Henry Long considers the consequences of a recent Court of Appeal case for parties to a land transaction.A recent decision of the Court of Appeal in Coles & ors (trustees of the Ward Green Working Men?s Club) v Samuel Smith Old Brewery (Tadcaster) (An Unlimited Company) & anr [2007] purported to simply be a decision about the exercise of an option. The Court of Appeal claimed that it was not considering the contentious issue of piercing the corporate veil. However, the order made, in context, had exactly that effect. The decision is difficult to reconcile with the relevant authorities, notwithstanding that the Court of Appeal claimed to be following them.
Background
Samuel Smith Old Brewery was the owner of unregistered freehold land at Mount Vernon Road, Ward Green, Barnsley, South Yorkshire. The property was subject to a lease in favour of the Ward Green Working Men?s Club, a registered society under the Friendly Societies Act 1974.
At some indeterminate date in 1958 the brewery granted an option to the club to purchase the property. The option was to:
? purchase the premises at any time by giving 6 months notice of intention at a price to be mutually agreed upon.
The option was an estate contract within class C(iv) of s10 of the Land Charges Act 1925 and s2 of the successor Act, the Land Charges Act 1972. Accordingly, in order to protect the option and to enforce it against any purchasers of the property, the club needed to register the option in the brewery?s name as a class C(iv) land charge in the register of land charges. The club did not register the option.
The effect of non-registration under s13(2) of the 1925 Act and s4(6) of the 1972 Act is that the option was:
? void as against a purchaser for money or money?s worth? of a legal estate in the land charged with it, unless the land charge is registered in the appropriate register before completion of the purchase.
On 17 May 2002 the club (acting through its trustees) served notice to the brewery exercising the option. The option notice was stated to expire on, and to require completion by, 30 November 2002. On 5 December 2002 the brewery transferred the property to its wholly owned subsidiary Rochdale and Manor (Builders). The transfer price was ?7,996.13, which was the brewery?s book value of the property.
Some three years later, on 9 December 2005, the club issued proceedings against the Brewery and Rochdale.1 The matter came before HHJ Pelling QC sitting as a judge of the Chancery Division.
The decision at first instance
HHJ Pelling found that the option and its exercise were valid and that there was an enforceable contract against the brewery. He declined, however, to order specific performance. The club appealed.
The Court of Appeal?s decision
The narrow ground for appeal was against HHJ Pelling?s refusal to order specific performance against the brewery. However, this required consideration of a number of other issues.
The option agreement
Void as an agreement to agree?The determination of the price as one ?to be agreed upon? is perilously close to an agreement to agree. Such a creature is unknown at English law: ?a bare agreement to negotiate has no legal content? (Walford & ors v Miles & anr [1992] per Lord Ackner at 138). The point was argued before HHJ Pelling, who ruled against it, and there was no appeal against the decision. Whilst the authors of Barnsley?s Land Options are correct when they observe that the modern approach of the courts is to seek to give efficacy to written agreements (see Martin Dray and Adam Rosenthal, Barnsley?s Land Options, 4th ed, 2004, p39 at para 2-037), it is difficult to reconcile this decision with the authorities. Even Smith v Morgan [1971] (which Barnsley?s treats as possibly having been incorrectly decided) only permitted this wording on the technical but relevant distinction that the agreement in that case was a pre-emption and not an option.
Void against Rochdale for perpetuities?In an earlier decision of the Court of Appeal in the same matter (an application for permission to appeal) Lloyd LJ (with whom Smith LJ agreed) noted that the option, being thought to date from 1958, was void for perpetuity against Rochdale but binding in contract against the brewery. The point does not appear to have been argued in the appeal itself and is not referred to in the decision of Rimer LJ (with whom Pill and Sedley LJJ each agreed).
The relevant law is increasingly arcane and merits rehearsal. The Perpetuities and Accumulations Act 1964 was not of retrospective effect for options created before 16 July 1964. This option, therefore, is governed by the old law. The old law is very simple: an option is void against the grantor?s successors in title if it is capable of being exercised outside the perpetuity period. Absent a royal lives clause, at common law this is 21 years. An exception to this rule is that of an option which, though unlimited in time, is construed as being exercisable within a reasonable period only. The exception was not canvassed on appeal and, accordingly, the option was void for perpetuities against Rochdale. However, in its later decision, the Court of Appeal made no finding on this point.
Void against Rochdale for want of registration?Section 4(6) of the Land Charges Act 1972 is quite clear that an option is void against a purchaser for money or money?s worth, unless the registration as a land charge is affected prior to completion of the transfer to the purchaser. Money or money?s worth may be a nominal consideration, but the purchaser must not be a donee (Merer v Fisher & anr [2003]). It is not the money stated on the face of the transfer that is important but rather the money that actually passes. Rimer LJ considered this issue and noted that the market value of the property was more than ten times the amount paid. Yet, as long as the amount paid was money or money?s worth, the amount is irrelevant. The emphasis on the higher market amount, however, leaves an impression that something is amiss.
Failing to register an option notice is an unforgiving area of law. There is no role to play for notice, nor for good faith by the purchaser (see Midland Bank Trust Co Ltd & anr v Green [1981]). The authors of Barnsley?s state that, in exceptional cases, the courts may be willing to give effect to an unregistered interest. The example they give is a sham, which requires an element of pretence. Consequently, unless the transfer from the brewery to Rochdale were a sham, then the want of registration rendered the option ineffective against Rochdale.
Was the transfer to Rochdale a sham?
HHJ Pelling regarded the sale by the brewery to Rochdale as genuine ?albeit? at a low price?, in other words, not a sham. Rimer LJ referred to this finding and referred to the definition of a sham given by Diplock LJ in Snook v London and West Riding Investments Ltd [1967]. The definition itself was not cited but it is worth considering again and it is narrower than may sometimes be thought. The definition is as follows:
? 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.
The conduct of the brewery and (possibly) Rochdale may have been sharp but there was no evidence that the transfer was a pretence. An ulterior motive does not equal a sham. One of the usual characteristics of a pretence is a company that has been established for the purposes of the sham transaction. Yet Rochdale was an established company that undertook the business of developing and selling property.
The club did not argue in the Court of Appeal that the transfer to Rochdale was a sham (although counsel did argue that there was in fact no sale, no vendor and no purchaser, which is a sham without using the word). However, the argument put to the Court of Appeal was that the present case was indistinguishable from Jones & anr v Lipman & anr [1962]. The difficulty in this submission was that the transaction in Lipman was indeed a sham.
Lifting the corporate veil
Counsel for the club argued that the transfer to Rochdale involved an impropriety in the attempted defeat of the club?s rights. This was a reference to whether the corporate veil between Rochdale and the brewery could be lifted.
Rimer LJ considered the issue of lifting the corporate veil as outlined in Trustor AB v Smallbone & ors (No 2) [2001] (at 1183), where Sir Andrew Morritt V-C gave three categories of when the veil might possibly be lifted. The first is where the company was a fa?ade or sham. The second is where the company was involved in some impropriety. The third is where justice requires intervention. In fact, later on in Trustor, Morritt V-C made it clear that the veil may not be lifted in that third category. That only leaves the other two. Of the second category, impropriety, he stated (at 1185):
The second proposition also appeared to me to be too widely stated unless used in conjunction with the first [ie the fa?ade or sham]. Companies are often involved in improprieties. Indeed there was some suggestion to that effect in Salomon v A Salomon & Co Ltd. But it would make undue inroads into the principle of Salomon?s case if an impropriety not linked to the use of the company structure to avoid or conceal liability for that impropriety was enough.
The conclusion is straightforward: applying the available legal authority, the transfer to Rochdale was not a sham and the corporate veil could not be lifted.
Specific performance as a remedy
Rimer LJ accepted that the transaction was not a sham. He then continued by saying that if an order for specific performance:
? can and should be made against the Brewery, which is plainly in a position to procure Rochdale to complete the contract, there is simply no need for any such order against Rochdale.
This is an extraordinary statement in two respects. First, there is the assertion that the brewery can procure Rochdale to complete the contract. As the brewery?s subsidiary, this is correct, even if it may mean dismissing Rochdale?s existing directors. But that point can only be reached if the veil is lifted. This seems to have escaped Rimer LJ. Secondly, there can be no order for specific performance against Rochdale. As the transfer to Rochdale was not a sham, the lack of registration of the option means that there can be no recourse against Rochdale.
The brewery was in breach of its contract with the club. What remedies were available to the club? The usual remedy in contracts for the sale of land is specific performance due to the unique nature of every parcel of land. However, the court will not order specific performance when the vendor is unable to convey the land. The statement of law approved in E Johnson & Co (Barbados) Ltd v NSR Ltd [1997] (in the Judicial Committee of the Privy Council, on appeal from Barbados) at 410-411 is that:
? if a case arises in which [the purchaser] cannot get the land in any substantial sense? the doctrine of specific performance is not applicable? [T]he time of judgment was the tempus inspiciendum for determining whether or not it would be appropriate to make an order for specific performance.
The only basis for making an order of specific performance against the brewery was if the transfer to Rochdale had been a sham and could have been disregarded, or, similarly, if Rochdale were a sham company and the corporate veil could be lifted. Neither was found in the instant case. Accordingly, the correct remedy for the club against the brewery would have been the one ordered at first instance, namely damages.
The consequences of Coles
The decision of the Court of Appeal seems to be premised on an underlying sense that what the brewery did was not quite right, and that the club should be able to obtain the freehold to the clubhouse. In so doing, the Court of Appeal has softened the strictness of the requirement for registration of land charges (so that registration is not required against a purchaser for money or money?s worth which is a subsidiary company of the vendor) and unintentionally broadened the extent to which the corporate veil can be lifted (so that it can be lifted if a parent company can no longer perform any obligation merely because its relevant interests now vest in a subsidiary).
The effect of this decision for negligent solicitors who fail to register class C(iv) land charges will be one of relief. The effect of the decision for corporate bodies that set up SPVs and that regularly transfer liabilities and assets from one group company to another will be rather less satisfying. Ideally, this decision would have been appealed to the House of Lords but the brewery is now out of time to do so and an appeal, therefore, is unlikely.
? Property Law JournalSource: Practical Conveyancing
