclosed, but Mr Dogan says he is willing to provide the original offer of finance to the court, if required. The terms and conditions which he exhibits are on their face dated 9 October 2007, but according to Mr Dogan this is a mistake for October 2008. The purpose of the loan is said to be to refinance Red River’s existing borrowing with HBOS and to provide funding in respect of the preliminary, substructure costs of the build of 32 residential units and 6 commercial units at the property. The term of the loan is two years, and the margin is 2.5% above the lender’s base rate. The loan comprises £1.3 million to pay off the existing first charge, together with a retention of £195,000 to cover interest payable to the lender over the next two years, and a development loan of £500,000, together with an associated interest retention of £37,000. Mr Dogan says that the development loan will be used to pay off a small judgment creditor and to fund the development down to the completion date. The security required by the lender includes a first legal mortgage over the property, and first, fixed and floating charges over all material assets and undertakings of Red River (UK) Limited.

It would appear from these terms and conditions that, if and when the completion date arrives, and assuming it to be before the expiry of the two year term of the loan, Red River will be able to use the £2.1 million purchase price of the site to repay the £1.8 million owing to the lender, together with a specified exit fee of £20,000, leaving a balance in Red River’s hands of a little over £200,000. Mr Dogan’s evidence on this point is, however, thoroughly confusing, because he seems to mix up the position at drawdown of the facility (when £1.3 million will be used to pay off the Bank of Scotland mortgage) and the completion date under the sale agreement, which (if it happens at all) probably lies well over a year in the future, and when the borrowing which requires repayment will be the refinance loan and the development loan, together totalling £1.8 million. Furthermore, this confusion goes to a central point in the application, because (as I shall explain) the proposal is that on completion (if and when it occurs) Red River will have a clear sum of £300,000 available to it which it will undertake to pay into court, in return for the release (here and now) by the Sheikhs of their restrictions over the property. I merely comment at this stage that it is wholly unclear to me that Red River would in fact have a sum of that size at its immediate disposal on completion, even if everything goes according to plan.

I now turn to the restrictions which the Sheikhs have entered on the title of the property, and the interests which they protect. In paragraph 10 of the amended particulars of claim, it is alleged that the Sheikhs entered two restrictions on the register of title in respect of the property:

In paragraph 8 of my judgment of 21 May 2008, I described the overall effect of these two restrictions as being

“that no disposition of the registered estate by Red River could take place without the written consent of Miss Sheikh’s mother, such consent to be certified by Miss Sheikh.”

In the Sheikhs’ existing defence, paragraph 10 of the particulars of claim is simply admitted. I have also been provided with a draft amended defence and counterclaim, for which permission has not yet been given, where the following amplification is provided:

“10.

Paragraph 10 [of the particulars of claim] is admitted save that for the avoidance of doubt the first restriction of 19 October 2005 was registered prior to any dispute arising between [Miss Sheikh] and [Mr Dogan] and the purpose of that restriction was to protect [MissSheikh’s] original loan for the acquisition of the Property and subsequent advances and interest set out [in her] Capital Account calculated up to 29 June 2007 and totalling £832,418.42, the registration of which [Red River] agreed at the time.”

On the basis of the evidence now available, it seems reasonably clear to me that the purpose of the two restrictions was to protect Miss Sheikh’s investment in the property, and that in one way or another she was contractually entitled to have her investment secured on the property by means of a second charge. I emphasise that this is only a provisional view. However, an underlying entitlement of this nature appears to me to be reflected in:

In due course the relevant documents were delivered by the Sheikhs to Isadore Goldman, and on 16 November 2007 Isadore Goldman wrote to Miss Sheikh confirming the terms upon which they held them:

“As to the documents we hold, these are retained under the terms of the Consent Order dated 3 September 2007. … We make it clear to you now that we have no, nor have ever had any, intention to release the RX4s other than on notice to you, in conjunction with an overall re-financing of the Property which will discharge such liability as our clients have to you under the terms of the Settlement Agreement.

If it puts your mind at rest we confirm that we will continue to hold the RX4s and not release them other than with your agreement or by order of the Court.”

Red River accordingly made it clear to the Sheikhs, by the above letter, that the RX4 forms and the executed share transfer were held by Isadore Goldman to the order of the Sheikhs, and that they would continue to be so held until a refinancing arrangement was in place which would discharge the entirety of Red River’s outstanding liability to the Sheikhs under the terms of the settlement agreement. Furthermore, those are the terms on which the relevant documents are still held today by Isadore Goldman, subject only to the relief which is now sought in the present application.

The application notice dated 23 December 2008 asks the court to make an order in the terms of the attached draft. The draft order recites an undertaking by Red River to pay into court (a) the sum of £300,000 from the proceeds of sale of the property, and (b) the further sum of £100,000 from the profit in relation to the development of the property, “such payments to await the determination of these proceedings or further Order”. It also recites (in optimistic anticipation) an agreement by the Sheikhs, pending the outcome of the proceedings,

“to make no further claim to any interest of whatever nature howsoever it arises in the Property and not encumber in any way the title to the Property and the proposed interest of any purchaser.”

The operative part of the draft then seeks orders:

It is clear from the terms of the draft order that, when the application was initially made in December, it was intended to ask the court to remove the two restrictions and the unilateral notice from the title, without making any application for that purpose to the Land Registry. An application in those terms would raise the question whether the court has jurisdiction, under the Land Registration Act 2002 and the Land Registration Rules 2003, to entertain such an application. In his skeleton argument on behalf of the Sheikhs, Mr Philip Newman submits that the court does not have jurisdiction to hear or determine an application for the removal of a restriction, and that there is no equivalent under the 2002 Act or the 2003 Regulations of the well-established power which the court used to have to order the vacation of a caution: compare the comments of Patten J in Stein vStein [2004] EWHC 3213 (Ch), unreported, at paragraphs 26 and 27. In the event, however, this point receded into the background, because when he opened the application counsel for Red River, Mr Tom Smith, made it clear that he was not asking the court to order the removal of the restrictions and the unilateral notice, but merely asking for the undertakings given by Isadore Goldman in relation to the documents held by them (namely the RX4s and the cancellation of the unilateral notice) to be varied so as to permit them to release the documents and submit them to the Land Registry upon Red River giving the specified undertakings as to payments into court.

I will assume, without deciding, that the court would have power in an appropriate case to vary the undertakings given by Isadore Goldman, notwithstanding that they are contained in a consent order. On what basis, I then ask myself, could it possibly be right to require the Sheikhs to give up their restrictions, and (for good measure) to transfer their shareholding in Red River to Mr Dogan, when all that they are offered in return is the uncertain prospect of future payments into court of two sums which together represent less than one third of the total amount due to them under the settlement agreement? In my judgment it would be quite wrong for the court to contemplate making such an order. Although I make no final determination of the legal or equitable rights of the parties in this judgment, my provisional view is that the existing undertakings are in place to protect the rights of the Sheikhs under the settlement agreement, as well as any enforceable contractual entitlement they may have to a second charge to secure their rights pursuant to the consent order. Their rights to security cannot be worth more than the equity in the property after discharge of the existing first mortgage in favour of Bank of Scotland, but it seems to me to be entirely a matter for the commercial judgment of the Sheikhs whether they should agree to give them up, and (if so) on what terms. It is not the court’s business to require them to give up their rights to security, whether by a variation of Isadore Goldman’s undertakings or otherwise, and still less so when it is wholly uncertain whether either of the promised sums will ever be forthcoming. As I have already pointed out, the sale agreement is itself conditional on a number of matters, including removal of the restrictions and the grant of satisfactory planning permission. Even if the contract does become unconditional, there can be no certainty that it will ever proceed to completion, and it is also unclear whether Red River will then have £300,000 at its disposal: see paragraph 9 above. The further proposed payment of £100,000 from the profits of the development is, for obvious reasons, even more uncertain.

In effect, the Sheikhs are being asked to give up any existing right to security they may have in return for the uncertain prospect of two payments which may never be made, and which amount to no more than one third of their claim. I know of no jurisdiction which would permit the court to take such an extraordinary step. Mr Smith skilfully sought to present the matter as an application to vary undertakings, and suggested that the court had a wide discretion in the matter. In my judgment, however, the underlying reality is that the undertakings at least arguably reflect and protect the Sheikhs’ contractual rights to security, and, if that is correct, the position is in all essentials the same as it would be if they already had a registered second charge to protect their interests under the settlement agreement and the consent order.

Mr Smith submitted that I should nevertheless accede to Red River’s application, because Red River has a pleaded claim against the Sheikhs for breach of their implied obligation to act in good faith in relation to the completion of the proposed refinancing transaction in 2007 involving the Bank of Ireland. In paragraph 70 of the amended particulars of claim, it is alleged that as a result of these breaches Red River lost the opportunity to refinance the property, and was therefore unable to proceed with a planned redevelopment of the property into a block of flats for which planning permission had been granted. Such loss of profit was said to be “in the region of £5 million”. Exhibited to Mr Dogan’s statement is a single page schedule of loss which, without any supporting documentation, estimates Red River’s minimum loss in the sum of £6,379,512. I made it clear to Mr Smith that I regarded this evidence as far too flimsy to substantiate any claim for loss of profit, even assuming I were satisfied to the standard required for a summary judgment application that the Sheikhs were in breach of the implied term. Mr Smith accepted that the evidence on quantum was insufficient as it stands, and invited me to adjourn the application for at least six weeks to enable Red River, if it could, to adduce some solid evidence of its loss.

For a number of reasons I am unable to accept that invitation. The first, and most fundamental, reason is that, even if such evidence were to be available, it would not in my judgment assist Red River on the present application. The court would still have no jurisdiction to require the Sheikhs to give up any existing security they may have for the sums contractually due to them under the settlement agreement. Red River might have a good cross-claim for damages in a larger sum, but that is a different matter and would not invalidate the Sheikhs’ security. Secondly, I would in any event think it wrong, on the evidence now before me, to hold that the Sheikhs have no reasonable prospect of success on the issue of liability for breach of the implied term. This is not an application for summary judgment, and the background to this case is so complex, and so hotly disputed, that the court should in my view be very wary before making any final determination of liability before trial. It is true that Briggs J in his judgment of 15 November 2007 did, on one reading of what he said, decide finally that the Sheikhs had acted in breach of the implied obligation to act in good faith in relation to completion of the composite transaction. However, that is the single point on which Rimer LJ has now given the Sheikhs permission to appeal to the Court of Appeal, on the footing that the question turned on matters of fact which could not be finally decided in advance of trial, and it is therefore arguable that Briggs J should have done no more than find that Red River had a good arguable case that the Sheikhs had breached the implied term. Furthermore, by a Respondent’s Notice filed on 8 January 2009 Red River has made it clear that, if the Judge did make a final determination in those terms, they do not seek to uphold it and will consent to his judgment being varied accordingly. In my judgment the grant of permission to appeal on that basis, and Red River’s reaction to it, do not sit at all easily with the contention that I should now treat the question of liability as established to the summary judgment standard.

Thirdly, even if I were satisfied on the issue of liability, I would not on balance think it appropriate to grant the requested adjournment. This application was taken out before Christmas, and Red River has had ample time to prepare and file its evidence. Further, it should have been obvious from the beginning that the quantum of the damages claim was central to the application, because the proposal was that the undertakings proffered should total only £400,000, or less than one third of the sums due to the Sheikhs under the settlement agreement. In order to justify that shortfall, it was clearly going to be necessary to persuade the court that the cross-claim was bound to be worth at least £900,000 or thereabouts. In those circumstances, I am not persuaded that it would be appropriate to grant Red River a lengthy adjournment in order to strengthen their evidence on this central point. Mr Smith made it clear that there was no certainty that stronger evidence would be forthcoming if I did grant an adjournment, and I was left with the strong impression that the quantification of the cross-claim is at this stage still subject to very considerable uncertainties.

Finally, Mr Smith argued that, if the court did not intervene, the overwhelming likelihood was that the Bank of Scotland would call in its debt and enforce the first mortgage, leading to a forced sale of the property which would in all probability leave nothing over for the Sheikhs in their (disputed) capacity as equitable second chargees. Mr Smith suggested that it would be unfair and unreasonable if the Sheikhs, by their recalcitrance, could prevent the sale of the property which has now been negotiated from proceeding. I have some sympathy with the predicament in which Red River and Mr Dogan now find themselves, but in my judgment this submission cannot be accepted. As I have already said, it seems to me to be a matter for the commercial judgment of the Sheikhs whether, and if so on what terms, they agree to give up any rights they may have as second chargees.

For the reasons which I have given, the application will therefore be dismissed.