B e f o r e :
|JUNE MARIE ANN SCROWTHER||Claimant|
Crown Copyright ©
This is a claim by Miss Scrowther for the return of £31,250 which was paid by Miss Scrowther to Watermill Properties ("Watermill") following the sale of her property 25 Postern Crescent, Morpeth ("the property") to Watermill in February 2007 out of the proceeds of sale. The sale was pursuant to a scheme under which the property was leased back to Miss Scrowther on an assured shorthold tenancy. It will be necessary to look at the scheme in more detail later in this judgment.
The tenancy came to an end September 2007 as a result of a possession order based on arrears of rent. In those circumstances Watermill contends that it is entitled to retain the £31,250 pursuant to a collateral contract which forms a constituent part of the scheme.
Miss Scrowther raises a number of challenges to Watermill's position. Not all of her challenges are pleaded. In a nutshell she contends:-
1. that there was no contract allowing Watermill to retain the £31,250;
2. that any contract that was made was void as a result of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989;
3. that she made a mistake in entering into the contract;
4. that Watermill's right to retain the £31,250 is unenforceable:-1) as a penalty clause;2) under the Unfair Terms in Consumer Contracts Regulations 1999;3) as a result of the unjust enrichment of Watermill.
Miss Scrowther has at all material times been a litigant in person. However she has had the invaluable assistance of Matthew West acting without solicitors on a pro bono basis. Mr West has produced a very helpful skeleton argument and represented Miss Scrowther throughout the two day hearing. I am most grateful to him.
Watermill has been represented by Miss Sarah Lippold instructed by Robson Palmer of 31 Beach Road, South Shields. Miss Lippold produced full and helpful skeleton arguments dealing both with the issues that were pleaded and with the other matters raised in Mr West's skeleton argument. I am grateful to her as well.
Miss Scrowther was the only witness to be called in support of her case. The principal witness on behalf of Watermill was Mr Botsford, a valuation consultant employed by Watermill who carried out the initial negotiations with Miss Scrowther. In addition Watermill called Mr Galloway who had some conversations with Miss Scrowther in the spring and summer of 2007. Finally Watermill called an expert valuer, William Kimmitt who was permitted to expand on his report in the light of the additional points being raised on behalf of Miss Scrowther.
4. The Facts
4.1. Watermill's Scheme
It will, of course, be necessary to consider the scheme in detail in the light of the actual documents executed by the parties. It is however helpful to consider the general nature of the scheme in order to understand the events that occurred. It is however important to bear in mind that this description is at least in part controversial.
The scheme is said to be a type of equity release scheme designed to allow home owners to obtain some of the equity in their property and yet to remain living in the property. It is designed for those who wish to live there for at least 10 years. No doubt different equity release schemes operate in different ways. This particular scheme comprises 3 elements:
1. A sale of the property to Watermill at a price agreed between the parties. That price is intended to be the full market value of the property. A percentage of the proceeds of sale (usually 70% but (as we shall see) in this case 75%) is available for the vendor. It is used first to discharge prior secured loans. Any remaining money is paid to the vendor for any purpose required by the vendor. [It is thus plain that the scheme cannot operate if existing secured liabilities exceed 75% of the value of the property.] The balance of the purchase price is paid to the vendor but immediately forwarded to Watermill pursuant to an authority signed by the vendor.
2. Simultaneously with the completion of the sale Watermill lease the property back to the vendor on a 6 month assured shorthold tenancy at a rent fixed by Watermill. The rent is fixed by reference to the purchase price. In this case it was 5.7% of the purchase price or £593 per month. Miss Scrowther contended that the rent was significantly above the market rental value. Although the tenancy was only a 6 month assured shorthold tenancy which gave no security of tenure to the vendor it was Watermill's intention that, subject to compliance with the obligations under the tenancy the vendor would in fact be able to occupy the property for as long as he or she liked.
3. A sum of money (described by Watermill as "the Rentback Bonus") was payable by Watermill to the vendor on vacation of the property. In the normal case where 30% of the purchase price is retained by Watermill the Rentback Bonus amounts to the whole of the 30% retained. If, however, (as in this case) the amount retained is less than 30% then the Rentback Bonus is less than the amount retained. The Rentback Bonus is only paid if the vendor vacates after 10 years' occupation under the tenancy or if Watermill terminates for a reason other than a breach by the vendor.
It is the third element of the scheme that is at the centre of the controversy in this case. Whilst there is a contract for the sale of the property in common form governed by the Law Society Standard Conditions of Sale, and whilst there is a standard form Assured Shorthold Tenancy Agreement governing the terms of the shorthold tenancy, there is no one document setting out the terms on which the 25% of the purchase money is retained by Watermill and the terms on which the bonus will be paid to the vendor. Those terms have to be gleaned if at all from a number of sources that is to say oral discussions between the vendor and the purchaser's representative, a client quotation form signed by the vendor, a letter sent to the vendor and a document entitled "Frequently Asked Questions" sent to the vendor during the course of negotiations. It is Watermill's case that there was a collateral contract between the parties under which the bonus was only payable after 10 years if the tenancy had not been terminated as a result of a breach by the vendor.
Watermill was a partnership between Mr Galloway, Ms Gibson According to Mr Galloway it started to operate the scheme in about 2005. The scheme was designed to exploit what was perceived to be a gap in the equity release market. It was aimed at vendors who were too young for more conventional equity release schemes but who wanted to stay in their properties for more than 10 years. The advantage of the scheme was that the vendors could obtain (usually) 70% of the value of the property immediately and subsequently (after 10 years) the remaining 30% of the value. They did not have security of tenure but they had a guarantee that if the tenancy was terminated for a reason other than a breach the "bonus" would be repayable and thus there was a disincentive on the part of Watermill to terminate the tenancy early.
Initially there were no consultants employed by Watermill and the partners did all the negotiating. In 2005 there were some 30 or 40 properties purchased by Watermill. 2 consultants including Mr Botsford were then employed. By 2008 some 360 properties had been bought. Due to the credit crunch there is no further finance to enable further acquisitions and no further properties have been bought.
4.3. Miss Scrowther's initial approach
25 Postern Green was formerly a council house. In January 2003 Miss Scrowther purchased the property pursuant to the right to buy scheme. She said that the value in 2003 was £49,000 but that she was entitled to a substantial discount. The purchase price was funded entirely with a loan secured on the property. As is well known the Council have a right to claw back some or part of the discount in the event of a resale within 3 years of the purchase. This right expired in January 2006.
It appears that Miss Scrowther first approached Watermill in August 2005. She has no recollection of a meeting but does remember a telephone conversation. On 25th August 2005 Watermill sent her a letter outlining the Bonus Leaseback Scheme. Miss Scrowther does not now have a copy of the letter but accepts that it may well have been sent to her. In any event nothing came of the approach. According to Watermill the reason for this was that they discovered about the claw back provisions.
By September 2006 Miss Scrowther was living in the property with her partner (Mr Paynter) and 2 children (aged 11 and 15). She was 41 years old and unemployed though she had worked in the past. Her partner was employed earning approximately £1,620 per month. She estimated the value of the property to be £125,000 but (according to her) there were debts of £63,000 secured on it. She had other debts totalling £13,000.
On 26th September 2006 Miss Scrowther contacted Watermill by phone. She gave Watermill the above information. She informed Watermill that she wanted to clear all her debts including the mortgage. She absolutely did not want to move as she loved the house. An arrangement was made for Mr Botsford to see her on 28th September 2006.
4.4. The meeting on 28th September 2006
There is some conflict of evidence as to precisely what was said at the meeting. Two documents were signed at the meeting:-
1. An agreement signed by Miss Scrowther and witnessed by Mr Botsford purporting to grant Watermill an option to purchase the property for £125,000. The option fee was £1 which was duly paid and the option was exercisable within 6 months. The agreement was not in fact signed by Watermill and it is not necessary to consider whether it was in fact enforceable.
2. A document described as "A Client Quotation Form" and marked "For Illustration Purposes Only". The form explained that the scheme is designed for clients who intend to stay in their homes for a minimum of 10 years and provides a substantial future bonus. The relevant part of the form reads:-Your vacant possession value has been assessed at £125,000 and we would require a report from a Chartered Surveyor (at our expense) in order to confirm. The initial payment to you would then be £93,750. After repayment of your mortgage and any other secured debts you would then have £15,250 available in cash for any purpose. The big advantage is that at any time after 10 years has elapsed if you decide to vacate the property we will then pay you or your nominee the remaining (£18,750) as well. The rent based on the assessed valuation figure would be £593 per calendar month, equivalent to £137 per week. You would save your current mortgage repayments, structural repair costs and building insurance premiums.
The form is not completely clear because the use of the words "the remaining" suggests that the £18,750 plus the £93,750 initial payment would add up to the agreed sale price of £125,000. In fact it does not. The explanation for this discrepancy is that the form is designed for the more usual case where 70% of the purchase price is made available immediately.
Miss Scrowther signed a "Client Declaration" at the foot of the page indicating that the valuation consultant had explained how the scheme worked and that she had supplied accurate mortgage and secured loan redemption figures to the best of her knowledge.
Mr Kimmitt was called to justify the rental figure of £593 per month. He produced a computer print-out from Rightmove which he said supported a rental figure of between £400 and £600 per month. He was cross-examined on his comparables and agreed amongst other things that ex council houses commanded lower rents than other houses. On any view the rent here was right at the top of Mr Kimmitt's bracket. In so far as it is relevant I am in fact satisfied that a rent of £593 per month was higher than the market rent for this property. In my view the market rent was nearer £500 to £525 per month. This view was confirmed by subsequent events. After taking possession of the property in November 2007 Watermill spent over £5,836 in repainting and replacing the carpets. It was then re-let at a rent of about £525 per month.
When she gave evidence in chief Miss Scrowther said she did not really understand the scheme. She agreed that there was a discussion about figures and percentages. She just went along with the figures put forward by Mr Botsford. She was pleased that the house was valued at the £125,000 she had suggested. She thought she was going to receive the full 100% of the value of the property. She was aware that two figures - £15,250 and £18,750 - were mentioned but she did not really understand them. She knew that part of the money was being held by Watermill but she thought it was being held on trust for her or her children. Nothing was explained to her about what would happen if she could not pay the rent.
Miss Scrowther was cross-examined for the best part of a day. She agreed that Mr Botsford explained that the purpose of the scheme was to enable people to stay in their property for a long time. She agreed that he explained that the property would be purchased and leased back on a shorthold assured tenancy. She said that Mr Botsford did not explain what a shorthold assured tenancy was. He did tell her that if she did not pay the rent she would be evicted. He also explained that the tenancy was for 6 months but would be renewed every 6 months. She thinks that Mr Botsford explained that the rent would be £593 per month and that she would need to be sure she could afford the rent. She said that she was told that the bonuses would be held for her out of the sale. She thought they were being held by Watermill for her. She did not understand that she would get a reduced sum or that the moneys would only be paid to her after ten years of tenancy. She did understand that she would only get the money when the property became vacant but it was not explained to her that if there was a breach of the tenancy leading to a possession order there would be no money paid. She did not really understand the explanation or the figures.
Miss Scrowther was asked about the Client Quotation Form. She said it was filled in by Mr Botsford. He did not go through it in detail. She says that the figures on the form did not mean anything to her. In any event she thought it was only a quotation.
Mr Botsford said that he explained the scheme in detail to Miss Scrowther. In particular:
1. He explained that the scheme was for people who wanted to stay in their property for a long time.
2. He explained how the scheme worked including the tenant obligations under an assured shorthold tenancy. She was told she would be evicted if she could not pay the rent and that she would have to be sure she could afford the rent.
3. He explained that Watermill normally buy at 70% of value. He performed the calculation and discovered how much would be released to Miss Scrowther after the discharge of the prior secured liabilities. Miss Scrowther said that this was not enough. Accordingly Mr Botsford carried out a calculation based on 75% of value but with a reduced bonus of 15% (the 10% reduction in the bonus reflected the fact that the payment was 75% of the value rather than the usual 70%).
4. Mr Botsford took Miss Scrowther through the documents. He read the documents clause by clause and explained the terms to Miss Scrowther.
After explaining the scheme he told her that the next step was a valuation by a surveyor. He then explained that Miss Scrowther could use any solicitor of her choice. However there were a number of local solicitors who were recommended by Watermill. If she used one of those solicitors Watermill would pay the fee. He made it clear that the solicitor was acting for Miss Scrowther and not for Watermill.
In cross-examination Mr Botsford repeated much of this evidence. He said that he did double check that Miss Scrowther understood what he said. He described the scheme as a "very simple scheme" and he did not think that the details were going above Miss Scrowther's head. He was satisfied that Miss Scrowther understood the documents and that she was keen to go ahead with the scheme. He said he went through the figures several times and that he did say that the bonus would be lost if she did not pay the rent.
He also said that he was not intending to create a contract outside the written documents.
In the final analysis there was much common ground between Miss Scrowther and Mr Botsford. Mr Botsford was a careful witness who was plainly doing his best to assist the Court. He was however involved in a lot of transactions he told me he was responsible for 200 sales and inevitably to some extent his evidence was based on his training and what he described as his universal practice.
Miss Scrowther was plainly very antagonistic towards Watermill. She feels that she has been defrauded out of the £31,250 which is the subject of the proceedings. She was prepared to make a number of unfounded allegations against Watermill. Despite this I got the impression that she was not trying to mislead the court and that her evidence was honest.
I make the following findings in relation to the meeting:
1. I am satisfied that Mr Botsford did explain the scheme to Miss Scrowther. Included in the explanation were the basic obligations under the tenancy such as paying the rent, and that the scheme was for people staying for a long time.
2. I am satisfied that Mr Botsford did go through the figures as he asserted; I am also satisfied that he told Miss Scrowther the amounts she could expect to receive immediately (based on her figures for the liabilities) and the amounts she could expect to receive on vacation after 10 years that is to say £18,750.
3. I am also satisfied that Mr Botsford went through the documents with Miss Scrowther before she signed them. I am satisfied that Miss Scrowther did understand the basic elements of the scheme and that she was very keen to proceed.
4. Whilst I am satisfied that Mr Botsford told Miss Scrowther that the £18,750 Rentback Bonus was payable after a minimum of 10 years I am not satisfied that he made it clear to Miss Scrowther or that she understood that if she was evicted for breach of the tenancy agreement such as non payment of rent at any time in the ten year period that she would receive nothing.
4.6. The letter dated 3rd October 2006
On 3rd October 2006 Mr Botsford sent Miss Scrowther a letter. The letter explained that Watermill was prepared to proceed on a 75/15 basis. It made clear that the normal agreement was for a payment of 70% of valuation with a Rentback Bonus of 30% after a minimum period of 10 years. He explained that Miss Scrowther had elected for a payment of 75% with a reduced bonus of 15%. The letter contained actual figures as follows
|Rentback Bonus after a minimum of 10 years||18,750|
The letter repeated that the reduced final price reflected the increased up front figure requested.
It is perhaps worth commenting that apart from the reference to the minimum period of 10 years the letter makes no reference to the terms on which the rent-back bonus is to be paid.
The letter also enclosed a document headed "Frequently Asked Questions" ("FAQ")
Miss Scrowther had no recollection of receiving the letter. However she accepted that as she certainly did receive the FAQ document she must also have received the letter. Despite the submissions of Mr West I am satisfied on the balance of probabilities that the letter of 3rd October 2006 was both sent by Watermill and received by Miss Scrowther.
4.7. the FAQ document
This is a double columned 2 page document which answers a number of questions about the scheme. It is relied on heavily by Watermill as containing the terms of the collateral contract not referred to anywhere else.
Amongst the answers it points out that Watermill pay for surveyor's costs and legal fees if Miss Scrowther uses an approved panel solicitor. It points out that the rent will not increase by more than the increase in the Halifax House Price index over the period.
The most important questions for present purposes are at the foot of the first page and the top of the second page:
Q: Is there any time scale in which I have to stay in my property?
A Following your initial 6 months no, although please remember that the bonus payment is only made to clients who have been tenants for a minimum of 10 years
Q Do I have to move out after 10 years?
A No. You can stay as long as you wish but remember your Rentback bonus is paid on vacant possession. In other words, when you decide to leave, at a time to suit yourself, we would sell the property on and pay your bonus
Q What if you cancel my tenancy after 6 months has elapsed, even if I am not in breach of my tenancy agreement.
A This is an extremely unlikely situation and has never actually occurred, but to protect you financially our unique guarantee ensures that if we were ever to terminate the tenancy (for any reason other than your breach of the tenancy terms) we would then be simultaneously liable to repay you the full balance of the bonus payment. Clearly this is not a good course for us, since it means that we have paid full market value for a property together with costs and we now have an empty property on our hands!
It can be seen that it is the only document setting out in detail the terms on which the "bonus" will be repaid.
Miss Scrowther was asked about this document in cross-examination. She agreed that she had read it. She made the point that it did not expressly state that Watermill would forfeit the bonus if she was in arrears of rent.
4.8. The Instruction of Sweeney Miller
Miss Scrowther decided to proceed. She also agreed to instruct Sweeney Miller, a firm of solicitors practising in Sunderland. They are a panel firm approved by Watermill. Thus Watermill agreed to pay Sweeney Miller's fees in respect of the transaction.
Some time around the end of October 2006 Watermill sent Sweeney Miller an e-mail introducing Miss Scrowther and giving brief details of the transaction. The e-mail included an authorisation form for Miss Scrowther to sign in relation to the £31,250.
On 31st October 2006 Sweeney Miller wrote 2 letters to Miss Scrowther. One was a client care letter to Miss Scrowther which made it clear that the fee of £300 plus VAT was payable by Watermill. The other was a letter of advice.
Amongst the points made in the letter of advice were:
1. the property was being sold for £125,000. On completion Miss Scrowther would authorise payment to Watermill of £31,250.
2. Following completion Miss Scrowther would remain in the property paying £593.75 in rent.
The letter also gives advice in respect of the scheme including the following:
1. We understand that a representative of [Watermill] has met with you and explained how the Bonus Rent Back Scheme works and you are happy and understand it. If this is not the case please contact me immediately
3. On completion we understand you will authorise us to transfer to the buyer the sum of £31,250 to be held by the buyer. This will be paid back to you when certain conditions are fulfilled. We understand a representative has explained such conditions to you. Should those conditions not be fulfilled then the sum (or some of it) will not be repaid. You are being asked to enter into a contract with the buyer and with any contract there is a risk that one or other party will not fulfil their contractual obligations. Please note it is for you to decide whether the risks of this happening are outweighed by the benefits to you of the scheme.
It is to be noted that the advice was vague in the sense that it did not purport to explain how the scheme worked. It also did not explain in detail the conditions under which Miss Scrowther would receive the return of her £31,250. It also suggested that the whole of the £31,250 would be repayable if the conditions were met. In fact the most that Miss Scrowther could hope to receive by way of the Rentback Bonus was the sum of £18,750. Furthermore one of the points stressed by Miss Lippold in her submissions was that the payment of the £18,750 to Miss Scrowther is not "the return of her money" but the payment of a bonus.
However Sweeney Miller were acting for Miss Scrowther and not for Watermill and thus any deficiencies in the advice given by Sweeney Miller cannot be laid at the door of Watermill.
On 2nd November 2006 Miss Scrowther signed a number of documents which were returned to her solicitors. These included:
1. A copy of the client care letter that had been sent to her on 31st October 2006.
2. A document setting out instructions to act in the sale giving details of the sale price and the amount of secured lending.
3. A Form of Authority under which Miss Scrowther "requested and authorised [Sweeney Miller] to pay [Watermill] the sum of £31,250 upon completion of the sale" of her property.
4.9. Problems with the mortgagee
As already noted Miss Scrowther informed Watermill that the amount due to the first mortgagee was £63,000. A redemption statement from G E Money (the mortgagee) dated 20th November 2006 confirmed this figure at £62,572.05. However there was an early repayment charge and other costs which meant that some £65,000 was needed to redeem G E Money's charge.
Miss Scrowther was in fact in arrears with the repayments due to G E Money and possession proceedings had been instituted. On 20th November 2006 G E Money indicated that they would not stay the proceedings unless or until there was an estimated completion date. The hearing of the possession action was fixed for 29th January 2007. In addition to the moneys due to G E Money there was a second charge in favour of Welcome Finance. As at 26th January 2007 the settlement figure for that loan was £17,243.17
On 13th December 2006 Watermill lent Miss Scrowther £2,033 and Miss Scrowther granted a further charge on the property to secure repayment.
4.10. Completion of the transaction
On 29th January 2007 G E Money obtained a 28 day possession order. Thus the transaction with Watermill took place at a time when there were significant mortgage arrears and Miss Scrowther was subject to a possession order.
Contracts for the sale of the property were exchanged at 3.25 p.m on 2nd February 2007. The contract duly provided for a sale price of £125,000 with completion the same day. On the same day Watermill and Miss Scrowther entered into the assured shorthold tenancy of the property for a fixed term of 6 months at a rent of £593 per month.
The completion statement provided by Sweeney Miller showed that the sum paid to Miss Scrowther was only £7,412.81. Approximately £83,600 was paid to the two prior chargees, £2,033 was repaid to Watermill in respect of the loan made in December 2006 and £31,250 was paid to Watermill pursuant to the authority signed by Miss Scrowther.
4.11. Events following completion
Miss Scrowther quickly fell into arrears with the rent and action was taken to pursue her for the rent. According to Mr Galloway one of the partners in Watermill there were a number of acrimonious conversations between himself and Miss Scrowther including, he alleges, threats to go to the press and threats of violence. It is not necessary for me to go into them in detail as they are not relevant to anything I have to decide.
Possession proceedings were taken against Miss Scrowther for possession for arrears of rent. On 3rd September 2007 D J Atherton made a 28 day possession order against Miss Scrowther and her partner. He also ordered that she pay arrears of rent in the sum of £1,781.25, mesne profits at the rate of £19.57 per day and costs of £150.
Possession was duly given up in early November 2007. The arrears of rent, mesne profits and costs have not been paid. In December 2007 Watermill spent £5,836 replacing the carpets, repainting, tidying the garden and clearing the guttering. Within a short period of time the property was relet at a rent of £525 per month.
In these proceedings Miss Scrowther seeks repayment of the £31,250 that she authorised be paid to Watermill.
5. The collateral contract
In her skeleton argument Miss Lippold identifies the three elements of the scheme as being the sale of the property to Watermill, the assured shorthold tenancy in favour of Miss Scrowther and a collateral contract. In paragraph 5 she analyses the collateral contract.
A collateral contract binding the scheme, that the Claimant pays back to the Defendant from the sale the sum of £31,250 (25% purchase price), in consideration of which:
1. The Defendant enters into the contract for sale;
2. The Claimant is not required to give vacant possession which the Defendant would otherwise be entitled to under the contract for sale. She remains in her own home as desired and avoids the cost of relocation;
3. The Defendant enters into the tenancy agreement and assumes all responsibilities as landlord, including mortgage payments, buildings insurance payments and maintenance of the Property;
4. The sum of £18,750 (15% purchase price) to be repaid to the Claimant on vacation of the Property following the completion of 10 years of satisfactory tenancy, or where the Defendant terminates the tenancy without breach by the Claimant ("the Rentback Bonus").
A number of points can be made about this analysis.
The sale was a sale at market value. No doubt it would have been possible to devise a scheme with the purchase price being 75% of market value but that was not this scheme.
Whilst it is true that Miss Scrowther was not required to give up possession the capacity in which she occupied changed. She became a tenant under the assured shorthold tenancy. As already noted this was a tenancy at above market rent with no security of tenure.
The requirements for the formation of collateral contracts were set out by Lightman J in Inntrepreneur Pub Co Ltd v East Crown Ltd  2 Lloyd's Rep 611, 615,  3 EGLR 31,  41 EG 209 and applied by the Court of Appeal in Business Environment Bow Lane Ltd v Deanwater Estates Ltd  LT & R 389 and Hanoman v Southwark L B C  AER(D) 146. As formulated by Arden LJ in paragraph 47 of the judgment in Hanoman the tests are
"(1) a pre-contractual statement will only be treated as having contractual effect if the evidence shows that parties intended this to be the case. Intention is a question of fact to be decided by looking at the totality of the evidence;
(2) the test is the ordinary objective test for the formation of a contract: what is relevant is not the subjective thought of one party but what a reasonable outside observer would infer from all the circumstances;
(3) in deciding the question of intention, one important consideration will be whether the statement is followed by further negotiations and a written contract not containing any term corresponding to the statement. In such a case, it will be harder to infer that the statement was intended to have a contractual effect because the prima facie assumption will be that the written contract includes all the terms the parties wanted to be binding between them;
(4) a further important factor will be the lapse of time between the statement and the making of the formal contract. The longer the interval, the greater the presumption must be that the parties did not intend the statement to have contractual effect in relation to a subsequent deal;
(5) a representation of fact is much more likely intended to have contractual effect than a statement of future fact or future forecast."
Mr West invited me to be extremely cautious before finding that any collateral contract existed in a contract for the sale of land. He referred me to a passage in paragraph 42 of the judgment of the Chancellor in Business Environment and reminded me of Mr Botsford's answer in cross-examination that he did not intend to enter into a contract outside the written documents.
In paragraph 56 of her judgment in Hanoman Arden LJ appears to have distanced herself from the Chancellor's view about the need for caution. In any event looked at objectively from all of the circumstances I conclude that Lightman J's tests are satisfied and that there was a collateral contract here. The terms of the collateral contract can be gleaned from the documents signed by Miss Scrowther, the letter sent by Mr Botsford on 3rd October 2006 and the FAQs and the fact that Miss Scrowther signed the authority and paid over the £31,250 to Watermill on completion.
It has to be remembered that Miss Scrowther did have the benefit of independent legal advice before she went ahead. As already noted the fact that the advice was inaccurate and/or may have fallen short of what was required cannot be laid at the door of Watermill even though Watermill agreed to pay the solicitor's costs.
Mr West did not pursue the question of mistake in his closing submissions. In my view he was right not to do so. In my view Miss Scrowther plainly understood sufficient of the transaction for it not to be vitiated by the law of mistake. Furthermore, as already noted, Miss Scrowther had the benefit of legal advice before she entered into the contract.
7. Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989.
Section 2 of the 1989 Act provides (so far as material):
"2(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.
(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.
(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.
(4) Where a contract for the sale or other disposition of an interest in land satisfies the conditions of this section by reason only of the rectification of one or more documents in pursuance of an order of a court, the contract shall come into being, or be deemed to have come into being, at such time as may be specified in the order."
Mr West, like Counsel for the landlord in Hanoman, submitted that if the collateral contract contradicted any of the terms of the contract for sale it would be invalidated by section 2. He relied on paragraph 42 of the judgment of the Chancellor in Business Environment with which May LJ agreed:
42 The law relating to collateral contracts is well-established but in connection with sales or leases of land needs to be applied with caution if not the suspicion to which Lord Moulton referred in Heilbut Symons v Buckleton  AC 30, 47. Thus, if the promise said to be binding as a collateral contract is in truth one of the terms for the sale or other disposition of land it will be unenforceable unless it is contained in the written contract required by s 2 of the Law of Property (Miscellaneous Provisions) Act 1989. It must also be recognised that such a promise may be binding on successors in title of both parties without the need for notice or registration as a Land Charge or in the Land Registry, cf Brikom Investments v Carr  1 QB 467. In that case Lord Denning considered (p 484) that conveyancers could look after themselves. But he gave no indication of how they could protect their clients from variations to the terms of a document forming part of their title to land of which they did not and could not know."
In paragraphs 56 and 57 of her judgment in Hanoman Arden LJ distinguished Business Environment and held that the collateral contract was not avoided by section 2. In order to understand her reasoning it is necessary to understand the facts.
H was a secure tenant of property owned by a local housing authority. He was in receipt of housing benefit. He sought to purchase the lease under the Housing Act 1985. There was litigation over his entitlement in respect of which he was ultimately successful. As a result of delays he alleged that the premium payable (£17,000) should have been reduced to nil under provisions of the 1985 Act. Correspondence between H and the local authority resulted in the completion of the purchase of the lease on the basis that he preserved his right to take up matters with the Defendant at a later date. That correspondence formed the basis of the collateral contract. H's attempt to take up the matter of the premium failed in the County Court but succeeded in the Court of Appeal, and, for that matter, in the House of Lords.
One of the issues was whether the collateral contract evidenced by the correspondence was avoided by section 2 on the ground that it was inconsistent with the lease which provided for the premium of £17,000. The Court of Appeal held that there was no such inconsistency. The crucial discussion is at paragraphs 56 and 57:
[56 Moreover, I do not consider that the court needs to interpret a collateral contract so far as possible to bring it within s 2 of the 1989 Act: on the contrary, on general principle the court should so far as possible interpret it so that it can be enforced and party autonomy respected.
 In my judgment, the collateral contract on its true interpretation meant that notwithstanding completion, Mr Hanoman would, subject as hereafter mentioned, be free to seek any appropriate remedy thereafter if he was right about the premium. "Any appropriate remedy" could on its face include rectification but there is no evidence that the parties discussed the question of amending the lease. Moreover, although Mr Hanoman has sought rectification in his pleading, the lease does not have to be rectified in order to give him a remedy. He now proposes to abandon his claim for rectification and seek only damages or restitution. That remedy does not involve rewriting the terms of the lease, but the giving of a personal remedy against Southwark in consequence of what the lease wrongly contains. As long as rectification is not sought when an order is made in these proceedings, the collateral contract is not in my judgment rendered unenforceable by s 2 of the 1989 Act. The collateral contract is not an agreement as to the terms on which the lease would be granted.
As Mr West pointed out the facts of this case are very different from the facts in Hanoman. This is not a case where the collateral contract arises in anything like the way it arose in Hanoman. It is central to the scheme. In reality Miss Scrowther is paying £31,250 for the privilege of selling the property at the contractual price of £125,000 with the possibility of recovering £18,750 after 10 years. In effect the purchase price is at best £112,500 (£125,000 - £12,500) and probably £93,750 (£125,000 - £31,250). These features are inconsistent with the price stated in the contract for the sale of the property and thus, he submits, the collateral contract is void under section 2.
In her skeleton argument Miss Lippold made 2 points in answer to Mr West's submissions. The agreements should as far as possible be construed so as to respect the autonomy of the parties. The collateral contract is not an agreement as to the terms of the contract for sale or as to the terms of the tenancy agreement - it runs parallel with them both. Second she submitted that the effect of section 2 if it were to apply would be to render the entire set of agreements void.
My mind has wavered on this point both during the course of argument and during the time whilst I have been considering this judgment. In the end I agree with Mr West that the payment of £31,250 is, in effect, a reduction of the price and inconsistent with the contract for sale. It does not run in parallel with it. I thus agree that the collateral contract is within section 2 and void. I do not accept Miss Lippold's second submission either. Section 2 affects only the collateral contract and not the contract for sale or the assured shorthold tenancy. It was not suggested in Hanoman that the contract for the purchase of the lease was void under section 2, merely that the collateral contract was void. It is the same in this case.
It follows, in my view, that Miss Scrowther is entitled to recover the whole of the £31,250.
8. Unfair contract terms
In the light of my views under section 2 it is unnecessary to express any views on this part of the case. However, as this case may well go further, and as the points were fully argued I shall express my views.
8.1. Unfair Terms in Consumer Contracts Regulations ("the Regulations")
The Regulations apply in relation to unfair terms in contracts between a supplier and a consumer. It is common ground that Watermill is a supplier and that Miss Scrowther is a consumer within the meaning of Regulation 3.
Under Regulation 5(1):
(1) A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.
Under Regulation 6
(1) Without prejudice to regulation 12, the unfairness of a contractual term shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent.
(2) In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate--(a) to the definition of the main subject matter of the contract, or
(b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange.
Schedule 2 contains an indicative and non-exhaustive list of the terms which may be regarded as unfair. Amongst the terms listed in Schedule are terms which have the object or effect of
(e) requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation;
Under Regulation 8 an unfair term is not binding on the consumer.
In her helpful submissions Miss Lippold pointed out that it is necessary to identify the term said to be unfair. She made the point that the terms as to the payment of 75% and 15% were individually negotiated with Miss Scrowther and thus could not be unfair within the Regulations. She submitted that the collateral contract was "in plain intelligible" language with the result that the assessment of fairness cannot relate to the definition of the main subject matter of the contract or the adequacy of the remuneration.
I accept the submission that the terms as to the sums payable were individually negotiated. The usual agreement provided for payment of 70% rather than the 75% payable here. I do not find it necessary to decide whether the collateral contract was in plain and intelligible language within the Regulations. As Mr West pointed out the terms have to be gleaned from the FAQs that were sent; furthermore the Client Quotation is not an easy document to follow.
It was suggested to Miss Lippold that the term that was potentially unfair was the term under which the "Rentback bonus" was only payable on vacation to tenants of at least 10 years standing unless the tenancy was terminated for a reason other than the breach of the tenant. It was suggested that the failure to pay bore no relation to any loss which might be suffered by Watermill. Suppose, for example, a tenant under the scheme pays rent for 9½ years and then falls into arrears so that possession is obtained. It is plain that the failure to pay the Rentback Bonus in those circumstances would bear no relation to any loss that might be suffered by Watermill.
Miss Lippold sought to answer this point in a number of ways. She reminded me of the evidence of Mr Kimmitt to the effect that it was usual for equity release schemes to provide only 70 - 75% of the purchase price. Thus the payment of the Rentback Bonus is indeed a bonus. In those circumstances it was open to Watermill to make whatever terms it chose for the payment of a bonus. There was nothing unreasonable or unfair in the terms it chose. This was accordingly not a term requiring Miss Scrowther to pay compensation or the forfeiture of any deposit by Watermill.
To my mind there are a number of answers to these submissions. First this was, as Mr Galloway readily acknowledged, a unique scheme. In my view the evidence of Mr Kimmitt as to other schemes was of limited assistance. The unique features of this scheme were the sale at full market value and the leaseback at full (or in this case above) market rent. Whilst the potential payment of £18,750 to Miss Scrowther was in one sense of the word a bonus to her it has to be seen in the light of the scheme as a whole under which she paid £31,250 to Watermill. Whilst the term is not strictly within paragraph (e) of Schedule 2 there are obvious similarities. Furthermore Schedule 2 is only an indicative list. The ultimate question is whether the term causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of Miss Scrowther. As already noted the failure to pay the Rentback Bonus bears no relation to any loss that Watermill might suffer as a result of a breach of the tenancy agreement by Miss Scrowther. In those circumstances I have come to the conclusion that the term would be unenforceable under the Regulations.
Miss Lippold then sought to argue that Watermill's losses were substantially in excess of the £18,750 that might otherwise have been payable to Miss Scrowther. She identified a number of possible losses:-
|Item||Amount Claimed||My Comment|
|Rent arrears||£3,144.43||There is already a judgment in the sum of £1,931.25 plus mesne profits from 3/9/07 to the date of actual possession. This can be set off against any judgment.|
|Cost of doing up the property||£5,836||It is not suggested that the replacement of the carpets or the redecoration arose out of any breach of the tenant's obligations under the lease. This is not accordingly a recoverable item of loss.|
|Costs associated with purchase such as legal fees||£458.25||These are costs associated with entering into the contract; they are not costs caused by Miss Scrowther's breach of contract. They are not recoverable.|
|Costs of surveyor||£150||These are costs associated with entering into the contract; they are not costs caused by Miss Scrowther's breach of contract. They are not recoverable.|
|Various costs in relation to Watermill's own mortgage||£1,593.75
|These are costs associated with entering into the contract; they are not costs caused by Miss Scrowther's breach of contract. They are not recoverable. In any event as the property was re-let the early redemption fee was not incurred.|
|Costs of marketing||1 2%||Remarketing costs would be incurred in any event when the property was eventually sold. It is not established that they will be any higher.|
|Administrative Costs||I accept that some additional administrative costs over and above the costs allowable in the possession proceedings will have been incurred by Watermill as a result of Miss Scrowther breach of contract. They are difficult to assess but I would have allowed £500.|
Thus if I had not thought that the collateral contract was void under section 2 I would have held that the term relating to the payment of the Rentback Bonus was unfair within the Regulations. I would have ordered its repayment subject to a discount for early repayment and would have set off the sums due under the possession order and a further sum of £500.
9. Unlawful Penalty
In the light of comments that I made during a pre-trial Case Management Conference the question arose as to whether the failure to pay the Rentback Bonus of £18,750 amounted to a penalty at common law and was thus void at common law. Both parties referred me to the decision of the Privy Council in Workers Trust v Dojap  2 AER 370.
In general, a contractual provision which requires one party in the event of his breach of the contract to pay or forfeit a sum of money to the other party is unlawful as being a penalty, unless such provision can be justified as being a payment of liquidated damages, being a genuine pre-estimate of the loss which the innocent party will incur by reason of the breach. There is an exception in the case of genuine deposits in contracts for the sale of land.
I have already held that the failure to pay the Rentback Bonus is not a genuine pre-estimate of Watermill's loss in the event of a breach of the tenancy by Miss Scrowther.
Miss Lippold, however, submits that this case does not fall within the law of penalties at all. There is no payment of a sum of money by Miss Scrowther on breach and the payment of the £31,250 was not a payment of a deposit or sum liable to forfeiture.
In the light of my views on section 2 and on the Regulations this question is now doubly academic. It is also not completely straightforward. In all the circumstances I prefer to express no concluded view on it and leave it to a case where it is decisive. In the event that this case goes further and it becomes necessary for the Court of Appeal to decide the point there are, I hope, sufficient findings of fact within this judgment to enable it to be done.
In my view Miss Scrowther succeeds on the section 2 point and is thus entitled to the return of the £31,250.
I have not heard argument on permission to appeal. My provisional view is that this is a case which bristles with arguable points of law and it is more than possible that the Court of Appeal would differ from me on any of them. In those circumstances I would be minded to grant Watermill permission to appeal.
Miss Scrowther is impecunious. There is accordingly a real risk that if the appeal succeeds that any sums paid to Miss Scrowther would not be repaid. In those circumstances I would provisionally also grant Watermill a stay of execution pending appeal. Any such stay would initially be for a period of 21 days. In the event that a Notice of Appeal was issued and served within that period it would extend until after the conclusion of the appeal. It would be a term of the stay that Watermill should prosecute the appeal with due diligence and there would be a liberty to apply.
Friday 23 October 2009