Ridgewood Properties Group Ltd & Ors v Valero Energy Ltd

This is the trial of a preliminary issue as to liability only in an action (or more accurately two consolidated actions- the issue is similar in both) for damages for breach of ten different agreements known as “the airspace agreements”, all of which were entered into (in three phases, the phase I and II agreements being subject to supplemental agreements which (among other things) extended the termination date) between 23 March 2001 and 30 July 2004 and all of which are contracts and not deeds.

The Phase I agreements comprised an agreement to grant a building lease but completion of the building lease was conditional upon certain matters relating to the grant of satisfactory planning permission, a defined term. On completion of the development, the freehold was to be transferred with a leaseback of the forecourt and shop. The Phase II and III agreements were in the form of options to take a building lease, again subject to conditions. The Phase I and Phase II agreements were all subject to supplemental agreements.

All of the airspace agreements were entered into between the first claimant (“Ridgewood”), and the defendant (then known as Texaco Limited and for present purposes called “Texaco”) but the benefit of five of them has, as a result of a joint venture agreement, been assigned by Ridgewood to the second to sixth claimants.

The claimants were represented at this hearing by Mr Pymont QC leading Mr Rosenthal and Texaco was represented by Mr Fetherstonhaugh QC leading Mr Robertson. The only live witness was Mr Norman Lynch, a consultant to Ridgewood and its subsidiaries.

All the properties were filling stations operated by Texaco. The plan was to build flats and offices above and around each filling station and shop; hence the name airspace agreements. In brief, Ridgewood was to apply for planning permission to redevelop the relevant site and once a final satisfactory planning permission had been granted, (permission had to be obtained before a date specified in each case) it would develop the site pursuant to a building lease. On completion of the development, the building lease was to be surrendered (or, in the case of the Phase I agreements, merged) and the first claimant was to acquire a freehold or long leasehold interest in the site subject to Texaco retaining or being granted an interest to enable it to continue to operate the filling station and shop on the site. Each of the airspace agreements has annexed to it the required form of building lease and of the grant back to Texaco.

The principal basis for the claim is that on 21 June 2005 Texaco transferred its interest in all of the properties to two transferees, Azure Properties Limited (“Azure”), a company formed for the purchase connected to Somerfield Stores Limited (“Somerfield”), and Somerfield itself. Two only went to Somerfield, the properties known as “Hove” and “Blue Star”, of which Texaco held long leasehold titles, and the others, of which Texaco held the freehold, “Crouch End”, “Clerkenwell, “St Katherine’s”, “Caledonian Road”, “Lansdowne”, “Forty Avenue”, “The Dome” and “Hendon Way” went to Azure, although Azure proposed to lease them on to Somerfield. The contract (following a Memorandum of Understanding) was dated 28 April 2005 but discussions were held from at least 18 March 2004.

The claimants allege that the effect of the sale was that Texaco was in breach of the agreements, put it out of its power to perform them, renouncing them, rendering them impossible to perform and committing a repudiatory breach. The claimants now also claim damages for breach of contract but there is a dispute as to whether this is open to them on their pleaded case.

The claimants rely on an alleged implied term that Texaco would not dispose of its interest in the relevant property subject to each airspace agreement until that agreement had been terminated in accordance with its terms. It is alleged that such a term falls to be implied to give business efficacy to the agreements and/or as the obvious intention of the parties. Texaco accepts that it was bound not to do anything which would put it out of its power to perform the airspace agreements but says that the implied terms go no further than that. In particular Texaco denies that it was not permitted to assign the properties by virtue of any term, express or implied. It maintains that it remained fully able to bring about performance of the agreements by compelling Somerfield and Azure to comply with them.

In short, the claimants’ case is:

Again in brief, Texaco’s case is as follows:

Texaco sues its former solicitors, Pannone & Partners, now Pannone LLP, (“Pannone”), as Part 20 defendants in the event that, contrary to its contention, it is held liable to the claimants. The Part 20 claims were stayed by an order of Master Teverson of 28 September 2011 but Pannone was given permission to participate in this trial. Mr Ayliffe QC accordingly attended on Pannone’s behalf and made submissions. For present purposes Pannone makes common cause with Texaco.

The contract for sale dated 28 April 2005 between (among others) Texaco, Azure and Somerfield (“the Sale Agreement”) provided that each of the freehold and leasehold sites (respectively), “is sold free from encumbrances other than (a) any disclosed matters”. “Disclosed" refers to a Disclosure Letter and item 12 in the schedule to that letter includes references to the airspace agreements. Further, by the conditions set out in Schedule 7 to the Sale Agreement, the sale was made subject to the rights benefiting the properties.

Further, Clause 11.2 of each of the transfers dated 21 June 2005 (“the Transfers”) completing the Sale Agreement contained a covenant by the relevant transferee as follows:

“The Transferee covenants with the Transferor to observe and perform at all times hereafter the covenants restrictions and stipulations contained in or referred to in the Registers of Title Numbers referred to in the Schedule hereto so far as they are still subsisting and capable of taking effect and affect the properties and to indemnify the Transferor against all actions proceedings costs claims expenses and demands whatsoever in respect of any breach non-observance or non-performance of all or any of the covenants restrictions and stipulations.”

Throughout there was a pattern of reassurance by Texaco to Ridgewood as to the enforceability by the claimants of the airspace agreements against the purchasers from Texaco. Mr Lynch gave evidence that he first heard rumours of the proposed sale in February or March 2005. He contacted Mr Dixon of Texaco to ask if the rumours were correct and was assured that if the sale went ahead the claimants’ position would be protected. On 3 June 2005 Mr Lynch was told directly by Somerfield about the proposed purchase and, on telephoning Mr Dixon, was again reassured that the claimants’ interest was protected. On 9 June 2005 Mr Johnstone of the claimants’ solicitors was told by Somerfield’s solicitors of the contract between Somerfield, Azure and Texaco and the scheduled date for completion.

On 25 July 2005, after the Transfers, Mr Bailey, Somerfield’s internal legal adviser, wrote to Mr Johnstone enquiring about the claimants’ intentions as to development of the airspace sites but reserving Somerfield’s position with regard to the “validity and enforceability” of the options.

On 8 August 2005 Mr Johnstone emailed Texaco’s solicitors asking whether Texaco had procured a covenant from Azure to honour the airspace agreements. No reply was received but on 10 August 2005 Mr Bailey sent a letter expressly contending that the options did not bind Somerfield. Mr Lynch then contacted Mr Dixon again and he again reassured him that the airspace agreements were protected.

All the airspace agreements imposed obligations on Texaco requiring it to assist Ridgewood in making and pursuing planning applications and to facilitate access. It is the claimants’ case that because on 25 November 2005 access was refused in relation to two of the sites, Blue Star and Forty Avenue, the claimants were unable to submit relevant planning applications and that planning applications generally were either not made or were withdrawn because of the terms of the Transfers and Azure’s stance generally.

It is Texaco’s case in the action that the claimants could not have obtained satisfactory planning permission in accordance with the terms of the airspace agreements. It is common ground that these are matters of causation which do not fall within the ambit of the preliminary issue I have to decide. However it is difficult to separate the issue of causation from that of the claimants’ approach to performance. On the facts it is highly relevant to the preliminary issue whether the claimants believed that they could obtain satisfactory planning permission in accordance with the terms of the airspace agreements. I am therefore dubious whether Master Teverson would have ordered a preliminary issue in the current form, omitting all causation issues, if he had appreciated this. Although I have been asked not to, and I do not, make any findings about causation, not least because the parties say that they have not come prepared to address it, I draw attention to this difficulty.

I was taken through one typical example of the agreements in each phase to examine the rights and obligations of each party. However the submissions of all counsel have been based on the assumption that similar considerations apply so that the preliminary issue stands or falls in relation to all the airspace agreements. This too creates a difficulty to which I refer below.

I should flag the point at this stage that there are various construction problems and errors in the airspace agreements. For example, in the Caledonian Road agreement, the expiry date specified is not, as also specified, 18 months from the date of the agreement. Again, the airspace agreements contain references to personal representatives of Texaco and the developer, both of which were companies and, whatever the construction of the agreements, were always likely to be companies. More importantly, there is a construction ambiguity as to when the option can be exercised under clause 2. That is an ambiguity which will have to be resolved at the damages hearing but although submissions were made in passing on the question I do not consider that it bears directly on what I have to decide. I was not asked, and I do not propose, to deal with it now.

There are other hallmarks of hasty drafting and the airspace agreements do not make easy reading. For example, in the original Phase I agreements definitions are left in which are appropriate to clauses which were struck out.

As I said, I have been encouraged to construe the airspace agreements as a whole. Clause 15 of all of them comprises a provision permitting certain assignments by Ridgewood, but in the case of the Phase I agreements only as a result of variation by supplemental agreements dated 17 December 2001. In their original form the Phase I agreements stated (although there was an apparently redundant definition of “Affiliate” and a definition of “Authorised Transferee” was excised: see below) that the agreement was personal to Ridgewood and should not be capable of assignment. There was however no express provision that the agreements should be personal to Texaco. Clause 15 provides as follows:

“15.

Restriction on assignment and severance.

15.1

This Agreement shall not be capable of assignment by the Developer other than to an Authorised Transferee.”

“Authorised Transferee” is defined as an “Affiliate” of Ridgewood (broadly a subsidiary or other associated company) or such other entity as previously approved in writing by Texaco. There is no equivalent change or restriction in relation to Texaco. There are other provisions to the effect that Texaco should not be required to grant the building lease or transfer the property in parts to anyone other than Ridgewood.

Clause 1.38 of the Phase I agreements (even in their original form) and clause 1.58 of the Phase II and III agreements provide as follows:

“Where the context so admits the expressions “Texaco” and “the Developer” includes their personal representatives and “the Developer” shall include any permitted successors in title of the Developer.”

The claimants rely on the fact that there is nothing in any of the airspace agreements which presupposes a transfer by Texaco. Thus for example Texaco’s solicitors are defined as Pannone throughout so that it is not contemplated that completion will take place anywhere other than where Texaco’s solicitors designate. However this curious reference to Pannone persists even in the building leases, where there is provision for assignees of Texaco but still their solicitors are referred to only as Pannone.

Again, Texaco is the company which is to control the planning process, enter into planning agreements, and grant access. Its consent or approval is required in a number of instances and there is no provision defining references to Texaco as references to its assignees. Mr Pymont submits that it is thus to be inferred that it was not contemplated that Texaco was to be permitted to assign, otherwise it could be argued that on an assignment it would still be Texaco’s approval which was required and this would be an absurd result.

In short, Mr Pymont submitted that as Texaco was the only person referred to on one side of the contract, whereas on the other side there are express provisions allowing for assignment and expressly saying that it was the assignee who was obliged to perform the assignor’s obligations in the event of assignment, it must follow that Texaco was not to be permitted to assign. However in the Phase I agreements there was originally, as I have said, an express prohibition only on assignment by Ridgewood and not by Texaco.

It must not however be forgotten that what is to be prohibited (by virtue of Mr Pymont’s argument) is not assignment of the airspace agreements as such but a transfer of the underlying sites. While consideration of whether or not the rights and obligations under the airspace agreements were personal or assignable is highly relevant to whether Texaco put it out of its power to perform them, the issue as to implied term is whether it is necessary and obvious that the sites should not be assignable.

It is common ground that it is appropriate to imply a term that Texaco was bound not to do anything which would prevent performance of the airspace agreements. This is, as Mr Ayliffe submitted, merely another characterisation of the principle of impossibility of performance. However the claimants go further and say that a term should be implied that Texaco is prohibited from disposing of the sites during the currency of the airspace agreements. I hope I am not doing Mr Pymont an injustice if I say that this term has now been refined so as to impose the qualification that Texaco should not effect a disposal of the sites other than one reserving to itself the ability to comply with the airspace agreements. If such a term, either absolute or in this qualified form, is to be implied, Texaco would necessarily have put it out of its power to perform: see Ogdens v. Nelson [1905] AC 109.

Texaco disputes the implication of such a wider term. It relies, first, on the express provisions of the airspace agreements. They contain no restrictions upon assignment by Texaco, although there are restrictions on assignment by Ridgewood. The mere fact that Ridgewood is defined to include permitted successors in title is thus said to be neutral. The claimants’ answer to this is that the fact that there was no contractual restriction preventing assignment is beside the point; if Texaco did assign (at any rate without a reservation), it would be putting it out of its power to perform. The claimants rely on the rejection of the argument in Ogdens (above) at 111.

In Omnium d’Enterprises v. Sutherland [1919] 2 KB 618 the defendant had chartered a steam ship to the plaintiff which it then sold free from the charter engagements before the date for performance. It was held to be a clear case of repudiation. It appeared from FratelliSorrentino v. Buerger [1915] 1 KB 307 that such a sale might not be a breach of the charterparty if (as was not of course done in the present case) the vendor retained the right to perform its obligations. In Omnium Bankes LJ said (at 622) that, by contrast,

“It seems to me plain from the judgments delivered by the members of the Court of Appeal [in Fratelli] that they were all of opinion that a sale of the ship and the parting with the possession of it, even with a term imposing upon the purchaser the obligation of performing the charterparty, would have been a repudiation of the contract.”

The facts of Synge v. Synge [1894] 1 QB 466 (where the defendant put it out of his power to leave certain property to his wife by will as promised when he conveyed the property to his daughters during his lifetime) and of Ogdens (where tobacco merchants had agreed to supply a retailer with goods and the retailer had agreed to sell them to the exclusion of other suppliers on terms of a shared bonus) are distinguishable in that the contracts in those cases were plainly personal to the obligors. The question is whether the obligation is one which the contracting party alone has undertaken to fulfil. Put another way, if the airspace agreements are personal to Texaco they must retain the ability to perform their obligations thereunder: see Fratelli at p. 371.

It is said by Mr Fetherstonhaugh that there are provisions in the airspace agreements which expressly contemplate assignment by Texaco. First, there is provision for the grant of a building lease to the first claimant, surrender of that lease on completion of development and a grant of a long lease to the first claimant. The definition of Texaco in the building lease includes, “the person or persons from time to time entitled to possession of the Premises when this Lease comes to an end”. Again, the airspace agreements contain a draft of an indemnity to be contained in the building lease and the ultimate lease which refers to Texaco and “its successors in title”, demonstrating that Texaco should not be a necessary party to the building lease or the ultimate lease. The building lease provides that the defendant developer must not unreasonably withhold consent to a request by Texaco under s. 8 of the Landlord and Tenant (Covenants) Act 1995 for release of Texaco from its covenants. Further, all the airspace agreements contain entire agreement clauses, namely clauses providing that they contain the entire agreement between the parties.

However Mr Pymont’s submission is that the claimants do not allege that Texaco is unable to assign the property at any time during the currency of the building lease, but only that it cannot do so until such a lease is granted. The riposte to this is simply that if such an interpretation permits the meaning of ‘Texaco’ to include its successors for the purposes of the further transaction, why should this not apply equally to the previous stages of the transaction? There is nothing special about Texaco being the grantor; if it is unsurprising, as Mr Pymont submitted, that the building lease should enure through changes of ownership it is equally unsurprising that this should apply also to the airspace agreements themselves.

Mr Fetherstonhaugh relies on other matters also. He submits that there is no justification for implying a term that Texaco should sterilise its freedom to deal with the property for the periods covered by the airspace agreements both as originally drafted and of the further periods of agreed extensions in the case of six of the properties. He says there is no necessity to imply such a wide term in circumstances in which the claimants were in any event adequately protected and, moreover, the claimants did not suggest at the time that they were inadequately protected but, on the contrary, continued to progress their planning applications.

Mr Ayliffe submitted that there are indications in the Phase III airspace agreements that assignment of the underlying sites would be permitted. In these agreements there is a consent by Texaco of registration by Ridgewood to protect the agreement under the Land Registration Act, (thus showing that the parties did consider protection in the event of an assignment) not, as would otherwise have been expected, consent to a restriction to be entered against the title preventing assignment without Ridgewood’s prior agreement.

Texaco relies on the principles for implication of terms as restated by the Privy Council in Attorney General of Belize v. Belize Telecom Limited [2009] 1 WLR 1988, and particularly on the statement of Lord Hoffmann at [17]:

“The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.”

In my view there is nothing in the airspace agreements on their true construction to prohibit assignment by Texaco and I cannot see a proper basis for implying a term to that effect. None of the cases relied on by Mr Pymont (which also included Wright v. Dean [1948] Ch 686 and Goffin v. Houlder (1921) 90 LJ Ch 488) to my mind drives the conclusion that there is an implied term prohibiting transfer.

The obligations could have been transferred to Somerfield and Azure and the question is whether in fact they were for, if not, Texaco was in breach of the admitted implied term not to do anything to prevent performance of the airspace agreements.

The real question is thus whether by selling the properties in the way that it did Texaco put it out of its power to perform the airspace agreements. If so, it does not much matter whether a term is implied in the wider or narrower form since assignment would necessarily result in impossibility of performance. The answer to this question turns on whether the burden of positive obligations could be imposed by Texaco on its transferees.

In his skeleton argument, Mr Fetherstonhaugh relied on the principle that where taking a benefit is conditional upon the discharge by the covenantee of reciprocal obligations, the burden of the obligations passes to the transferee (see Rhone v. Stephens [1994] 2 AC 31 and Thamesmead Town Ltd v. Allotey [1998] 3 EGLR 97) and that this applied in the case of the transfers to Somerfield and Azure. However, Mr Fetherstonhaugh did not renew that point in oral submissions and both he and Mr Ayliffe seemed to accept that the authorities show that the burden must be attached to the benefit that is being enjoyed. There is no general principle requiring a party deriving benefit from a document to accept any burden in the same conveyance. Thus the thrust of the argument was under the next two heads.

Texaco does not rely on s. 78 and s. 79 of the Law of Property Act 1925 because they apply to restrictive covenants only. Instead it relies in relation to positive covenants on the Landlord and Tenant (Covenants) Act 1995 (“the 1995 Act”), which by s. 3 annexes the benefit and burden of “all landlord and tenant covenants of a tenancy”, to each and every part of the premises and which provides that they shall pass on assignment of the reversion and of the tenancy. A landlord or tenant covenant is respectively defined by s. 28 as a covenant falling to be complied with by the landlord or tenant of premises demised by the tenancy.

By s. 2 of the 1995 Act, the Act applies to a landlord covenant or a tenant covenant of a tenancy whether or not the covenant has reference to the subject matter of the tenancy and whether the covenant is express, implied or imposed by law. Importantly, by s. 28 (1) “tenancy” includes an agreement for a tenancy.

By s. 1 of the 1995 Act, s. 3 applies only to “new tenancies”. By s. 1 (3) a tenancy is a new tenancy if it is granted on or after the date when the 1995 Act came into force otherwise than in pursuance of an agreement entered into before that date. An important provision (at any rate in relation to the Phase II and III agreements) is s. 1 (6), which provides as follows:

“Where a tenancy granted on or after the date on which this Act comes into force is so granted in pursuance of an option granted before that date, the tenancy shall be regarded for the purposes of subsection (3) as granted in pursuance of an agreement entered into before that date (and accordingly not a new tenancy), whether or not the option was exercised before that date.”

Mr Fetherstonhaugh relies on the decision of Hoffmann J in Spiro v. Glencrown [1991] Ch 537, dealing with the provisions of s. 2 of the Law of Property (Miscellaneous Provisions) Act 1989. In that case Hoffmann J held that the Act attaches to the contract creating the option rather than the notice exercising the option. He said, at 541-2,

“If the ‘contract for the sale…of an interest in land’ was for the purposes of s. 2 (1) the agreement by which the option was granted, there is no difficulty…But the letter which exercised the option was of course signed only on behalf of the purchaser. If the contract was made by this document, it did not comply with section 2…

Apart from authority, it seems to me plain enough that section 2 was intended to apply to the agreement which created the option and not to the notice by which it was exercised. Section 2, which replaced section 40 of the Law of Property Act 1925, was intended to prevent disputes over whether the parties had entered into a binding agreement or over what terms they had agreed. It prescribes the formalities for recording their mutual consent. But only the grant of the option depends upon consent. The exercise of the option is a unilateral act….There seems no conceivable reason why the legislature should have required this additional formality.”

Mr Fetherstonhaugh submitted that as a matter of principle the same policy reasons apply. What is it, he asked rhetorically, about an option which should make it any different to any other agreement creating an interest in land? Section 28 (1) shows that the 1995 Act is intended to apply equally to tenancies and agreements for a tenancy, so what policy reason could there be for treating options under agreements, which if granted would lead to tenancies, any differently to agreements for tenancy? He submitted that exactly the same policy argument underpins both. He pointed out that there is a lacuna: if an agreement creating the option is not within the terms of the 1995 Act none of the protective systems would apply to protect the option until such time as notice is given exercising the option.

However, I do not think that the same policy reasons do apply. The Law of Property (Miscellaneous Provisions) Act 1989 was enacted to prevent disputes about whether there was a binding agreement between the parties. It was therefore logical to opine that there was no reason why Parliament should require an additional formality. In the case of the 1995 Act, it is just as logical to say that it was intended only to apply to the running of covenants in relationships of landlord and tenant, including relationships in equity (the agreement for a lease). As Mr Pymont pointed out, the history of this area of the law since 1540 has been to extend the running of covenants from covenants entered into by deed only, to written tenancies, and to performable agreements for lease. There is no necessary justification for extending the principle to options which, as Hoffmann J said, are not strictly speaking either offers or conditional contracts, although there are ways in which they resemble both.

Section 1 (6) of the 1995 Act expressly refers to options. Mr Fetherstonhaugh said that it would be a very odd construction to read this subsection as treating the date as significant but not treating an option agreement as an agreement for a tenancy. However this ignores two matters.

First, the fact that by s. 28 a tenancy is defined (“unless the context otherwise requires”) to include an agreement for a tenancy. If this definition applies, in other words if the context does not otherwise require, the expression “a tenancy” in s. 1 (6), in the expression “a tenancy…granted in pursuance of an option”, necessarily excludes the option itself from being a tenancy or an agreement for a tenancy. This is in accordance with Hoffmann J’s analysis of an option in Spiro at 543, namely a process in which the bilateral contract does not arise until exercise of the option; until that time the option may be characterised as an irrevocable offer in favour of the purchaser. It seems to me that the whole thrust of s. 1 (6) is to include within the scope of the 1995 Act tenancies which are actually granted, and although this includes an agreement for a tenancy this is because such an agreement has the effect of a tenancy.

I think in the course of argument Mr Fetherstonhaugh came round to the idea that in s. 1 (6) of the 1995 Act, ‘tenancy’ means the actual grant of a tenancy so that the context yields for the purposes of s. 28 (1) and ‘tenancy’ cannot include ‘agreement for a tenancy’. However his point is that the agreement with which s. 1 (6) is designed to deal is the agreement creating the option which is therefore treated as an agreement for a tenancy.

However, there is also the fact that the effect of s. 1 (6) of the 1995 Act is expressly said to be limited “for the purposes of subsection (3)”, that is to say, for the purposes of identifying whether or not the 1995 Act applies to a tenancy granted in pursuance of an option. The object is to ensure that the 1995 Act is not to have retrospective effect even in cases where an option is exercised after the date of commencement. If that is correct, s. 1 (6) is neutral in the present case.

In my judgment the 1995 Act does not apply to option agreements in which the option is not exercised (the Phase II and III agreements) and therefore the burden of the personal obligations undertaken by Texaco could not have passed automatically to purchasers from Texaco on an assignment.

That leaves the Phase I agreements which are conditional agreements in the strict sense. The arguments about these agreements were not detailed and as I have said I feel some difficulty in lumping all the airspace agreements together. Mr Fetherstonhaugh simply said that they were plainly within the expression ‘agreement for a tenancy’ for the purposes of s. 28 (1) of the 1995 Act. Mr Pymont merely said that once it is recognised that options are outside the Act conditional agreements must, ‘by parity of reasoning’, be outside as well.

As I understand it, his argument is that an agreement for a tenancy does not comprise an agreement where something has to happen before there is an enforceable agreement to grant the tenancy in the first place.

The 1995 Act was intended to abolish the distinction between covenants which touch and concern the land and those which do not, ensuring that the parties to a tenancy are both bound by and benefit from all the obligations in the lease or tenancy agreement and also of course abolishing the anomalous position of original tenants who remain liable by privity of contract even though they may have long since abandoned all interest in the premises. I assume the argument is that the 1995 Act should not apply to covenants which relate to matters prior to the grant of the tenancy and which cannot fairly be described as landlord and tenant covenants at all: see s. 2 of the 1995 Act. Although s. 2 (1) (a) provides that the Act applies “whether or not the covenant has reference to the subject matter of the tenancy”, this provision merely avoids the necessity of distinguishing between certain types of covenant.

I agree with Mr Pymont. The circumstances of the 1995 Act are different from the question of whether the benefit of an option is assignable, referred to by Jenkins LJ in Griffith v. Pelton [1958] Ch 205 at 225 (cited by Hoffmann J in Spiro at 541) where he characterised an option, even one with conditions attached to its exercise, as a conditional contract for the grant of an interest in land. It is true that the grant of an option to buy land confers an interest in that land on the grantee (see London & South Western Rly v. Gomm (1882) 20 Ch D 562, also cited in Spiro (at 543). Conditions precedent to the grant of a lease are not in my judgment covenants which are part of the agreement for a tenancy nor are they comprised within landlord or tenant covenants within the meaning of s. 28 (1) of the 1995 Act.

Accordingly it is my view that the provisions of the 1995 Act do not apply to any of the airspace agreements.

That however does not dispose of the issue whether the airspace agreements could nevertheless be performed after the sales by Texaco.

It is a main plank of Texaco’s argument that, because of the terms of the Sale Agreements and the Transfers completing it, Somerfield and Azure were bound, at any rate to Texaco, to perform the airspace agreements. Had the claimants requested Texaco to do so (and it is common ground that they did not) Texaco would have had the opportunity to enforce those obligations.

It was plainly Texaco’s intention that Somerfield and Azure should take over responsibility for observing and performing the terms of the airspace agreements. In the case of Somerfield, its intention also is confirmed by a pre-emption agreement. Further, the claimants registered (save in two cases) notices against the properties providing comfort to Texaco that the transferees could not dispose of the Properties free of the airspace agreements.

As Mr Fetherstonhaugh and Mr Ayliffe pointed out, Texaco had rights in any event of indemnity against Somerfield and Azure which could have been used to bring pressure on them to perform the airspace agreements.

The argument is therefore that there was no breach and no impossibility of performance because:

Mr Pymont submitted to the contrary that the effect of the clauses that were included in the Sale Agreement and in the Transfers was not to impose an obligation on Somerfield and Azure to comply with the airspace agreements.

Parts 1 and 2 of Schedule 7 to the Sale Agreement provided that the sale of the freehold and leasehold sites respectively was free from incumbrances other than certain disclosed matters.

In Lyus v. Prowsa [1982] 1 WLR 1044 a sale was effected “subject to and with the benefit of” the plaintiff’s contract. That phrase was held to create a constructive trust, conferring rights on the plaintiff as against the defendant. Dillon J said (at p.1051),

“In the factual matrix [of Binions v. Evans [1972] Ch 359] it was necessary for the protection of the vendors to interpret the agreement between the vendors and the purchasers as conferring rights on the defendant as against the purchasers, and this was done through the medium, as Lord Denning MR put it, of imposing a constructive trust on the purchasers for the defendant’s benefit.

By contrast, there are many cases in which land is expressly conveyed subject to possible incumbrances when there is no thought at all of conferring any fresh rights on third parties who may be entitled to the benefit of the incumbrances. The land is expressed to be sold subject to incumbrances to satisfy the vendor’s duty to disclose all possible incumbrances known to him, and to protect the vendor against any possible claim by the purchaser if a third party establishes an overriding right to the benefit of the incumbrances against the purchaser. So, for instance, land may be contracted to be sold and may be expressed to be conveyed subject to the restrictive covenants contained in a conveyance some 60 or 90 years old. No one would suggest that by accepting such a form of contract or conveyance a purchaser is assuming a new liability in favour of third parties to observe the covenants if there was for any reason before the contract or conveyance no one who could make out a title as against the purchaser to the benefit of the covenants.”

In that case Dillon J concluded on the evidence that the clause in question, clause 11, could not have been inserted solely for the protection of the vendor (as was another clause in common form, clause 7, setting out other matters subject to which the property was sold) and thus it was a stipulation of the bargain between the vendor and the defendant that it would give effect to the contract.

In the present case there is no express stipulation of a sale subject to but with the benefit of the airspace agreements which can be compared to clause 11, but only a clause in standard conveyancing form similar to clause 7 of the agreement in Lyus.

Texaco also relies on the covenants in the Transfers to Somerfield and Azure, to the effect that the transferee will,

“observe and perform at all times hereafter the covenants restrictions and stipulations contained or referred to in the Registers of the Title Numbers referred to in the Schedule hereto so far as they are still subsisting and capable of taking effect and affect the properties and to indemnify the Transferor against all actions proceedings costs claims expenses and demands whatsoever in respect of any breach non-observance or non-performance of all or any of the covenants restrictions and stipulations”

In Harris v. Boots, Cash Chemists (Southern), Ltd [1904] 2 Ch 376, the question of law arose for decision whether an assignor of a lease, the original lessee, was entitled to enforce against his assignee by way of specific performance covenants contained in the lease, where the covenant in the assignment was to “perform and observe” the covenants and conditions contained in the lease and to indemnify the assignor against all claims and demands on account of the same.

In that case Warrington J said 381-2,

“…what, under the circumstances and having regard to the relative position of the lessor and the original lessee after the assignment [and it was a strange case as the lessor was not concerned to enforce the covenants], is the true meaning and effect of the covenant contained in the assignment, because it is that covenant which is sued upon, and not the covenant in the original lease….it seems to me that, when you really consider what it is that in such a case the assignor is insisting upon, it is indemnity and indemnity alone. If I were to hold that the covenant is intended to require the assignee, as between himself and the original lessee, specifically to perform every covenant in the lease, I must go to this extent. I must say that it is quite immaterial whether the lessor objects, or whether he has even waived enforcing the covenant. In that view it is an independent covenant entered into by the assignee with the lessee, and I have nothing to do with anything else. Now it seems to me that I cannot so hold. I think the true object of the covenant entered into on the assignment of the lease is to indemnify and protect the original lessee against breaches of covenant contained in the lease under which he holds.”

In so holding, Warrington J applied a dictum of Vaughan Williams LJ in In Re Poole and Clarke’s Contract [1904] 2 Ch 173 at 177 to the effect that such a covenant should receive the same construction as if it had actually been prefaced with the statement that the object of the covenant was to afford to the assignor an indemnity in respect of the covenants, but not further or otherwise. Warrington J decided that there was “a considerable difference” between the case where the covenants in the lease were expressly inserted by way of repetition in the assignment and a covenant simply to perform and observe the covenants contained in the lease. He therefore rejected the argument that a covenant in the latter form was “equivalent to a covenant over again by the assignee with the lessee in the words of the original covenants of the lease.”

Mr Fetherstonhaugh submitted that it would be absurd to apply the facts of Boots to the facts of the present case. He distinguished the decision on the ground that in a landlord and tenant case it was sensible to limit the impact to avoid the effect of entitling a former tenant to make the current tenant perform covenants which the lessor had not apparently asked him to perform. However he also took the point that in the present case the covenant of indemnity was severable from the covenant to observe and perform. The problem with that submission is that the covenant was similar to that in Boots and Warrington J expressly rejected the argument that the covenant of indemnity was a separate and severable one. To place an assignee under a specific obligation to the assignor to perform, going beyond mere indemnity, there had to be a clear covenant in unequivocal terms.

Mr Ayliffe distinguished Boots on the basis that in Ayling v. Wade [1961] 2 QB 228 a landlord’s covenants in an underlease to “observe” the covenants in the head lease obliged the covenantor to perform and was not merely a covenant of indemnity. The ratio was that the undertenant has an interest in their performance and Mr Ayliffe submitted that the same is the position in the present case.

However in Ayling, Danckwerts LJ (with whom the other members of the Court of Appeal agreed) distinguished the case of assignment from that of an underlease on the ground that once the premises had been assigned the assignor had no estate in the property and was not interested in anything save the possibility of being sued under his original obligations.

Thus as a question of law I see no valid distinction between Boots and the present case, save that Boots was about an assignment of a leasehold interest. I agree with Mr Pymont that the clauses in the assignments are insufficient to render the covenants in the airspace agreements enforceable by Texaco against Azure and Somerfield, let alone enforceable directly by the claimants.

However I flag the point that if the claimants had taken the matter up with Texaco at the time it could have called on Azure’s and Somerfield’s indemnity and Azure and Somerfield might have taken a policy decision to honour the airspace agreements instead. Mr Fetherstonhaugh and Mr Ayliffe say that in real terms there is no impossibility; the claimants did not call upon Texaco to perform until after expiry of the period in which it was open to them to seek planning permission. If they had done so it was submitted that it is likely that pressure would have brought to bear on Somerfield and Azure such that (perhaps taking a view on causation) they would in fact have performed. Somerfield and Azure are not parties to these proceedings and I do not say anything further on that issue.

It is therefore my view that Texaco, in assigning to Azure and Somerfield, did put it out of its power to comply with its personal obligations under the airspace agreements. That is not however the end of the matter.

The claimants’ claim (or at any rate principal claim) is for repudiatory breach which is alleged to have been accepted and it is alleged that either their election to accept was communicated to Texaco or no communication was necessary in the circumstances.

I was taken to several passages in Chitty on Contracts (31^st Edition) Vol 1 Chapter 24 summarising the authorities on discharge by breach. I would quote the following:

“A middle ground. An innocent party, faced by a repudiatory breach, is …given a choice: he can either treat the contract as continuing (“affirmation” of the contract”) or he can bring it to an end (“acceptance of the repudiation”). He must “elect” or choose between these options. Further, it is sometimes said that there is no other option open to the innocent party; that is to say, there is no “middle way” or “third choice”. This is true in the sense that there is no

“…third choice, as a sort of via media, to affirm the contract and yet be absolved from tendering further performance unless and until [the breaching party] gives reasonable notice that he is once again able and willing to perform.” (Fercometal SARL v. Mediterranean Shipping Co SA [1989] AC 788, 801.)

But the proposition that there is no middle way can be over-stated. There is a sense in which there is a middle way open to the innocent party in that he is given a period of time in which to make up his mind whether he is going to affirm the contract or terminate. This point was well-expressed by Rix LJ in Stocznia Gdanska SA v. Latvian Shipping Co (No 2) [2002] EWCA Civ 889 at [87] when he stated:

“In my judgment, there is of course a middle ground between acceptance of repudiation and affirmation of the contract, and that is the period when the innocent party is making up his mind what to do. If he does nothing for too long, there may come a time when the law will treat him as having affirmed. If he maintains the contract in being for the moment, while reserving his right to treat it as repudiated if his contract partner persists in his repudiation, then he has not yet elected. …”

The length of the period given to the innocent party in order to make up his mind will very much depend upon the facts of the case. The period may not be a long one because a party who does nothing for too long may be held to have affirmed the contract. The length of time will also depend upon the time at which the innocent party’s obligations fall due for performance. A contract remains in force until it has been terminated for breach so that a contracting party who has not elected to terminate the contract remains bound to perform his obligations unless the effect of the other party’s breach is to prevent performance of the innocent party’s obligations becoming due.

Affirmation. Where the innocent party, being entitled to choose whether to treat the contract as continuing or to accept the repudiation and treat himself as discharged, elects to treat the contract as continuing, he is usually said to have “affirmed” the contract. He will not be held to have elected to affirm the contract unless, first, he has knowledge of the facts giving rise to the breach, and, secondly, he has knowledge of his legal right to choose, between the alternatives open to him…

Effect of affirmation. Where the innocent party, being entitled to treat himself as discharged by the other’s breach, nevertheless elects to affirm the continued existence of the contract, he does not thereby necessarily relinquish his claim for damages for any loss sustained as a result of the breach. Further, he may insist on holding the other party to the bargain and continue to tender due performance on his part. [White and Carter (Councils) v. McGregor [1962] AC 413.]”

So did the claimants treat the airspace agreements as at an end? Did they accept repudiation? Were they still making up their minds? Or did they affirm?

The claimants knew about a potential breach when they received Somerfield’s letter of 25 July 2005 as this states unequivocally that there had been a sale of some, at any rate, of the properties. On 8 August 2005 Mr Dixon told Mr Lynch in a telephone call that most of the properties had been sold to Azure. Mr Lynch accepted in cross-examination that from 10 August 2005 he knew that both Azure and Somerfield were asserting that they were not bound by the airspace agreements. It is evident from an email from the claimants’ solicitor, Mr Johnstone, of 8 August 2005 that the allegation was that the airspace agreements were personal to Texaco. It is also evident from that email that Mr Johnstone advised that this might be the case if the sale agreements did not contain express covenants to honour the relevant site option. That point was expressly made by Somerfield in a letter to the claimants’ solicitors on 10 August 2005:

“…because, in the transfer of these sites to Somerfield, there was no express provision made for Somerfield to assume a direct contractual obligation to Ridgewood under the airspace options; the contractual burden of these options did not devolve on Somerfield. As a result we take the view that they do not bind Somerfield.”

Mr Lynch said that he was concerned about this and despite Mr Dixon’s assurances remained concerned. Mr Lynch therefore asked Mr Johnstone to “insist and establish whether our position had been protected” and Mr Johnstone duly emailed Pannone in accordance with these instructions. Pannone did not reply. Mr Lynch then said that he took advice on how to proceed, but the claimants have refused to disclose that advice on the ground of legal professional privilege.

Mr Pymont says that constructive notice cannot be imposed so that knowledge, or lack of knowledge amounting to negligence, on Mr Johnstone’s part cannot be ascribed to Mr Lynch and the claimants. He says, relying on the dismissal of an appeal from Mr Recorder Cowell by the Court of Appeal in Chrisdell v. Johnson and Another [1987] 2 EGLR 123, that “there is a heavy burden on a defendant if he alleges knowledge if he represents the contrary to be the case”.

Mr Pymont also relied on the decision of the Court of Appeal in Peyman v.Lanjani and Others [1985] Ch 457 for the principle that where a party to a contract was faced with the choice whether to affirm or rescind the contract, he would have to have knowledge not only of the facts which gave rise to the election but also of the right of election itself.

However, on the facts of the present case it can be inferred that the claimants knew precisely what they were doing. Mr Lynch accepted in his evidence that from the time the claimants learned that the transfers had been made they were “working under advice”. The advice received by Ridgewood can be gauged by what the claimants did. Ridgewood proceeded with the airspace agreements, treating them as in full force, rather than claiming that the sale was a breach of a kind entitling them to repudiate.

On 30 November 2005 the claimants were plainly considering a claim against Texaco. There is a manuscript note of a telephone conference between Mr Johnstone and Steve Thompson, a consultant to Ridgewood, iterating the importance of complying with the airspace agreements in the meantime.

In oral evidence Mr Lynch said that the claimants’ aim was to “establish a loss of the profit that we were going to suffer”. He accepted that there was no doubt in his mind that the sales had taken place and that there was a breach of the option agreements. There was therefore a strategy of continuing with the airspace agreements on the basis that if planning permission were obtained the claimants would be able to crystallise their loss in proceedings against Texaco.

The claimants’ strategy appears from a number of documents:

The claimants say that it was only when (on advice) they realised that the airspace agreements could no longer be enforced that they withdrew their planning appeals. Texaco says that it was only when the claimants realised that the prospects of securing planning permission on appeal was hopeless that they changed their strategy and accepted the breaches.

In the case of Crouch End, the claimants’ letter before action says that Ridgewood was working on a further planning application which it was advised would result in planning permission being granted. However the airspace agreement provided that if satisfactory planning permission had not been obtained by a stipulated termination date (in the event 23 December 2005) the airspace agreement would come to an end unless an appeal was outstanding. No planning permission had been granted by 23 December 2005 because, as the person at the claimants in charge of the matter said, it was a “dead duck” in respect of which no further action was to be taken.

In relation to Clerkenwell Road, again, planning permission was refused after the expiry of the option. Mr Lynch said that the application might have been considered prior to the option expiry date but that this could not happen because of difficulties in notifying Azure. However he eventually accepted that although instructions were given to serve Azure the fault in not doing so was that of the claimants’ own agents rather than that of Texaco or Azure.

In relation to Blue Star, there was again no satisfactory planning permission in place prior to expiry of the option. The claimants allege that this was the fault of Texaco because the claimants’ acoustic consultants were not granted access to the site for a sound survey. However the necessary work had not been completed for the requisite highways study, a matter which was treated separately by the claimants. The claimants had themselves made a mistake about the option expiry date and it was in any event too late to achieve satisfactory planning permission or a non-determination enabling them to keep the option alive.

The same applies to Forty Avenue in that, by the time the problem of access became apparent, it was too late to obtain planning permission.

In relation to Hove, no valid planning permission was obtained owing to the fault of the claimants. Again, with the Dome, it seems clear that the claimants wanted to keep an appeal on foot in order to establish a platform for suing Texaco.

In relation to St Katherine’s, Hendon Way and Lansdowne, no planning applications were submitted at all. Mr Lynch alleges that the reason for this was because it became known that Texaco had sold its interest in the properties to Azure and there were “problems coming to the surface” with the new owners of the sites. However the difficulties with access did not apply to any of these sites and the assertion by Somerfield and Azure that the airspace agreements were personal to Texaco was known, as Mr Lynch accepted, on 8 August 2005.

The claimants rely on a letter from Azure dated 26 January 2006 in which it was stated that Azure was not bound to fulfil the airspace agreements. However there was nothing additional in that letter which would have led the claimants to understand for the first time that they had a cause of action. They already knew of their rights to sue as is evident from the note of 30 November 2005 to which I refer above.

There was a positive decision to perform the airspace agreements so that in the event of a claim against Texaco the claimants would not face an argument that they failed to comply with their own obligations. The performance comprised trying to get planning permission, giving notifications under the terms of the agreements and obtaining positive assurances from Texaco and its agents. The closest Ridgewood came to reservation of rights was in their complaint that they had been denied access to Blue Star and Forty Avenue (a complaint which was not pursued very vigorously and which only affected two of the sites) and there was never any general reservation of rights. The performance continued right up until expiry of the airspace agreements.

Thus there is in my judgment clear evidence of affirmation. If the breach was constituted by the fact of the Transfers, then Ridgewood knew about it all along. If the breach was, as Mr Pymont now suggests (on the basis of Fratelli) a transfer without reserving a covenant to perform, that idea had never been canvassed before this action and plainly did not operate on the minds of Ridgewood’s personnel or their advisers. If the breach was a transfer without taking a clear positive covenant from the transferees that they would perform, it can be inferred that the claimants knew about that position as well. The precise reasons why power to perform is lacking cannot be crucial.

I agree with Mr Fetherstonhaugh and Mr Ayliffe that there are only two possibilities. Either Ridgewood was continuing to perform in the hope that planning permission would be obtained and the claimants would be able to enforce the airspace agreements by getting Texaco to put pressure on their transferees, or Ridgewood would try and get planning permission to improve their position on a claim against Texaco which they always intended to bring. Questions of constructive notice are beside the point.

Even if I am wrong about this, there is the further question of communication of the claimants’ acceptance of the repudiation.

Where an innocent party wishes to treat himself as discharged by a repudiatory breach he must accept the repudiation by a clear and unequivocal communication of his acceptance to the party in breach, although, depending on the circumstances, a failure to perform may sometimes signify to a repudiating party an election by the aggrieved party to treat the contract as at an end because “an omission to act may be as pregnant with meaning as a positive declaration”: see e. g. Vitol SA v. Norelf Ltd [1996] AC 800.

Texaco must have known that the claimants were not doing anything in relation to the seven agreements which expired without planning applications or appeals being made, but that was consistent with the claimants taking a policy decision to let the airspace agreements lapse on expiry. In relation to the three sites where planning applications were made and appealed against, Ridgewood’s solicitors gave notices on 20 and 30 January 2006 to Texaco about the appeals which purported to be under the terms of the airspace agreements. Thereafter the claimants dropped the appeals without informing Texaco, whereupon the airspace agreements lapsed. No notice was given as to renunciation or impossibility. There was no reason for Texaco to infer otherwise than that Ridgewood thought that the appeals would fail. There was thus no communication of any acceptance of repudiation.

By the time that Azure wrote to Ridgewood on 18 April 2006 asking for the notices on the title to be removed, the airspace agreements had already expired.

I now turn to limitation. The action is statute-barred if the cause of action accrued under s. 5 of the Limitation Act 1980 at the date of the contract to sell to Somerfield and Azure. It is not if time began to run from the date of the Transfers. It is thus a simple point but not one on which there is any direct authority.

Mr Fetherstonhaugh’s allegation is equally simple. He says that from the time that Texaco signed the sale agreement it became bound to complete the Transfers. If, by entering into the sale agreements Texaco put it out of its power to enforce the airspace agreements, it had, as he put it, “sold that pass” at the date of the sale. If it did not put it out of its power, he accepts that time would not start to run, but Texaco would win the action in any event.

Mr Pymont counters that it was only when the Transfers were made that Texaco’s right to possession of the sites was lost. Although most of Texaco’s obligations under the airspace agreements (such as supporting planning applications) could be discharged off-site, one obligation, crucial for present purposes, could not, and that was the obligation to give Ridgewood access to the properties for the purposes of inspection. That obligation could be discharged for so long as, and only for as long as, Texaco retained legal title because it was only while it retained legal title that it had the right to possession and to grant access.

He further submitted that although Azure and Somerfield had an equitable interest in the sites as purchasers Ridgewood too had an equitable interest under the airspace agreements. As the first in time it would, pending completion of the sale agreement, take priority over the interests of Texaco’s transferees.

Mr Pymont relied on the decision of SavilleJ in Alfred C Toepfer International GmbH v. Itex Itagrani Exports SA [1993] 1 Ll Rep 360. He held that the fact that a party to a contract subsequently enters into obligations which are inconsistent with its ability to perform does not necessarily establish his inability to perform. However he also held that whether the claimant can establish inability on the balance of probabilities depends on whether in entering into the inconsistent obligations he has put it out of his power to perform. Mr Pymont’s case is indeed that Texaco put it out of its power to perform the airspace agreements, but that the power was lost only when it entered into the Transfers.

It could be said that Texaco could have performed the airspace agreements in breach of the sale agreements. If it was then sued for specific performance by the transferees the interest of the claimants would prevail as having been created first in time.

The importance of the date of transfer was affirmed by Mr Fetherstonhaugh and Mr Ayliffe in their submissions, albeit in a different context, (relying on Halkett v. Earl of Dudley [1907] Ch 590 and Price v. Strange [1978] Ch 337), namely that the time for performance of a contract does not come until completion.

In principle therefore it seems to me that the claim is not statute-barred.

Lastly, I should deal with the claimants’ alternative claim for damages which does not depend on repudiatory breach. I agree with Mr Ayliffe that the claim for damages does not appear to be what the claimants had in mind when drafting the claim, the thrust of which is on termination after repudiation. Again, Mr Pymont’s skeleton argument is premised on a claim for damages for repudiation.

However Mr Pymont put forward cogent submissions that breach giving rise to damages is adequately pleaded on the basis that there is no principle that says that a claimant has to succeed on everything in his pleading in order to be awarded relief on what he has established.

Nevertheless it does not seem to be right to make a finding about breach today which will take Mr Fetherstonhaugh and Mr Ayliffe by surprise on reasonable grounds. Mr Ayliffe submitted that it is not open to Mr Pymont to rely on a claim for damages for breach without pleading causation and particularising his claim for damages.There will be arguments about pleading, amendment, limitation arising out of amendment and also argument about whether summary judgment lies. In these circumstances I accede to Mr Ayliffe’s request to return for further argument on the question of whether the claim is adequately pleaded. My judgment is therefore limited to repudiatory breach only.

In conclusion therefore, I make the following findings: