England and Wales Court of Appeal (Civil Division) Decisions

Case No: CHANF 97/0471/CMS3

B e f o r e :

MICHAELS

Appellant

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(Transcript of the Handed Down Judgment of

Smith Bernal Reporting Limited,

180 Fleet Street, London, EC4A 2HD

Telephone No: 0171-421 4040)

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John Mowbray QC, and Edward Cousins (instructed by Messrs Merriman White for the appellant)

Kim Lewison QC and Anthony Tanney (instructed by Messrs Titmuss Sainer Dechert for the defendants)

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Crown Copyright

Robert Walker LJ

Introductory

This is an appeal from an order of Lloyd J made on 3 March 1997 dismissing the plaintiffs’ claims for relief under Part I of the Landlord and Tenant Act 1987 (“the 1987 Act”). The appellants, the plaintiffs below, are Mr & Mrs Michaels, the tenants of Flat 11, Harley House, 28 - 32 Marylebone Road, London, NW1. The respondent is a company originally named Jaguar Properties Ltd but now named Harley House (Marylebone) Limited (“the company”). The company is now a subsidiary of Frogmore Estates plc (“Frogmore”) which was originally the first defendant to the originating summons, the company being the second defendant. But Frogmore has ceased to be a party to the proceedings.

Part I of the 1987 Act operates, as its long title indicates,

“to confer on tenants of flats rights with respect to the acquisition by them of their landlord’s reversion”.

I hardly need add that the classes of tenants on whom those rights are conferred, the occasions on which the rights are exercisable, and the various procedural requirements, have been spelled out by Parliament in great detail. The 1987 Act has been fully analysed by this court in Mainwaring v Trustees of Henry Smith’s Charity 1998 QB 1 and I shall have to refer to several of the detailed provisions. But by way of introduction I can identify s.5 as the key provision which requires a landlord of premises to which the 1987 Act applies, if he is proposing to make a relevant disposal affecting the premises, to give notice to qualifying tenants offering them first refusal. The Act does not apply to a block of flats unless (s. 1(2)(c)) at least half the flats are held by qualifying tenants as defined in s.3. Section 4 defines “relevant disposal” by a wide initial provision (s. 4(1)) subject to numerous exceptions, including (s. 4(2)(l))

“where the landlord is a body corporate, a disposal to an associated company”.

Sections 11 and 12 give qualifying tenants rights against the new landlord if a disposal has been made by the former landlord in contravention of his statutory obligations. Section 19 contains procedural provisions relating to applications to the court.

The 1987 Act, as originally enacted, did not impose any direct sanction for a landlord’s breach of his statutory duty under s.5. That gap has been closed as part of the extensive amendments to the 1987 Act made by the Housing Act 1996, but not so as to affect the outcome of this case.

There were five issues (of varying complexity) before the Judge and all five are raised on this appeal either by the notice of appeal or by the respondent’s notice. They are as follows :

(1) Was the disposal of the freehold of Harley House to the company a relevant disposal, that issue (which was, as the Judge said, the fundamental issue) depending on whether the company was at the relevant time an associated company of a company called Taylor Woodrow Property Co Ltd (“TWP”) ?

(2) Was a notice given on 24 May 1993 by solicitors acting on behalf of qualifying tenants a valid notice under s.11 of the 1987 Act (that point depending essentially on a question of fact arising on s.1(2)(c)) ?

(3) Did the company fail (in a letter dated 26 May 1993) to comply adequately with the notice ?

(4) Were the appellants entitled to relief despite the respondent’s contention that they were estopped?

(5) Did the appellants (or can they now) comply adequately with the requirements of s. 19 ?

The appellants must succeed on all these issues if they are to obtain relief of practical utility to them. The Judge resolved almost all the issues against them, although his view on issues (3) and (5) was inconclusive and qualified in a manner which I need not go into for the moment.

In order to explain how those issues have arisen I must summarise the salient facts. I can do so fairly briefly, taking them gratefully from the Judge’s careful reserved judgment, to which reference may be made for further detail. Although the proceedings were commenced by originating summons, points of claim and defence were ordered, witness statements were exchanged, and the Judge heard some cross-examination of witnesses. But except on one point (which really turns on the weight to be attached to documentary evidence) no challenge is made to any of the Judge’s findings of primary fact.

Harley House is a large block of flats in central London. From 1965 until 1993 the registered freehold proprietor was TWP, a company in the Taylor Woodrow group. But by the end of 1992 TWP had agreed to sell the freehold to another company which was undoubtedly TWP’s subsidiary (on any definition of that term), namely Taylor Woodrow Development Ltd (“TWD”). The purchase price (apparently about £1m) was paid and TWP became beneficial owner, but TWP remained registered proprietor and so was in the position of a nominee for TWD.

I have already set out s. 4(2)(l) of the 1987 Act, which makes an exception for a disposal to an associated company. That expression is defined (in s. 20(1)) by reference to s. 736 of the Companies Act 1985 which, when the 1987 Act came into force, referred (in subs. (4)) to “any shares held or power exercisable by the other [company] in a fiduciary capacity”). The definition in the Companies Act 1985 was amended by the Companies Act 1989 to meet the requirements of the Seventh Company Law Directive, and the corresponding provision in the new s. 736A(5) provides in apparently simple (but perhaps deceptively simple) terms,

“Rights held by a person in a fiduciary capacity shall be treated as not held by him”.

It is common ground that it is the new definition that must be read into the 1987 Act for the purpose of applying s. 4(2)(l) to the facts of this case.

It is also common ground that persons within the Taylor Woodrow group and the Frogmore group and their respective legal advisers set about producing a scheme under which they could achieve the commercial substance of a sale of the freehold of Harley House while in form and in law (as they hoped) avoiding triggering any relevant disposal for the purposes of the 1987 Act. That was to be achieved by selling, not Harley House itself, but all the shares in a specially-formed company - that is, the company - which would first have become owner of Harley House. There was nothing illegal about the scheme, whatever the tenants may have thought about its ingenuity, and it is entitled to a fair, if not particularly benevolent, consideration by the court (see Lord Wilberforce in IRC v Plummer 1980 AC 896, 907).

The scheme had basically three elements. I refer to them as elements rather than steps because what happened was not a simple sequence of discrete steps, one after the other. The elements were interdependent and overlapping. Nevertheless it is possible to discern three basic elements.

(1) TWD formed the company (it was actually incorporated on 12 October 1992) with an issued share capital of £2 and agreed to sell the freehold to the company for £15.75m. The company’s obvious inability to pay that price was made good by TWD’s agreeing to lend £15.75m to the company on the terms of loan notes. This was agreed by a contract dated 26 February 1993 together with a side letter dated the previous day. Completion of the sale was to be on 25 March 1993.

(2) TWD agreed with Frogmore (by another contract also dated 26 February 1993) to sell to Frogmore for £15,750,002 the issued shares in the company and the loan notes representing TWD’s right to receive £15.75m from the company. Completion was to be on 25 March 1993. The contract was expressed to be conditional on completion of the property sale. The sense in which the share sale was conditional, and the implications of that, are an important issue in this case.

(3) The share sale agreement provided that Frogmore could if it thought fit satisfy any part of the consideration due from it to TWD by allotment to TWD of new shares in itself (Frogmore). These were to be sold on behalf of TWD by S.G.Warburg Securities Ltd (“Warburg”). That could not happen unless and until the new shares had been admitted to official listing by the Stock Exchange. In the event just over £10m of the consideration was satisfied in that way.

On 23 March the parties’ solicitors confirmed the placing arrangements with Warburg. On 24 March the two firms of solicitors held what was called a “pre-completion” meeting at which a number of documents were executed in escrow and a so-called “escrow memorandum” was signed. The most important documents signed in escrow were (i) the loan note documentation (ii) the Land Registry transfer of the freehold from TWP to the company, in which TWD joined to acknowledge receipt of the consideration; (iii) a deed of indemnity by the company in favour of TWD, primarily in respect of liability under landlord’s covenants: and (iv) transfers by TWD to Frogmore of its shares in the company and the loan notes. The escrow memorandum set out in detail what was to happen on that day and on the following day, Thursday 25 March 1993. I will set out the whole memorandum (except for an introductory paragraph).

“On Wednesday 24th March 1993, or such other date as shall be the business day immediately preceding the proposed date for completion, the events listed below shall take place.

The parties meet at 9.30 am.

The Loan Note Instrument and a Loan Notes certificate are executed by the Company, but not dated.

All documents required for completion of the Property Acquisition Agreement are signed, but not dated.

All documents required for completion of the Share Sale and Purchase Agreement are signed, but not dated.

Assuming that the Purchaser [Frogmore] has already given notice to the Vendor [TWD] that it has made the Placing Election, the Power of attorney is executed by the Vendor.

The Purchaser holds a Board Meeting (or Committee Meeting) to allot the consideration shares conditional upon receipt of the subscription monies.

The Vendor (or the Purchaser/Warburgs under the power of attorney) executes the renounceable letters of allotment supplied by Warburgs.

The Purchaser/Warburgs deliver to the Stock Exchange prior to 12.00, a copy of the Board/Committee minutes.

All documents are held by the Purchaser’s solicitors on terms that are to be held in escrow until Admission of the consideration shares to the Official List.

On Thursday 25th March 1993, or such other date as shall be the date for Completion, the events listed below shall take place.

At 8.30 am The Stock Exchange post the 520 Notice.

Warburgs confirm this has been done to the Purchaser and to the Purchaser’s solicitor.

Warburgs transmit placing monies to the Vendor’s Solicitors (details of which account to be supplied to the Vendor’s Solicitors).

The Purchaser instructs its bank to transmit the balance of the Consideration to the Vendor’s Solicitors.

Upon confirmation that the total Consideration has been transmitted, the Vendor’s Solicitors confirm to the Purchaser’s Solicitors that the documents can be released from Escrow”.

Each party’s solicitors went away from the meeting with the documents which their respective clients were meant to have on final completion.

The Judge made a finding of fact, which is not challenged, that

“the transfers of the shares were executed in escrow on 24 March, after the execution in escrow of the transfer of the building and of the deal of indemnity, and they were not dated until the following day. I find that the condition of the escrow was satisfied during the morning of 25 March 1993”.

The Judge then discussed the significance of an error which was made in inserting the date on the transfers of the shares and loan notes, and other points which are not raised on this appeal. He did not spell out with great particularity exactly what escrow conditions attached to each document, and he commented that it would have been clearer if the escrow memorandum had stated that the conditions of the escrow for the share transfer and the loan note transfer included the prior release from escrow of the property transfer. But that was, he said, what it amounted to, as was made plain by clause 2.1 of the share sale agreement dated 26 February 1993. Clause 2.1 is in the following terms,

“The sale and purchase of the Shares and the transfer of the Loan Notes is conditional upon the completion of the purchase of the property by the Company in accordance with the provisions of the Property Purchase Agreement (and for the avoidance of doubt completion shall not include any stamping or land registration requirements relating to that purchase)”.

The completion of the purchase of the freehold (in the sense just mentioned) occurred, in accordance with the Judge’s findings, on the morning of 25 March 1993. Within about a fortnight, as the Judge recorded, the transfer of the freehold was stamped and registered at HM Land Registry, the company in the meantime having changed its name from Jaguar Properties Ltd to Harley House (Marylebone) Ltd.

It is clear from his judgment that Lloyd J had to investigate the events of 24 and 25 March in great detail in order to determine their legal significance. In consequence of the Judge’s findings, which are not challenged on appeal, it is apparent that the resolution of the first issue in the appeal depends, not on any escrow condition attached to the execution of any of the completion documents, but on the express condition in clause 2.1 of the share sale agreement, which I have set out above, together with the issue of fiduciary capacity.

This court has heard extensive submissions on these points, supported by a good deal of authority. The starting-point, on which both sides agree, is that a contract for the sale of shares (at any rate in a company whose shares are not quoted and readily obtainable on the market) is, like a contract for the sale of land, at first sight enforceable by specific performance; and that the effect of specific performance being available is to make the vendor under an uncompleted contract of sale a trustee of some sort for the purchaser.

In relation to sales of land the principles and the leading authorities are set out in Megarry & Wade Law of Real Property, 5th ed pp. 602 - 3. The authorities are well-known and lengthy citation is unnecessary but I will refer briefly to Rayner v Preston (1881) 18 Ch.D 1, 6, where Cotton LJ said

“An unpaid vendor is a trustee in a qualified sense only, and is so only because he has made a contract which a Court of Equity will give effect to by transferring the property sold to the purchaser, and so far as he is a trustee he is so only in respect of the property contracted to be sold”.

and Clarke v Ramuz 1891 2 QB 456, 459 - 60 where Lord Coleridge CJ said

“It appears to be well established in equity that, in the case of a contract for the sale and purchase of land, although the legal property does not pass until the execution of the conveyance, during the interval prior to completion the vendor in possession is a trustee for the purchaser, and as such has duties to perform towards him, not exactly the same as in the case of other trustees, but certain duties, one of which is to use reasonable care to preserve the property in a reasonable state of preservation, and, so far as may be, as it was when the contract was made”.

The respondent company accepts that general principle but contends, first, that it does not apply to voting rights attached to shares pending completion of a contract for sale of the shares; and secondly, that the principle does not in any case apply to a contract which is (in the relevant sense) conditional - as the respondent submits the agreement for sale of the company’s shares was. The first of these points (which is very closely connected with the amended definition of “subsidiary” in the new ss. 736 and 736A of the Companies Act) is a point on which the respondent succeeded below, and Mr John Mowbray QC (appearing with Mr Cousins for the appellants) has had to assail the Judge’s conclusion that this (in his words) “seemingly fortuitous result” followed from the amendment. The second point is one on which the Judge accepted Mr Mowbray’s submissions, and it has been assailed by Mr Kim Lewison QC (appearing with Mr Tanney for the company). The Judge dealt with the significance of the sale agreement being (in some sense) conditional before he dealt with the issue of fiduciary capacity. That is plainly the more logical order (since if the conditionality of a contract prevents any sort of trusteeship arising, the second point does not arise) and I will follow the same order, even though it means taking the respondent’s notice before the notice of appeal.

In considering the effect of a conditional contract the Judge referred first to observations of Nourse LJ in a tax case concerned with the meaning of “beneficial ownership” in provisions relating to group relief from corporation tax, Sainsbury v O’Connor 1991 1 WLR 963, 978 - 9. In that case Sainsbury and a Belgian company held 75% and 25% respectively of a joint venture company. Sainsbury had an option, not exercised for 5 years, to acquire the 25% holding. The option was never exercised and was cancelled. The case is therefore very distant on the facts : an option can be regarded as a sort of conditional contract, but unless and until the option is exercised there is no contract of which specific performance can be claimed or ordered. Another type of condition precedent is where the principal obligation under the contract (for instance, to sell land) arises only on fulfillment of a condition which is not within the control of the parties (for instance the grant of planning permission). In such a case there may be a contract with some unconditional obligations of a preliminary character (for instance, to seek planning permission and to appeal if necessary) but the contract is properly classified as being subject to a condition precedent as regards its principal obligation.

However there are other contracts which appear to contain conditions but which are not properly regarded as conditional contracts. The Judge referred to, and decided this point in favour of the appellants in reliance on the decision of this court in Eastham v Leigh London & Provisional Properties 1971 Ch 871. That was another tax case, concerned with the long-abolished short-term gains tax introduced by the Finance Act 1962. Under the provisions of that statute the contract (rather than the transfer or conveyance) fixed the date of an acquisition or disposal unless (so far as now material)

“the contract is conditional and the condition is not satisfied”.

The taxpayer company was the prospective tenant under a building agreement. By clause 4 it agreed to build a six-story office block in Reading and clause 4 provided that if the building was completely and satisfactorily finished the landlords would grant a 125-year lease, which the tenant would accept.

This court held, upholding Goff J at first instance, that the contract was not, in the relevant sense, conditional. Buckley LJ read clause 4 and said (at page 891)

“Reading that clause in isolation there is something to be said for the view that it is couched in conditional terms and that suggests that the obligation of the landlords to grant a lease is conditional upon the prior performance by the tenants of their obligations under the contract. But when one comes to read the agreement as a whole, it appears to me to be perfectly clear that the tenants’ obligations with regard to clearing the site and putting up the building were part of the consideration which the tenants were giving in exchange for the landlords’ promise to grant them a lease for 125 years at £5,000 a year, and the landlords are not to be expected to perform their part of the contract (that is to say, the granting of the lease) unless and until the tenants have performed their obligations which constitute the consideration for the landlords’ promise. Although clause 4 is couched in conditional language, in my view, it amounts to no more than this: it provides that if the tenants perform their part of the contract, then the landlords will perform their part of the contract; in other words, it is a recognition of the fact that the obligations of the parties are mutual and that the granting of the lease will, in fact, follow completion of performance of the obligations of the tenants. That is not, in my judgment, a condition precedent to the contract at all, it is part of the terms of the contract. You may call it a condition if you please, but it does not make it a condition precedent to the existence of a contract”.

Cairns LJ agreed and the judgment of Russell LJ, which treated it as a short and simple point, reached the same conclusion. The same principle appears in the judgment of Jenkins LJ, with whom Parker LJ and Pearce LJ concurred, in Parway Estates v IRC (1958) 45 TC 135, 147 - 8.

Lloyd J applied this principle to the share sale agreement between TWD and Frogmore, and in my judgment he was right to do so. He recognised the important difference (mentioned by Goff J in Eastham at pp 880 - 1) between a true condition precedent which it is not within a contracting party’s power to bring about, even though he may undertake to use his best endeavours to bring it about, and a promissory condition which the party does have power to fulfil or to cause to be fulfilled. In this case the share sale agreement was said to be conditional on completion of the sale of the freehold to the company. But TWD had control over the freehold, TWP’s capacity being merely that of a nominee; moreover the company was TWD’s wholly-owned subsidiary, and TWD had already put in place the loan notes arrangement enabling the company to complete its purchase. In clause 10.3 of the share sale agreement TWD covenanted with Frogmore in the clearest terms to procure completion of the sale and purchase of the freehold. In short completion of the sale and purchase of the freehold was something that TWD had power to bring about, and which it undertook to bring about.

Mr Lewison has sought to distinguish Eastham as being a tax case concerned with the meaning “conditional” in a taxing statute, in which Russell LJ (at page 886) found it unhelpful to consider cases in which the question was whether specific performance could be granted. Mr Lewison submitted that the parties have by their language, and in particular by clause 2.1 of the share sale agreements, made clear that beneficial ownership of the shares in the company was not intended to pass until completion of the property transaction.

Since the parties to all these transactions clearly intended to steer a course outside the 1987 Act, they did no doubt intend that the company should continue to be TWD’s (and therefore TWP’s) subsidiary until after completion of the sale of the freehold. But whether they achieved that depends on the correct construction of the documents which they entered into. I can find nothing in the terms of the share sale agreement to indicate that the parties intended to introduce any special provision as to the passing of the property in equity. I also agree with the judge that TWD’s obligations under the share sale agreement were not dependent on some outside contingency beyond its control (since it could call on TWP to transfer the registered title, and it effectively controlled the company). Had TWD not completed on 25 March 1993, it could have been sued for specific performance. Had it repudiated its obligations to Frogmore before that day, it could have been sued for specific performance even before the contractual date for completion (see Hasham v Zenab 1960 AC 316). The condition in clause 2.1 would have been no defence.

It is therefore necessary to examine what rights (if any) in the company’s shares Frogmore had immediately before completion of the sale of the freehold, and whether TWD did in consequence hold the relevant rights in a fiduciary capacity. It is important to remember that the substituted s. 736 and s. 736A, including s. 736A(5), refer primarily to rights or voting rights; it is also worth noting that s. 736A(6) refers separately to rights held by a person as nominee for another (which, in contrast to the position under s. 736A(5), are treated as held by the beneficial owner) and subs. (7) refers to rights attached to shares held by way of security.

The Judge analysed the new s. 736(1) and concluded that it was the voting rights attached to the company’s shares which had to be shown to be held in a fiduciary capacity. The Judge then referred to the decision of Russell J in Musselwhite v Musselwhite & Son Ltd 1962 Ch 964 and, in reliance on that decision, resolved this second part of the first issue against the appellants.

He referred to Russell J’s conclusion that the vendor under an uncompleted contract for the sale of shares is prima facie entitled to exercise the voting rights, even though he could no doubt be restrained by injunction from exercising the rights in a way inconsistent with the terms of the contract. Lloyd J then said at page 17 of the transcript,

“it seems to me that it is impossible to say, in those circumstances, that he holds the voting rights in a fiduciary capacity for the purchaser even if, because of the doctrines of equity, he holds the shares themselves in a fiduciary capacity. This is consistent with the proposition that the vendor’s trusteeship of the property agreed to be sold does not extend to the pre-completion fruits of the property, or give the purchaser a right to possession”.

So the Judge made a clear distinction between the shares themselves and the voting rights, which he seems to have regarded as equivalent or analogous to “fruits” of the shares, or to a right to possession of the shares.

As I have already noted, the Judge regarded this result as “fortuitous”, and at first blush I find it surprising. The legal nature of a share in a company is frequently (and not inaptly) described as a “bundle of rights” and if the bundle is held in a fiduciary capacity by the registered shareholder it might be thought that each constituent part of the bundle must also be held in the same way. It is therefore necessary to look with some care at Musselwhite and also at JRRT (Investments) v Haycraft 1993 BCLC 401 in which Musselwhite was followed by Chadwick J.

In Musselwhite there was a small family company. Exactly half of the issued shares belonged to one brother, Ross, and his wife, and the other half belonged to the other brother, Kenneth, and his wife. In May 1958 Ross (on behalf of himself and his wife) agreed to sell their shares to Kenneth for an immediate payment of £2,500 with the balance to be paid by quarterly instalments over five years, without interest. Ross and his wife executed transfers of their shares and the transfers and share certificates were lodged with the company’s solicitors, but Ross and his wife remained on the register. In December 1958 no notice of the company’s annual general meeting was given to Ross and his wife. In October 1959 a small number of additional shares was issued to Kenneth’s wife. Instalments of the purchase price continued to be paid promptly.

In January 1960 Ross and his wife issued a writ against Kenneth and his wife claiming that the annual general meeting in 1958 had not been validly convened, and seeking an order for a new meeting to be convened. The defendants counterclaimed for an injunction to restrain the plaintiffs from voting at any annual general meeting or exercising any other rights in respect of the shares registered in their names otherwise than in accordance with Kenneth’s directions. There appears to have been no allegation on the pleadings that Ross and his wife had been guilty of, or were threatening, any breach of fiduciary duty.

The counterclaim did therefore put the defendants’ case very high : not that Ross and his wife owed general fiduciary duties to the defendants in exercising any rights attached to the shares still registered in the plaintiffs’ names, but that they owed a specific duty to comply with Kenneth’s directions, unless it happened (see the judgment at page 980) that their lien as partly-unpaid vendors was improperly prejudiced. That far-reaching claim was rejected by Russell J. But it is in my view important to see how the case was argued. At page 969 counsel for the plaintiffs is reported as having argued

“Where vendors retain the legal title to the property, that legal title is part of their security for the unpaid part of the purchase price. The plaintiffs can, therefore, vote in respect of the shares as they think fit and, if the male defendant objects to anything they do he can sue them for breach of trust, but he cannot, as he is attempting to do, control the exercise of their voting right in advance, unless they are threatening to commit a breach of trust”.

So the existence of a fiduciary relationship, and the possibility of its inhibiting the vendor in the exercise of his voting rights, were conceded, and Russell J seems to have regarded the concession as rightly made. At pp. 985 - 7 he cited some well-known statements of principle (Lord Cairns and Lord O’Hagan in Shaw v Foster (1872) LR 5 HL 321, 338, 349 and Jessel MR in Lysaght v Edwards (1876 Ch.D 499 505) and he also referred to the decision of this court in Parway Estates . He did not express any sort of dissent from those principles, which were binding on him.

In Musselwhite Russell J referred several times (and most notably in his conclusion at page 987) to what he called the vendor’s “prima facie right” to vote in respect of the shares in his name. Mr Lewison submitted that that referred to his right in the absence of contractual provisions ousting or qualifying it, and that seems to be the view which Lloyd J took of Musselwhite. Certainly Russell J had (at pp. 981 - 4) cited extensively from the decision of this court in Siemen Bros v Burns 1918 2 Ch 324 in which it was recognised that the rights of mortgagees of shares, registered in their names, might be qualified by contractual provisions (the fact that the mortgagees in that case were trustees for debenture-holders is an irrelevance which should not cause confusion). But Russell J then went on to cite Shaw v Foster , Lysaght and Parway Estates , and I cannot accept that it was not the inhibition of a fiduciary obligation which he had in mind in speaking of a “prima facie right”.

The “prima facie right” of Ross and his wife was sufficient, in Musselwhite, for them to resist the defendants’ high-pitched counterclaim, not founded on any pleading of breach of fiduciary duty, seeking to prevent them making any exercise whatever of their voting rights except at Kenneth’s direction. I do not accept Mr Lewison’s submission that this court cannot decide this point in favour of the appellants without overruling Musselwhite. Chadwick J followed Musselwhite in JRRT (Investments) but that was another case in which a purchaser of shares (under an agreement which Chadwick J described as ineptly drawn) had pitched his claim very high. The summons under RSC O.14A raised the single issue of whether the purchaser was entitled to direct the vendor to vote the shares. I do not differ in any way from what Chadwick J said in JRRT (Investments) .

The new s. 736A may raise some problems but the provisions in its sub-sections (5), (6) and (7) do seem to me to fit together, and to fit in with the authorities, reasonably coherently. A registered shareholder who is absolute beneficial owner can vote as he pleases, subject only to rather imprecise constraints imposed by company law (see Smith v Croft (No 2) 1988 Ch 114, 186). A registered shareholder who is a nominee must vote in accordance with the directions of the absolute beneficial owner, to whom his voting rights are attributed. A registered shareholder who is vendor under an uncompleted contract is in an intermediate position, a fiduciary but not a nominee, and his voting rights are for the purposes of s. 736 in abeyance. Mr Lewison submitted that it cannot have been the intention of Parliament to produce that result in a commercial context such as a sale, but I am not persuaded of that. The only qualification that I would express about Musselwhite is that the special provision about voting rights attached to mortgaged shares (in s. 736A(7)) suggests that the analogy which Russell J drew in Musselwhite between a vendor and a mortgagee may no longer be helpful for the purposes of applying s. 736A.

Mr Lewison put forward and developed some further arguments, all aimed at restricting the scope of “fiduciary capacity” in s. 736A(5). He pointed out that not all contracts for the sale of shares are specifically enforceable. If the shares are quoted shares then (apart, possibly from some special market situation) damages would be an adequate remedy and specific performance would not be available. Parliament cannot, Mr Lewison submitted, have intended that the test for status as a subsidiary should vary depending on whether a company’s shares were quoted or unquoted. But the situation in which the shares of a subsidiary company are quoted is very rare indeed, and I cannot attach much importance to this supposed anomaly. Mr Lewison cited Bristol and West B.S. v Mothew 1998 Ch 1, 16 , for Millett LJ’s salutary reminder that not every breach of duty by a fiduciary is a breach of fiduciary duty. He cited Kelly v Cooper 1993 AC 205, 215 in which Lord Browne-Wilkinson, delivering the opinion of the Privy Council, referred to the judgment of Mason J in Hospital Products v United States Surgical Corporation (1984) 156 CLR 41, 97,

“That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according its true construction”.”

These citations show that claims for breach of fiduciary obligations must not be extended outside their proper limits, and even within those limits they may be influenced and restrained by contractual terms. But they do not in my judgment displace the existence of the fiduciary relationship (or in the words of s. 736A(5), fiduciary capacity) nor do they cast doubt on the proposition that in Musselwhite the vendor’s right to vote as he pleased was inhibited by a fiduciary, rather than a contractual obligation.

After argument had been concluded Mr Lewison drew the court’s attention to the recently-reported decision of this court in R v Chester and North Wales Legal Aid Area ex parte Floods of Queensferry 1998 1 WLR 1496. In this case the court had to construe the definition of ‘person’ in s. 2(10) of the Legal Aid Act 1988. It refers to a company or an unincorporated body “which is not concerned in a representative, fiduciary or official capacity”. Both Millett LJ (at page 1501) and Hobhouse LJ (at page 1503) thought that the expression “representative, fiduciary or official capacity” must be construed as a composite whole, and without detailed technical analysis. The judgment of Millett LJ contains (at pp. 15001 - 1) a short discussion of the concepts of fiduciary relationship, trust, and separation of legal and beneficial ownership. Millett LJ’s observations are addressed to the particular facts of that case, in which a controlling shareholder and director caused his company to make an equitable assignment in his favour. I do not derive much assistance from them in construing ss. 736 and 736A and applying them to the very different facts of the present case.

For those reasons I respectfully differ from Lloyd J on the point about fiduciary capacity. I would resolve the first issue in favour of the appellants. I consider that the ingenious efforts of the successive landlords to steer a course around the 1987 Act failed to achieve their objective.

The validity of the notice dated 24 May 1993 served by the tenants’ solicitors on the company depends on a simply stated question of fact, that is whether on that date (in the words of s. 1(2)(c) of the 1987 Act)

“the number of flats held by [qualifying] tenants exceeds 50 per cent of the total number of flats contained in the premises”.

Mr Michaels produced, as an annex to his witness statement, a schedule of tenancies, but he had not prepared it himself and he could not say what date it related to. The Judge treated it as inadmissible and that ruling is not challenged. The respondent company admitted in its points of defence that the 1987 Act applied to Harley House on 25 March 1993, but the only admissible evidence as to whether that position still obtained on 24 May 1993 consisted, in view of the Judge’s ruling, on three documents from the respondent’s files. These were -

(i) a note of a consultation with leading counsel on 25 May 1993, at which (according to the note) Mr Davies of Frogmore said that a Mr Eve (a surveyor) “estimated that there were 99 units. The allegedly “qualifying units” included some company lets. At the present time 52 units were perceived to [be] qualifying and 47 non qualifying, although in a few cases there was room for argument”;

(ii) on the following day Mr Davies wrote a memorandum stating “our present calculation is that there are only 52 or possibly 53 qualifying units and it may well be possible to acquire leases to reduce this number below”;

(iii) on 16 September 1993 Mr Davies wrote a memorandum stating “Having reappraised these tenancies, we believe three now are in effect business tenancies although this may in due course be disputed by the tenants”.

The Judge referred to the first and second of these pieces of documentary evidence and said that they at least had the merit of dating from close to the relevant date. Then he said,

“However given the closeness of the numbers indicated and the element of doubt and estimation apparent from the terms of those documents as to the precise accuracy of the number of flats and of qualifying tenants, and their context, I am not prepared to regard these documents as admissions proving that which the plaintiffs have to demonstrate”.

This was a finding (or perhaps a non-finding) of primary fact, but Mr Lewison accepts that this court is in as good a position as the Judge to make a finding on the point. The first two documents are almost exactly contemporaneous with the tenants’ notice and their context was one in which the senior management of Frogmore and the company had every reason to make as realistic and accurate a computation as they could, without undue optimism or pessimism, as to whether the position had changed fundamentally since 25 March 1993 (when there was a majority of qualifying tenants, as the points of defence admitted). It is a short point on which I have reached a clear conclusion contrary to that of the Judge. I consider that he should have found, on the balance of probabilities, that there was a majority of flats held by qualifying tenants on 24 or 25 May 1993 when the s. 11 notice was served.

The company’s solicitors responded very promptly to the tenants’ s. 11 notice. They wrote on 26 May 1993 to Miss Veronique Banse, the chair of the residents’ association and the correspondent nominated for the purposes of s. 11. The solicitors’ letter did not admit that the s. 11 notice was valid or that there had been any contravention of the 1987 Act. Nevertheless it provided information in four numbered paragraphs. Paragraph 1 was in these terms : -

“On 25th March 1993 Harley House was transferred by way of sub-sale from Taylor Woodrow Property Company Limited through Taylor Woodrow Developments Limited to Jaguar Properties Limited at a price of £15.75m the consideration being satisfied by the issue of £15.75m of Loan Notes”.

Paragraphs 2 and 3 stated, in unqualified terms, that at the time of the transfer the company was a subsidiary of TWD and TWP, and that the purchase of shares took place following completion of the transfer of freehold. Paragraph 4 gave correct information about the change in the company’s name.

I should at this point state the terms of s. 11 rather more precisely. A notice under that section may require

“particulars of the terms on which the original disposal was made (including those relating to the consideration payable) and the date on which it was made”.

In this case the original disposal was the transfer from TWP, by the direction of TWD, to the company. The importance of a s. 11 notice, and of compliance with it, is that in a case where the vendor landlord has not complied with s. 5 of the 1987 Act, s. 11 is intended to provide the qualifying tenants with the information which they need in order to decide whether to exercise their rights under s. 12 against the purchaser landlords. For up to fifty or more tenants to raise a sum in excess of £15m is plainly a serious undertaking, and one likely to involve substantial outlay on solicitors’, surveyors’ and other fees. The time limits laid down in s. 12(2) are not over-generous, at any rate in the case of a large and valuable block of flats. That is the context in which the nature of the particulars required under s. 11 has to be determined.

In many cases, where the landlords and their solicitors recognise the tenants’ rights and are even moderately sympathetic to their dilemma, common sense and goodwill would avoid serious difficulties. The landlords’ solicitors would provide basic information under s. 11 and inquire what more was needed; and the tenants’ solicitors would respond promptly with any queries. In such circumstances it might be difficult to say exactly when the period of three months began to run under s. 12(2)(a), but in most cases litigation would be unnecessary. Unfortunately there has been precious little goodwill in this case. The last paragraph of the solicitors’ letter of 26 May 1993 can only be described as aggressive and intimidatory, as was a personal letter dated 13 August 1993 which Mr Davies sent to Miss Banse. The company’s aim seems to have been to discourage the residents’ association from collective pursuit of rights under the 1987 Act, and it seems to have been largely successful in that aim. By December 1993 D.J.Freeman were acting on behalf of “various tenants” (the number was unspecified); two years later Merriman White were acting on behalf of Mr and Mrs Michaels alone.

In those circumstances the adequacy of the company’s response to the s. 11 notice has to be decided on the basis that the landlord and the tenants were entirely at arm’s length. It is also necessary to look at the complaints of inadequacy made at various times on behalf of Mr and Mrs Michaels (either jointly with other tenants or on their own). The reality of the matter is that the appellants and their advisers now have a very full and detailed picture of what happened. They seek an order under s. 19 for the sole purpose of keeping time running under s. 12(2)(a). The appellants’ complaints were as follows.

(1) D.J.Freeman’s letter of 3 December 1993 made four complaints. One was that no details had been given of the loan notes issued by the company. The other three related in different ways to aspects of the sale of the shares and loan notes of the company.

(2) Merriman White’s letter of 1 December 1995 simply called on the company to make good its default under s. 11(3), with no details.

(3) The appellants’ points of claim (paragraph 12) complained about the absence of particulars of the loan notes and made further complaints that information about the sale of shares of the company, and the company’s status as a subsidiary of TWD and TWP, was false.

(4) The appellants’ notice of appeal complains (apart from one new point which Mr Mowbray rightly did not press) only about the loan notes.

The Judge did not hear full argument on each point raised on the third issue. He took the view that the company was not bound to provide particulars of the loan notes because the consideration was £15.75m, not the loan notes; that, he said, would have been the starting point if rights under s. 12 had ever arisen and had been exercised. However the Judge did hear evidence about the value of the loan notes. He concluded that the loan notes could not sensibly be held by anyone other than the controlling shareholder of the company. He accepted evidence that

“as between parent and subsidiary, the value of the loan notes was par and that in any other context it is impossible to put any sensible value on the loan notes”.

The Judge said that it was well arguable that the company should have provided particulars both of the separate deed of indemnity entered into by TWD, and of terms of the property sale contract dealing with various management matters, including pending proceedings between the landlord and some of the tenants. He expressed doubts (but not a final view) as to whether (in respect of anything other than the loan notes, if he was wrong on that point) the appellants had complied with s. 19(2)(a), which makes service of a notice “on the person in question requiring him to make good the default” a precondition to an application to the court complaining that a person is in breach of a duty imposed by Part I of the 1987 Act.

In rejecting Mr Mowbray’s submission that the tenants were entitled to particulars of the loan notes, the Judge said,

“The disposal was made in consideration of the payment of £15,750,00 by [the company] to TWD. In fact [the company] obtained that money by borrowing from TWD on the terms of the loan notes. But that is a matter distinct from the purchase”.

I find it hard to understand why the Judge concluded that the loan notes were a distinct matter. This court was not referred to any documentary or other evidence that the sum of £15.75m actually went round in a circle between the respective bank accounts of TWD and the company. On the contrary, the witness statement of Mr Jonathan White (now managing director of Frogmore, and formerly a partner in White Druce & Brown, the managing agents of Harley House) stated,

“As between [the company] and [TWD] the consideration was to be satisfied by way of issue of £15.75m of loan notes in accordance with a facility letter dated 26 February 1992”.

The facility letter was actually dated 25 February 1993. The use of the loan notes was a pre-arranged part of the composite transaction, as appears from the escrow memorandum prepared at the pre-completion meeting. The company’s solicitors’ letter of 26 May 1993 was to my mind correct in referring to the loan notes as part of the “particulars of the terms on which the original disposal was made, including those relating to the consideration payable”. I respectfully disagree with the Judge’s conclusion that the loan notes arrangement

“although clearly part of the transaction as a whole, was not, as a matter of fact, one of the terms on which the disposal to [the company] was made”.

The terms of the loan notes became known in the course of the proceedings, and they do not contain any obviously uncommercial or artificial provisions. That does not however affect the conclusion that the tenants were entitled to information about the terms, but did not get it.

For those reasons I consider that if the tenants had, during the summer of 1993, pressed for information about the loan notes and the other terms of the contract for sale of the freehold, and had they served a notice of default under s. 19(2) of the 1987 Act, they would have been entitled to an order requiring the company, as the new landlord, to perform its duty under s. 11(3).

However that was not the tenants’ response. A residents’ association newsletter dated 15 July 1993 referred to s. 11 notice as having

“actually produced a reply giving us the information we sought. We are now in a position to serve a follow up notice requiring Frogmore to sell the building back to us and this, on legal advice, we shall be doing shortly”.

However no s. 12 notice was served by the tenants. Mr White’s witness statement suggests that the residents’ association was unable to obtain enough signatures and says that by 26 August 1993 (three months from the letter replying to the s. 11 notice) the company believed that the last had been heard of the tenants’ attempt to challenge the company’s purchase. In the meantime the company had put on an exhibition at Harley House of its plans for refurbishing the building and extending it vertically by constructing a new floor with penthouses. Some but by no means all of the tenants attended a meeting called by the landlord and held at a hotel on 25 January 1994. Mr and Mrs Michael did not participate in the meeting.

The landlord began work on the building early in 1994. At the time of the trial (early in 1997) the landlord had spent about £18m on refurbishment and over £1m on promotion and advertising and had sold 42 flats (including three penthouses) on long leases for a total of about £23m. Mr White’s evidence was that if the tenants had pursued their challenge under the 1987 Act, Frogmore would not have expended those sums. These matters are summarised in the company’s points of defence, which plead that in the event Mr and Mrs Michaels and other qualifying tenants are now estopped from relying on any points under the 1987 Act.

The Judge, having decided the first issue in favour of the company, dealt with this point fairly shortly. He did however refer to the provisions of s. 12(4) and (6) of the 1987 Act and concluded, to my mind correctly, that it was problematic how the calculations called for by those subsections would work out

“in any case, such as the present would be, where a substantial period has elapsed between the original disposal and the purchase pursuant to a s. 12 notice and where a great deal has changed in the meantime”.

The Judge thought, and I agree, that the company might, if now subjected to a s. 12 notice, suffer detriment. He concluded that it would be unconscionable for Mr and Mrs Michaels to assert a continuing right to complain of the company’s default in complying with the s. 11 notice (if they had such a right, which the Judge thought they had not) and that they would have been estopped.

On this part of the case Mr Mowbray criticised the Judge for going beyond what had been pleaded. However it would have been impossible to assess the implications of a possible s. 12 notice given in 1997 without considering how s. 12(4) and (6) would work in practice, and I do not think the Judge can be criticised for doing so. Mr Mowbray also pointed out that the appellants were Mr and Mrs Michaels, not the residents’ association as a body, and that the Michaels had not attended the meeting on 24 January 1994 or given the landlord any overt encouragement. Mere silence cannot, Mr Mowbray submitted, amount to the sort of unambiguous representation required to found a promissory estoppel.

Mr Lewison’s response was that he relied not on promissory estoppel but on the wider principle of estoppel by acquiescence which is to be found in the decision of Oliver J in Taylors Fashions v Liverpool Victoria Trustees 1982 1 QB 133, and which higher courts have since approved and applied. Mr Lewison also submitted that the fact that the company and Frogmore may so far have done well out of the acquisition and improvement of Harley House is irrelevant; the detriment to the company, he said, would be if the tenants were now, five years after the acquisition, to be able to enforce statutory rights with unpredictable financial consequences for the company.

I do not seriously differ from the Judge’s view on the issue of estoppel, although the facts of this case seem to be some way away from the “mistake which, at the material time, everybody shared” identified by Oliver J (at page 155) as being of central importance in Taylors Fashions . Such evidence as there is indicates that in the months after the company’s acquisition of the freehold there was real doubt on both sides as to whether the tenants had statutory rights.

However for my part I consider that the matter can be decided simply by reference to the Court’s powers under s. 19, under which the court has a discretion whether or not to make an order, once a default notice has been served. Whether or not the case can aptly be described as one of estoppel, Mr and Mrs Michaels let two years go by between D.J.Freeman’s letter dated 3 December 1993 (which was, I consider, an effective default notice in relation to information about the loan notes) and Merriman White’s letter of 1 December 1995. Then the best part of a year elapsed before proceedings were commenced. In the meantime, the landlord’s improvements and relettings drastically changed the situation. Even making allowances for the aggressive stance taken by a powerful landlord and for any difficulties which the Michaels had in obtaining legal aid (a circumstance which ill accords with the notion of their promoting the purchase of the freehold for the sum of £15.75m as adjusted under s. 12(4) and (6)) I consider that they have not acted sufficiently promptly to be entitled to relief under s. 19.

To make a declaration on the first issue would be contrary to the practice of the court in circumstances where the declaration would be of no practical utility to those seeking it. I would therefore dismiss the appeal.

Ward LJ

I agree.

Hirst LJ

I also agree.

Order: Appeal dismissed with costs; application for leave to appeal to House of Lords refused.