Maloney v Filtons Ltd & Anor

This judgment arises out of a trial of this action. The trial took place as a result of an order made by His Honour Judge Mackie QC (sitting as a Judge of the High Court) on 21^st March 2012 directing (inter alia) an expedited trial to commence at the end of April 2012.

The Claimants are the Receivers (“the Receivers”) of Thomas Bernard McFeely and Conal Derek McFeely. In this judgment I shall call them “the McFeely Brothers”.

The Receivers are represented by Mr Anthony Trace QC and Ms Rosanna Foskett.

Until shortly before the trial the Defendants were represented by solicitors and had Leading Counsel (Mr Steven Gee QC) at the hearing on 14^th March 2012 before Mr Justice Warren and Mr David Berkley QC on the above mentioned hearing before His Honour Judge Mackie QC. In addition, Mr Berkley QC settled a Defence and Counterclaim.

Throughout the hearing the Defendants were represented by one of its Directors, a Mr Moshin Kothia. Mr Kothia presented his case extremely lucidly and tenaciously and I pay tribute to his efforts in that regard. However, Mr Kothia, of course, is not a lawyer and it follows that things were missed of a legal nature which would never have occurred to him as a non lawyer.

I should also say that Mr Trace QC following the well established and proper traditions of the Bar without derogating from his duty to his clients provided Mr Kothia with considerable help in the production of documents and references to authorities and assistance to me as his duty to the court as an advocate when one party is unrepresented.

This case as this judgment will show demonstrates the difficulties a court faces at a trial when one party is unrepresented. There is of course the general difficulty of a litigant in person not understanding how trials run. That can be covered by assistance from the bench. There is the difficult aspect of cross examination and the need to put matters. There is always the difficulty of when the litigant in person gives evidence, is cross examined and there is no one who can effectively re-examine him. That is a role which effectively falls on the Judge to address matters of clarification that might have been raised in re-examination by an advocate if there were such an advocate.

As this judgment shows there is a further significant difficulty in my view arising out of matters which were not pleaded in the Defence and Counterclaim which was settled by Leading Counsel and served as long ago as 26^th March 2012. Mr Kothia in the closing stages of his submissions applied to amend the Defence and Counterclaim. I heard submissions on that. Mr Trace QC objected to that late amendment. The further difficulty about the amendment is that Mr Kothia has no idea how to plead the amendment which it is fair to say was raised by me in argument with Mr Trace QC and during the course of the trial.

It is always difficult to assist the litigant in person without giving the represented parties the impression that they are being punished for having representation.

The dispute relates to a block of residential apartments (“the Property”) known as Athena Court which is on a site 160-188 High Street Stratford East London. It is very close to the Olympic Park. It has a registered title with HM Land Registry EGL74535.

The registered proprietors of the Property are (and have been since January 2007) are the McFeely Brothers. The McFeely Brothers hold the Property upon trust for Ashwood Enterprises Ltd (“Ashwood”) an Isle of Man company. Thomas McFeely was declared bankrupt in the High Court on 13^th January 2012.

That bankruptcy does not affect the Receivership because the Property has been held on trust by him rather than beneficially so it and any causes of action associated with it do not form part of the bankruptcy estate (section 284 (3) IA 1986). Further the Trustee in Bankruptcy has been notified of the proceedings and has not sought to participate in them.

The Bank of Ireland (“the Bank”) entered into loan facilities for up to £49m with Inis Developments Ltd (“Inis”). Inis is a Northern Ireland construction company in which the McFeely Brothers have an interest. Inis’ liabilities to the Bank were (inter alia) secured over the Property by way of a first legal mortgage dated 26^th June 2007. That charge (“the Legal Charge”) was between (1) the Bank (2) the McFeely Brothers and (3) Ashwood. It was registered at HM Land Registry on 2^nd July 2007.

As such the Charge pre-dates any proprietary interests the Defendants might assert. There is nothing to suggest that the Defendants’ rights bind the Bank.

The Legal Charge is a third party charge whereby the McFeely Brothers charge the Property as security for Inis’ liabilities to the Bank.

It should be observed that by clause 10 of the Legal Charge the McFeely Brothers are prohibited without the Bank’s consent from creating or permitting to arise any mortgage charge or lien on the Property. They are also prohibited from granting or accepting a surrender of any lease or license of the Property and are prohibited from disposing of or parting with or sharing possession or occupation of the Property unless permitted. There is no suggestion that the Bank has permitted any of the transactions that are the subject matter of the present dispute.

Under clause 11 of the Legal Charge the Bank is given power to appoint a Receiver or Receivers who are deemed to be the agent of the McFeely Brothers and jointly and severally responsible. Finally clause 14 has a statement that a certificate by an official or manager of the Bank as to the amount of Inis’ obligations or the amount due from the McFeely Brothers under the Legal Charge should be conclusive evidence save in the case of manifest error or any question of law. The legal effect of that clause is binding as to its terms: see Bache & Co (London) Ltd v Banque Vernes et Commerciale de Paris SA [1973] 2 Lloyds Reports 437 CA.

On 4^th November 2011 the Bank made a demand on Inis under the loan facility for repayment of sums in excess of £49m. Shortly thereafter it made demands on the McFeely Brothers under the Legal Charge. Neither Inis nor the McFeely Brothers managed to meet those demands. As a result of the failure to repay the whole or any part of the sums demanded receivers were appointed. The relevant demand seems to me to be a certificate in accordance with clause 14 above mentioned. In any event there is nothing to suggest in these proceedings that the amounts due are in any way challenged.

Following failure to repay initially 4 partners at BDO LLP (“the Original Receivers”) were appointed on 4^th November 2011 by the Bank pursuant to its powers under the Legal Charge. In addition on 10^th January 2012 George Maloney a partner in the Irish associated firm Baker Tilly Ryan Glennon was appointed out of court in Northern Ireland as administrator of Inis pursuant to the demand. On that same day (10^th January 2012) the Claimants were appointed as Receivers under the Legal Charge in place of the Original Receivers who resigned.

According to the evidence which was not challenged by the Defendants the Original Receivers in November 2011 had difficulties obtaining access to the Property. They were blocked by Noel McFeely another McFeely brother. The Original Receivers then discovered that the Second Defendant had been instructed to find tenants for the Property. They contacted the Second Defendant and were told that the Second Defendant had a lease over the whole of the Property and that it had been granting sub tenancies of residential units in Athena Court. Those tenancies are let out on Assured Shorthold Tenancies (“ASTs”). The Original Receivers were then provided with a document by which the Defendants purported to claim a lease over the Property. That document is central to the issues before me (“the Lease”).

The Lease is dated 31^st October 2010. It is stated to be a lease between Ashwood Enterprises (note not the full name of Ashwood). Its address is stated to be c/o Merriman White Solicitors. The tenant is described as Filtons Leasing (London) Ltd and the Property is described as Athena Court. The term created is a term of 24 months commencing on 1^st November 2010 and expiring on 31^st October 2012. The rent payable is £32,000 per week payable in advance on the Friday of each week. Thus under the Lease a total of £3,328,000 is payable by the Second Defendant to Ashwood as rent for the 2 year term. On the same day (31^st October 2010) the Directors of the Second Defendant signed a document whereby it was agreed all security deposits obtained by the Second Defendant would be passed over to Thomas McFeely on behalf of Ashwood Enterprises. The document in question is also signed by Thomas McFeely on behalf of Ashwood Enterprises. He similarly signed the Lease although he is not an officer of Ashwood. Nor is Ashwood the owner of the legal estate. Thomas McFeely is a co owner with his brother Conal. Thus whatever else could have been granted it is impossible for the Second Defendant to assert (unless it can assert an estoppel) that it has a legal lease. At best it will have an equitable lease by virtue of section 63 of the Law of Property Act 1925 and then only if the equitable owner who purported to grant the lease actually did so.

The Lease is an unusual document. It ignores the fact that parts of Block 1A had already been let to other parties as were the commercial parts. It is said with some force that the form is that normally used for short term residential lettings see for example clause 7.1 (3) and clause 9.4. None of these is in my view significant. It appears that the Lease was drafted by Mr Kothia. These features which are said by the Receivers to be curious do not of themselves prevent it being a lease in my opinion.

The Second Defendant has negotiated a number of ASTs in respect of the Property since November 2010. I have been provided with a large number of them. They do not appear to change materially. I give as an example one dated 1^st September 2011 in respect of 7 Athena Court where the tenant is one Zahid Panchbhaya. He acknowledged on 1^st September 2011 in writing that the Landlord would require possession on 31^st August 2012. The Landlord in that document is stated to be Inis and its managing agent is stated to be the Second Defendant. The AST in question is stated to be between “c/o Filtons Ltd…….” as Landlord and the relevant tenant. The pre tenancy notice as I have said describes Inis as the Landlord and the First Defendant as its agent.

Later ones (see for example flat 2 in favour of Igor Marin) described the Landlord expressly as “Inis c/o Filtons Ltd” and the pre tenancy notice similarly describes Inis as the Landlord.

This is all incorrect of course on the Defendants’ case. Any AST sub tenancy should be from the Second Defendant yet it features nowhere so far as I can see in any of the ASTs. There is no mention made anywhere of Ashwood or the McFeely Brothers (except as regards receipt of the deposits).

This has a number of consequences. First the deposits are handed over to Thomas McFeely. He is not the Landlord nor is he a party to the Lease and I can well see that any tenant would face great difficulties in seeking to recover a deposit back from him although they were all paid over to him. The tenant was issued in some cases with a “Deposit Protection Certificate”. Some appear to be uncompleted; others are completed. These certificates appear to be operating under the government scheme under the Housing Act 2004. Under the scheme set out under that Act a landlord of an AST is required to protect any deposit. He can either hold the deposit in a secure account (always unattractive to landlords) or he can take out an insurance scheme with an approved insurer (of which mydeposits.co.uk is one). He pays a fee and the repayment of the deposit is guaranteed under an insurance certificate provided by that organisation.

Mr Kothia was briefly cross examined on these documents but there was no evidence led to challenge the validity of these certificates. Mr Kothia gave evidence (repeating what he had said at a meeting with the Original Receivers on 22^nd December 2011) that deposits were handed over to Thomas McFeely and that he would never keep the deposits. When a tenancy is terminated he then used the incoming tenant’s deposit to repay the original tenant. That is not far removed from a “Ponzi” scheme in that the deposit is not secured at all as its repayment is dependent on incoming funds. If the lettings dry up there will be no funds available to repay the deposit and Mr McFeely does not assume any liability to any sub tenant or repayment of any deposit despite the fact that he has the monies.

Of course that does not matter if the deposit is protected by the insurance backed scheme. The evidence is unclear but I have no reason to doubt that these certificates are genuine. Given that there is nothing improper in the Second Defendant dealing with the deposit as if it was its money because it has provided full protection to the tenant by the insurance backed scheme.

As part of their investigations the Original Receivers as I have said had a meeting with Mr Kothia on 22^nd December 2011. Parts of that meeting were without prejudice but the parties agreed that the note taken by the Original Receivers’ solicitors SNR Denton could be received. I have no reason to suggest that the note is not an accurate and comprehensive summary of what was discussed at the meeting.

Mr Kothia’s attendance was to assist the Receivers and also to state the Defendants’ case. He was also anxious to obtain confirmation (which was not forthcoming) that the Lease was accepted as binding on the Original Receivers as agents for the McFeely Brothers. In essence his case was that the Defendants had a lease and under the terms of that lease they were able to sub let the flats on ASTs. They collected the rent paid expenses and were entitled to the income generated after payment of the weekly rent due to Ashwood of £32,000 under the terms of the Lease.

He explained how the rents were collected and accounted for to Thomas McFeely.

Following the meeting the Original Receivers wrote to Mr Kothia on 22^nd December 2011 setting out their concerns. Mr Kothia never replied to that letter. In evidence he stated that he never received it. I do not accept that evidence.

On 24^th January 2012 SNR wrote again in effect to Mr Kothia. This time they were acting on behalf of the Receivers. In that letter they asserted that the Lease was a nullity because Mr Thomas McFeely had no authority to sign the Lease on Ashwood’s behalf. Alternatively a number of factors (unidentified) suggested that the Lease was a sham. They requested the Defendants to vacate the Property in 7 days failing which they would commence proceedings. They required a response within 7 days. On 27^th February 2012 the Receivers wrote to all occupiers of the Property asserting that none of the arrangements was valid and binding on the Receivers. On 27^th February 2012 SNR Denton wrote to the Defendants requiring them to cease having any involvement in the Property. For the avoidance of doubt they enclosed a notice terminating any basis for acting as letting or managing agent forthwith and stating that the Defendants had no authority to collect any rent from any occupiers. The notice was given without prejudice to the contention that any such agency or authority has already been terminated or rescinded. The Defendants did not vacate.

On 20^th February 2012 colleagues of the First Claimant as administrator of Inis obtained access to 4 email accounts used by that company. One of those showed an email dated 11^th January 2012 from a Waseem Tailor of the Defendants headed “Athena sheet” that purports to show an analysis of rent collected and expenses paid. The amount stated to being paid as rent from sub tenants is £3,277,000.19 of which £2,939,696.43 was already paid. There are deductions for costs and commissions. Those schedules have not been challenged by the Receivers. Further Mr Kothia in his first affidavit stated that after the Lease had been entered into because of a lack of AST lettings at that early stage Mr Thomas McFeely had insisted that all the rents due under the two year term was paid up front before the Defendants took any of the overriding profits. The amount gross that would be payable under the Lease would be £3,328,000.

Down to 11^th January 2012 Mr Kothia deposed that the Defendants paid £2,810,706.94 to Mr Thomas McFeely and retained £140,535.35 representing approximately 5% of the sums collected less sums paid for maintenance charges.

In paragraph 33 of his first affidavit he challenged the Receivers’ assertions that the 5% represented the sole commission payable to the Defendants. The reason for challenging that is that he stated that no commercial agent would charge 5% for managing a property let alone one of this size and he exhibited a typical management agreement which shows that a charge for managing a property is inevitably in excess of 10%.

There is a discrepancy between the schedules that the Receivers obtained from Inis and Mr Kothia’s first affidavit of some £128,989 which has not been explained. No provision under the Lease entitles the Defendants to a 5% commission. However Mr Kothia in his first affidavit (paragraph 30) suggested that Mr Thomas McFeely allowed a retention of 5% of all revenues to allow the Defendants to continue to function.

The Defendants’ case therefore is that a lease was entered into by them from Ashwood acting by Thomas McFeely whereby they were obligated to pay £32,000 per week but in effect all other rent accruing in respect of the Property was due to them. They contend that they have paid because of the variation of the agreement close on all the rent due for the two year term. This includes a sum of £120,000 that was paid to Thomas McFeely on 13^th March 2012 (i.e. the day before the inter partes hearing listed before Warren J). By that time the Defendants were aware that the Receivers had been appointed. By that time therefore they should not have made any payment to Mr Thomas McFeely but in fact should have accounted for that sum to the Receivers.

The 2 year term is significant because it includes the period when the 2012 Olympics are taking place. The Property is very valuable for that period as it is believed that substantial rents will be available for that. Mr Kothia at various stages has stated that he expects to make a sum of in excess of £1m or maybe £2m during that period. This is his payoff as he put it. Having paid the 2 year rent to Mr Thomas McFeely as set out above he claims (with some force) that he should not now be deprived of his opportunity to make money from the Olympics. He has on his case paid up the rent until October 2012. The difficulty facing Mr Kothia is his pleading settled by David Berkley QC. His claim stands or falls on establishing that the Lease is effective and binding on the Claimants. He has no alternative claim currently before the Court addressing the consequences of the Claimants establishing that the Lease was either void or is a sham. I explored this with Mr Trace QC and Mr Kothia during the course of the trial and especially in the closing speeches.

I suggested a number of possibilities. First in opening I asked Mr Trace QC if the Defendants did not have a Lease what did they have? His answer was that they might have had a managing agency. The next question then to be posed is what are the terms of the managing agency? In that context the key issue is as to whether or not the agency is terminable on reasonable notice or no notice at all or whether the managing agency has in effect a fixed term until October 2012.

I also suggested that if the Lease is void but the Defendants entered in to possession under that void Lease the tenancy created would be a tenancy at will (see for example Woodfall “Landlord and Tenant” at paragraph 6.066. If the tenant at will subsequently pays rent then any tenancy at will would ripen into a tenancy measured by the periodical nature of the rent payment. In this case the Defendants contend that they have in effect paid up front all the rent until October 2012. If that is correct then the tenancy at will arising out of the void Lease would reinstate itself as a fixed term tenancy.

It would of course be necessary for the Defendants to show that such Lease is binding on the Freeholders i.e. the McFeely Brothers. The Lease has been signed by Mr Thomas McFeely purportedly on behalf of Ashwood. I have already observed that that would create an equitable lease in my view. Further it is clearly arguable that the McFeely Brothers would be estopped from denying giving effect to that lease having received rent payments collected by the Defendants pursuant to the void Lease and thus pursuant to the tenancy at will.

All of this would provide a defence in my view to the claim as presently formulated. It would not of course avail them if the proceedings were brought in the name of the Bank because the Bank does not appear to be bound by any of these leasing arrangements which as I have set out above are excluded in the usual way.

The Particulars of Claim are dated 8^th March 2012. The claim is brought by the Claimants as Receivers for the McFeely Brothers. The Defendants are the 2 companies controlled by Mr Kothia.

The Claimants assert that the Defendants were instructed as property agents on behalf of the McFeely Brothers concerning the Property in October 2010 and that they have purportedly granted leases and licenses of part of the Property both in their own name and on behalf of Inis despite the fact that they were merely letting agents. They assert that the Defeandant have collected in excess of £3m from residential occupiers and transferred those monies after deductions of costs and a commission of 5% to the McFeely Brothers.

The Claimants contend that the Lease is a nullity and Ashwood had no title to grant a legal lease. Alternatively they claim that it is an obvious sham whose object is to disguise the true relationship between the Defendants and the McFeely Brothers. Consequently they contend that the sub leases or licenses granted by the Defendants whether on behalf of Inis or otherwise are also nullities as Inis and the Defendants and Ashwood if necessary had no power to grant any leases or licences.

Any agency the Claimants contend was terminated either on 22^nd December 2011 or as a result of a letter on 27^th February 2012.

There are various ancillary claims to that. The relief sought is declaratory as regards the basic occupation of the Property and claims for accounts of monies collected by the Defendants and a declaration that any monies received by them from occupiers are held on trust for the McFeely Brothers.

The Defence and Counterclaim was served sometime in March (I do not have a signed and dated copy).

After reciting that the Property was held and owned by the McFeely Brothers and they held it in turn on trust for Ashwood and the Claimants are Receivers appointed on behalf of the Bank no admissions are made as to the appointment of the Claimants. I interject to point out there is no issue in my view that the Claimants have been validly appointed as Receivers on behalf of the McFeely Brothers.

The Defence and Counterclaim then said that the Receivers if validly appointed are agents of the McFeely Brothers. The Defendants admit that they were initially appointed as letting agents but following negotiations the Lease was entered into. It was admitted that it was signed by Mr Thomas McFeely on behalf of Ashwood. It is also asserted that Mr Thomas McFeely was actually authorised by Derek McFeely alternatively that the McFeely Brothers are bound by the Lease and are estopped from denying its validity and that the Receivers are similarly so bound.

The advance payment of the rent is pleaded and the Defendants consequently deny that they are merely letting agents and deny that the Lease is a nullity or sham and deny that the sub tenancies are nullities.

There is then the usual traditional traverse of the relief sought by the Claimants.

The Counterclaim merely seeks a declaration that the Second Defendant holds the Property under the Lease. There is an unparticularised allegation that the Receivers’ conduct has caused loss and damage. A cause of action is not set out and the loss is equally not set out.

That Defence and Counterclaim was settled by leading Counsel.

Unfortunately what is missing from it is what I called in argument “a fall back position”. It seems to me to be clear that there ought to be more to the Defendants’ occupation of the Property than the Lease and that in the light of the Claimants’ contentions that the Lease was a sham then the Defendants ought to have addressed what would be the consequences of the Court determining the Lease was a sham or that the Lease was void. In the case of the former Mr Trace QC in the course of opening said that the true relationship between the McFeely Brothers and the Defendants was that of a letting agent. He submitted that it was not necessary for the Court to examine the nature of the true relationship; the only issue was whether the Lease was a sham. That might be satisfactory from the Claimants’ point of view but it is clear a Defendant faced with a claim that the document is a sham and that there is another genuine relationship would seriously consider seeking to assert such an alternative arrangement in any event. In the present case if the Defendants can establish that they have a letting agency until October 2012 it will not necessarily cause them any difficulties. The terms of the lettings agency would involve them collecting the rents and keeping them for themselves after they had made the payments that were due under the Lease as the agency fees. Of course it might be the case that the letting agency was not for a full fixed term but was terminable on reasonable notice.

If the Lease is held to be void then as I have set out above a consequence of that might be a different form of Lease in favour of the Defendants.

As I have set out above none of this is pleaded.

This particular problem (namely the inadequacy of in my view the present pleadings served on behalf of the Defendants) was raised by me during the course of the trial. There is a particular difficulty because the Defendants are unrepresented. They cannot be expected (although Mr Kothia did a very good job on their behalf) to understand the subtleties of the law. In effect I invited Mr Kothia to make an application to amend the Defence and Counterclaim to include these fall back claims. Mr Trace QC objected to the amendment on the grounds that it was late and the case was not put to the Receivers. Whilst both those points are correct they are not in my view significant. I do not see that the proposed pleading is anything other than a pleading of a point of law as to the legal effect of the relationship between the Defendants and the McFeely Brothers as determined on the facts as I find them. There will be no point to put to the Receivers because it is a submission as to law. Further of course the Receivers have no knowledge of the arrangements that might or might not have been made the year before they were appointed.

I accept that the amendment application is made very late but it seems to me that I must take into account the fact that Mr Kothia whatever his ability to articulate things and to respond quickly to matters that arose in Court is not legally trained. I cannot comment as to why the fall back position was not contemplated but it is plain to me on the material and the Claimants’ case that a fall back position of the Defendants is relevant. To deny them to run a fall back argument albeit late in the day could potentially be a denial of justice to them. I can see no prejudice to the Receivers beyond the fact that they have to face a case which they have not had to face before. The Receivers are represented by very experienced Counsel and they were able in my view satisfactorily to deal with this point.

I would therefore grant the Defendants permission to amend their Defence and Counterclaim by adding a new paragraph as follows:-

“24A If which is denied the Second Defendant is not entitled to a Lease of the Property set out above it makes the following contentions:-

1)

If the Lease is void it entered possession of the property as a tenant at will. It paid rent and accounted for rent to the McFeely Brothers up until October 2012 and accordingly the tenancy at will was converted by such payment and acceptance of rent in to a fixed term tenancy expiring on 31^st October 2012. The McFeely Brothers are estopped (and the Receivers are similarly estopped as being agents of the McFeely Brothers) from denying the effect of that Lease by reason of the receipt of rent monies from the Defendants until the intervention of the Court orders in this action.

2)

Alternatively the arrangement between the Defendants and the McFeely Brothers is that the Defendants were managing agents. The terms of the managing agency are the terms set out in the Lease in so far as those provisions are capable of applying to a managing agent and in particular was for a term expiring on 31^st October 2012. As regards remuneration the Defendants were entitled to collect all the rent but had to pay a weekly sum of £32,000 to the McFeely Brothers. Thereafter all monies collected by the Defendants belonged to them absolutely and they were responsible for paying the expenses of running the Property. In the interim pending finalisation of the amounts due to them they were entitled to deduct a 5% commission from the rent as and when they accounted for them to the McFeely Brothers.”

I would then add in the prayer for relief a new declaration:-

“1A) a declaration that if, which is denied the Lease is not valid and persisting the Second Defendant entered in to possession of the Property as a tenant at will and such tenancy at will ripened in to a 2 year tenancy expiring on 31^st October 2012 and it is thereby entitled to remain in possession of the Property until the expiry of that term.

1B) a declaration in the alternative that the Defendants were managing agents in respect of the Property until 31^st October 2012 on the terms set out above.

1C) a declaration that the Defendants are entitled to an account for all sums due to them in accordance with either the above mentioned Lease or alternatively on the basis of them being managing agents.

1D) all further and consequential necessary accounts directions and enquiries.”

I was referred to the well known decision of Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802:-

“As regards the contention of the plaintiff that the transactions between himself, Auto Finance and the defendants were a “sham”, it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of rating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities (see Yorkshire Railway Wagon Co. v Maclure and Stoneleigh Finance Ltd v Phillips), that for acts or documents to be a “sham” with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating. No unexpressed intentions of a “shammer” affect the rights of a party whom he deceived. There is an express finding in this case that the defendants were not parties to the alleged “sham” So this contention fails.”

I now consider the evidence in relation to the relationship. The first point to note is that despite there being a supposed Lease there is no evidence to show the Defendants ever paid any rent to Ashwood who is supposed to be its Landlord. Second in the vast majority of sub leases that were purportedly granted the Second Defendant is not named as sub lessor whereas the proposed sub lessor is Inis which does not have any interest in the Property whatsoever. Third up until the intervention of the Receivers the Defendants collected rents from these various sub lettings and accounted for them in full to the McFeely Brothers, less expenses, less 5% commission.

It seems to me clear that the terms of the Lease were never implemented in any way. I have only had the evidence of Mr Kothia. That is significant. The Lease was signed by Thomas McFeely.

The McFeely Brothers applied on 4^th April 2012 to be joined in this action. That was heard by Master Marsh who dismissed the application and awarded the Receivers costs of £23,000. The McFeely Brothers did not seek to appeal that order when they could have done so. However that is not to say that they had no role. During the course of the hearing from time to time one or other of the brothers was present and was seen giving instructions to Mr Kothia. It is quite clear that it was at all material times open to Mr Kothia to call one or other of the McFeely Brothers to explain what was actually supposed to happen. Despite that easy ability and despite the fact that the McFeely Brothers were in Court the Defendants did not choose to do so. Absent an explanation for the non calling of the McFeely Brothers (and there is none) I infer that they will not come to Court because they will not support on oath the case that is being put forward by the Defendants. In other words they will not come to Court and say the Lease was a genuine document. There are a number of authorities concerning the non calling of a witness without justification starting with the well known decision of the Court of Appeal in Wisniewski v Central Manchester Health Authority [1998] P324. I followed that decision in a number of cases:- Lewis v Eliades (No4) [2005] EWHC 488 (Ch) (on appeal) [2005] EWCA Civ 1637, Bocardo SA v Star Energy UK Ltd [2008] EWHC 1756 (Ch) paragraph 61-69, JD Wetherspoon v Van de Berg & Ors [2009] EWHC 639 (Ch) paragraphs 168-175, Group Lotus Plc v 1 Malaysia Racing Team [2011] EWHC 1366 (Ch) paragraphs 261 and 304-307 and finally Nottinghamshire and City Fire Authority v Gladman Commercial Properties [2011]EWHC 1918 (Ch).

There was a strong suggestion that the McFeely Brothers had a major hand in the Defendants Defence and a similarly strong suggestion that the McFeely Brothers intimidated the Defendants. This was particularly significant in relation to a sum of £120,000 paid over to them on 13^th March 2012. That was the day before the inter partes hearing before Warren J. I will revert to this further in this judgment. Mr Kothia in his evidence in cross examination by Mr Trace QC was unable satisfactorily to explain that payment merely saying the payment was “regrettable”. It is plain in my view that he was under pressure from the McFeely Brothers to make the payments to them. That is reflected in a note prepared by the Receivers’ solicitors in a meeting of 21^st December 2011 where they record Mr Kothia telling them that he would not provide any information voluntarily because “his concerns around Mr McFeely”. It is quite clear in my view that Mr Kothia was one way or another, both during the operation of the Defendants’ relationship with the McFeely Brothers and right up to and during the Court proceedings simply responding to what the McFeely Brothers said and told him to do.

There is no evidence as I have said that the Lease ever operated. There is plenty of evidence to the contrary. First the documents obtained by the Receivers which showed the collections, payment of expenses and deduction of 5% commission are completely at odds with the suggestion that there was a Lease. There is no record of any rent payments being made. Mr Kothia sought to avoid the obvious consequence of that by suggesting that an arrangement was made between the McFeely Brothers and him in November 2010 that he would pay all of the 24 months rent up front because he had failed to make the first payment. I do not believe that evidence. In my view Mr Kothia made that up in an attempt to pretend that he had paid 2 years rent under the Lease. The reality in my view is that Mr Kothia has managed the Property through the Defendants entered into lettings and has deducted expenses and 5% commission for such operations. All other rental income and deposits he has handed over to the McFeely Brothers.

That demonstrates in my view that the true relationship between the Defendants and the McFeely Brothers was that of a managing agent, managing the Property on behalf of the owners namely the McFeely Brothers.

Accordingly I accept the Claimants’ contention that the Lease for the above reasons is a sham.

Nevertheless as I said earlier it is necessary to determine what the relationship was.

The major difference in reality is whether the estate agency is for a fixed term expiring on 31^st October 2012 and whether the Defendants are entitled to the entirety of the rent income generated after having paid the sum of £32,000 per week to the McFeely Brothers as “rent”. As I have said that is not what happened.

The best evidence in my view is the evidence obtained by the Claimants colleagues as administrators of Inis. The significance of it is that this records a dealing between the Defendants and the McFeely Brothers and Inis. It can be taken to be understood therefore as the true relationship between them as opposed to a relationship generated for display to outsiders. The schedules included in the emails to which I have referred above set out rentals collected, deposits collected and expenses paid. The McFeely Brothers objected to the obtaining of the information and I can well understand why they did so. The objection was because in my view they have been caught out as the material shows the true relationship between the Defendants and them and the amounts of money that they have actually received.

Those spreadsheets show a deduction of 5% commission. Mr Kothia acknowledged that he had received £160,000 commission over the period. He said that figure was 5% and that represented an on account payment to enable him to continue operating because of the special arrangement that was made in November 2010. He expressed the view that no agent would operate at a figure as low as 5%. I cannot comment on that. However I do not accept his evidence. In my view having seen him I am of the view that he has made this up to justify the claim that the Lease subsists and that he is entitled in effect to collect all the large rents which will fall due fairly rapidly this summer. He described his opportunity to have the ability to collect all the rents during the Olympic period as his big payoff. That is why he is fighting the case. However in my view this key document demonstrates that the nature of his role in the Property was as a letting agent for the McFeely Brothers. That is what he did although as I have observed already the ASTs that he granted are curious documents in a number of respects. They do demonstrate however the fact that the Defendants were not the possessor of a legal or equitable estate because the overwhelming number of ASTs were granted by Inis as I have said which of course had no interest. He has made this evidence up also of course to cover up the fact that he has no documentary record showing the payment of rent by the Defendants to the McFeely Brothers or Ashwood.

I therefore conclude that the relationship between the Defendants and the McFeely Brothers was that of a managing agent in respect of the Property. The Defendants are entitled to manage the Property and grant ASTs and obtain deposits. They were then required to account to the McFeely Brothers for the rental thereby collected less the expenses and the 5% commission.

The other vital term of this letting agency is the question of its duration. Having considered Mr Kothia’s evidence and taking into account the fact that I disbelieve him on some points I am of the view that he entered into a two year arrangement in October 2010. He did that because he wanted the arrangement in particular to cover the Olympic period. I therefore conclude that the letting agreement runs until 31^st October 2012.

That agreement was created before the Receivers were appointed and is binding on them as they derive title via the McFeely Brothers.

It follows from that that the termination notices relied upon by the Receivers had not been effective to terminate the letting agency.

However acknowledging the existence of such a letting agency does not necessarily mean that the Defendants should be allowed to operate it until 31^st October 2012. I will deal with this below but in my view there are considerable reasons why they should not be allowed to continue to operate the letting arrangement until 31^st October 2012.

The Receivers contend that the Lease is in any event void because it had been signed by Thomas McFeely on behalf of Ashwood. He is not an officer of Ashwood and there is nothing to suggest he had authority to bind Ashwood.

On 16^th January 2012 SNR Denton the Receivers’ solicitors wrote to Pam Matthews. After setting out the appointment of the Receivers and the title being held by the McFeely Brothers for Ashwood they referred to the Lease. They asked questions of Mrs Matthews (who is a director of Ashwood) concerning the Lease and Ashwood’s role in it. She replied by email to the Receivers’ solicitors on 31^st January 2012 confirming that the directors of Ashwood did not execute a Lease on behalf of Ashwood and that Thomas McFeely is not a director of Ashwood. On being informed of the proceedings Mrs Matthews sent a further email on 31^st January 2012 saying that she confirms that Ashwood did not oppose the making of the order detailed in the letter and did not wish to intervene or be represented in the proceedings. This was stated to be because Ashwood is the beneficial owner and not the legal owner of the Property and is unable to influence the outcome.

On that basis the Receivers contend that the Lease in any event purportedly executed on behalf of Ashwood is in any event void.

Not to be outdone the Defendants produced a letter signed by Mrs Matthews on Ashwood notepaper dated 14^th March 2012 addressed to “Thomas”. That letter after setting out that she is the director of the beneficiary company under the declaration of trust dated 21^st December 2006 declared by the McFeely Brothers over the Property. The letter then says:-

“We understand that a Lease was entered into over the Property forming the assets of the trust by Thomas McFeely. From the information that we have available, Mr McFeely has entered into the Lease, and has thus dealt with the assets of the trust, with our best interests in mind as he is required to do as a trustee. We have never been given cause to believe that the trustees were not fulfilling their duties by acting in our best interests.”

The letter is very Delphic. It totally fails to deal with her earlier emails and the suggestion that the Lease was not binding.

Neither party called Mrs Matthews. The Receivers made a decision on legal advice and Mr Trace QC outlined in detail the difficulties the Receivers would have in procuring Mrs Matthew to attend as a witness. A witness summons would have to be issued out of this court and the Receivers would then need to seek the assistance of the Isle of Man Court to enforce that order in the Isle of Man. There is no certainty that Mrs Matthews would actually have complied.

It seems to me that the Receivers have provided a justified reason as to why they cannot procure Mrs Matthews’ attendance.

By way of contrast the Defendants have not provided any explanation as to why they could not procure Mrs Matthews’ attendance. It is clear she is closely linked with all these matters; she acts on behalf of Ashwood but is mindful apparently of the role of the McFeely Brothers.

In terms of legal analysis of course the burden of establishing that the Lease was void is on the Receivers. However the documentation they have adduced and the simple fact that Mr Thomas McFeely is not an officer of Ashwood raises prima facie evidence to discharge the legal burden which shifts the evidential burden onto the Defendants to rebut that evidence. They have not done so with any credible evidence. I reject the letter dated 14^th March 2012 from Mrs Matthews and I give it no weight whatsoever. Further I determine that the reason why Mrs Matthews has not been called by the Defendants is because she would not support the case put forward by the Defendants. This is an attempt to confuse matters and put up a smokescreen in my view.

I therefore conclude in the alternative that the Receivers have established that the Lease is void.

Whatever the inadequacies of the documentation had there been a genuine Lease executed by Ashwood instead of the McFeely Brothers I would have held that the McFeely Brothers and thus the Receivers would have been estopped from denying the existence of such a Lease. The execution of the document by Thomas McFeely, the assent by Conal McFeely to the arrangements, the acquiescence of granting ASTs and the collection of rent by the Defendants and the receipt of those rents would in my view have estopped the McFeely Brothers from denying that the Defendants had a Lease of the Property. That does not however arise because I am firmly of the view as set out above the true relationship between the parties is that of owner and managing agent.

It follows also that because of that finding I do not accept that the Defendants would have occupied the Property under a tenancy at will ripening into a 2 year term by the payment of rent.

There are a number of reasons for this. First as I have said I have determined that the true relationship is that of managing agent so no question of Lease can arise. Second I reject the evidence that any rent at all has been paid by the Defendants. Therefore there is no periodical payment of rent that can ripen any tenancy at will into a periodic or fixed term tenancy. There is no evidence to support it for the reasons I have set out above.

I therefore conclude that the Lease was a sham alternatively void and that the true relationship between the Defendants and the McFeely Brothers was that of a managing agent whereby they were entitled to manage the Property until 31^st October 2012 and were entitled to collect the rents in respect of the ASTs that they had granted but that they had to account for them to the McFeely Brothers after deducting any expenses and 5% commission.

The Receivers put the Defendants and in particular Mr Kothia on notice in December 2011 and at the latest January 2012 that they required all rents to be accounted for to them and not to the McFeely Brothers. Whatever the relationship the Defendants contended they had with the McFeely Brothers the appointment of the Receivers meant that any monies that were due to be paid to the McFeely Brothers under that arrangement had to be paid to the Receivers and not the McFeely Brothers. They could of course have challenged the Receivership but there has been no challenge to the Receivership. The Defendants were put on notice very quickly of their obligation to pay rents they were collecting to the Receivers rather than the McFeely Brothers. As no agreement could be reached on this the Receivers issued an application on notice dated 8^th March 2012 returnable on 14^th March 2012 seeking protection as regards lettings collections and receipt of rents. The Defendants must have known that absent any challenge to the Receivership any monies that they would have formerly paid to the McFeely Brothers they ought now to pay to the Receivers.

The hearing was heard before Warren J on 14^th March 2012 and he granted injunctive relief over 21^st March 2012 when His Honour Judge Mackie QC continued the injunctive relief and directed the trial.

In the directions for an expedited trial the parties were required to give standard disclosure by 5^th April 2012. Despite that the Defendants failed to produce any bank statements relating to the collection and payment of rents until the middle of the trial. That was a flagrant breach of the order of 21^st March 2012 and an examination of bank statements once again shows why this happened. The bank statements revealed the payment of £120,000 by cheque to Mr Thomas McFeely the day before the hearing before Mr Justice Warren. On being cross examined about this Mr Kothia said the payment was “regrettable” which is a serious understatement. It is true that there was on 13^th March 2012 no order which bound the Defendants but absent a challenge it was inevitable an order would be and was made the next day. He eventually tried to explain it by saying that he was under pressure by the McFeely Brothers. This demonstrates why the Defendants cannot be trusted to collect any further rents or have any role in managing the Property until the end of their agency on 31^st October 2012.

Those monies should have been paid to the Receivers because the true role of the Defendants as I have said is that of managing agents and they have a duty to account for receipts after deductions of expenses and their commission. The payment of £120,000 to Mr Thomas McFeely was an improper payment and it must be repaid to the Receivers by the Defendants. In addition during the course of the trial Mr Kothia accepted that the Defendants had not properly accounted to the Receivers pursuant to the orders of the Court. He suggested that he figure was some £4,000. The Receivers do not necessarily accept that as the correct figure and the Defendants will have to account for the payments that they have received since the making of the orders.

As I have determined above the Defendants had a management agreement from the McFeely Brothers. Equally that agreement predates the receivership an is accordingly binding on the Receivers. The question arises as to whether or not I ought to grant in effect specific performance of that managing agreement until 31^st October 2012.

I have firmly concluded that in exercise of my discretion I should not grant the Defendants this relief. I accept that the Courts have in exceptional circumstances granted specific performance for a short period see for example Verrall v Yarmouth Borough Council [1981] QB 202. However there are other factors which militate against granting relief.

It will inevitably if granted put the Receivers and the Defendants in a position of having to work with each other. That is a relationship the nature of which the Court would not order by way of specific performance. It is akin to a situation of master and servant and involves a personal service see Snell “Principles of Equity” at paragraph 17-013 to 17-104.

In addition I do not think the Defendants can be trusted to operate this relationship. They are plainly in thrall to the McFeely Brothers. That thralldom is to such an extent that they flagrantly paid £120,000 to Mr Thomas McFeely when they knew that it ought to have been paid to the Receivers. They have failed to provide proper disclosure in this action to hide that payment in particular and they have failed to account properly in accordance with previous court orders and to provide proper disclosure. I also refer to the difficulties the Receivers had in obtaining information from them and regulating what was going on at the Property. For all of those factual reasons it is inappropriate that they are allowed to continue having any role in the management of the Property.

The question that then arises is to what would they be entitled? I will await further submissions on that when working the order out. It seems to me (subject to what might be said) is that the Defendants should have a 5% commission on all lettings achieved by the Receivers until 31^st October 2012. That 5 % however should be payable after the deduction of costs the Receivers have incurred in managing the Property, the lettings and any other matters arising out of their operation of the lettings in the Property. That is only appropriate in my view because the Defendants would have had to incur those expenses as part of the arrangement and in any event the incurring of those expenses is necessary because of the way in which the Defendants have conducted themselves as demonstrated in this litigation.

The form of the order will have to be settled after submissions when I hand this judgment down. Any order should address the operation of set off as regards monies passing between the parties to the litigation.