England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIS HONOUR JUDGE RUDD
SOUTHAMPTON COUNTY COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		Thursday 1st March, 2001

LORD JUSTICE MUMMERY :

1. The issue on this appeal is whether, on the true construction of sections 283 and 436 of the Insolvency Act 1986 Act (the 1986 Act), a right of pre-emption belonging to or vested in a bankrupt at the commencement of the bankruptcy is "property." If it is property, the right forms part of the bankrupt's estate; it vests in the trustee in bankruptcy immediately on his appointment taking effect; and it is available to meet the claims of the creditors. If it is not property, it remains vested in the bankrupt.

2. The interpretation provisions contained in section 436 state that

   "property" includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of , or incidental to, property."

3. As Sir Nicolas Browne-Wilkinson V-C said in British Airport PLC v. Powdrill [1990] Ch 744 at 759D-

   " It is hard to think of a wider definition of property."

   The Facts

4. The point of construction arises in an unusual factual and procedural context.

5. "Melville", Addison Road, Sarisbury Green, Southampton (the Property) consists of a bungalow and some backland with possible development value. It was acquired in 1988 by Ms Karen Robinson and Mr Geoffrey Dear as their home. They had been in a relationship since 1986. The contract to purchase at the price of £187,500 was originally made by Karen Robinson's then employer, Mr Reeves, on 26 February 1988. The completion date was in August 1988. Mr Reeves assigned the contract to Ms Robinson and Mr Dear, subject, however, to the terms of a Deed of Pre-emption dated 1 August 1988.

6. By the Deed Ms Robinson and Mr Dear ( "the Grantor") gave an undertaking to Mr Reeves ("the Grantee")

   " ...for a period of Twenty years from 1st day of August 1988 not to sell the [Property]....or agree or offer to do so to any person without first offering to sell the same by notice (" the Offer Notice") in writing to the Grantee at a price to be determined in manner hereinafter provided..."

7. The Deed then contained provisions spelling out the consequences of giving an offer notice.

8. It was agreed in clause (4) that-

   "The right of pre-emption hereby granted is capable of assignment by the Grantee and is binding on the personal representatives and successors in title of the Grantor."

9. Provision was made for the Grantee to register the right against the title to the Property at HM Land Registry.

10. The provisions as to the determination of the sale price included the following

    " (11) (a) The price of the Property shall be the value of the Property in the open market and with vacant possession as between a willing vendor and a willing purchaser regard being had to all the circumstances at the time of the service of the pre-emption notice save that the price of the property shall exclude any value attributed to the land shown hatched on the plan annexed."

11. The hatched land at the back of the bungalow is the part of the Property having possible development value.

12. Finally it was agreed that-

    "This deed shall cease to be of any effect following the marriage according to the laws of England of the said Karen Denise Robinson to the said Geoffrey John Dear."

13. The Property was transferred to them as beneficial joint tenants, but a further deed was executed on the same date declaring that the Property was held as to 50% for Ms Robinson's infant son, Aaron, and 25% each for her and Mr Dear. Mr Dear challenges the validity of that deed in pending proceedings.

14. Mr Dear and Ms Robinson never did marry each other. Instead, Ms Robinson married a US citizen. She went to live in the USA for several years. The marriage ended in divorce.

15. Mr Dear also left the Property for a while, but he continued to pay the mortgage and outgoings. He later returned to live in part of the Property. He still lives there. Ms Robinson (with Aaron, who reached the age of 18 on 19 May 2000) returned to live in the Property in 1996, but they have since left. Ms Robinson started proceedings for the sale of the Property under section 14 of the Trusts of Land and Appointment of Trustees Act 1996. It is in those proceedings that Mr Dear has made a Part 20 Claim that the Trust Deed is not binding on him and that he and Ms Robinson hold the Property in equal shares.

16. Things have not gone well for Mr Reeves. Once it was thought that he was rich. Then on 22 March 1993 he was made bankrupt on a creditor's petition owing £7m. Mr Barry Knight was appointed trustee on 22 August 1994. Mr Reeves was discharged from his bankruptcy in 1996.

17. Mr Dear and Mr Reeves have fallen out about the right of pre-emption. Mr Dear started proceedings for a declaration that the right of pre-emption was no longer binding, as "offer notices" had been served and Mr Reeves had failed to exercise them.

    The Judgments

18. All the proceedings came before HHJ Rudd in the Southampton County Court in March 1999 and resulted in judgments on 1 and 3 March 1999 to the following effect:-

19. The Judge declined to grant the declaration sought by Mr Dear against Mr Reeves, holding that no offer notices had been served. He rejected the submissions of Mr Dear that letters dated 10 July 1992, 11 May 1993 and 10 July 1993 constituted "offer notices."

20. He granted the order sought by Ms Robinson for the immediate sale of the Property.

21. The Part 20 claim by Mr Dear challenging the validity of the Trust Deed has not yet been heard. Doubts have arisen as to whether it was procedurally correct for the judge (a) to make an order for the sale of the Property before determining who was entitled to the beneficial interests in it and (b) to decide the claim for a declaration regarding the right of pre-emption in the absence of the trustee in bankruptcy of Mr Reeves. At the hearing the judge himself raised the point whether the trustee should be joined, but, when counsel for Mr Dear made an application for an adjournment for that to be done, he rejected it without deciding whether the right of pre-emption was vested in Mr Reeves or in his trustee.

    Permission to Appeal

22. These questions surfaced on the applications by Mr Dear for permission to appeal against the refusal of the declaration and against the order for the sale of the Property. The renewed applications for permission were heard on 15 June 2000 by Clarke LJ who made the following orders:-

    i) The application in the pre-emption action was adjourned to be heard inter partes on the basis that argument was to be confined to the limited point whether the right of pre-emption was vested in Mr Reeves or in his trustee in bankruptcy. This point turns on the legal analysis of the nature of the right conferred by the Deed and on the construction of the 1986 Act.

    ii) The application in the action for an order for the sale of the Property was adjourned to be heard at the same time as i) above, the respective appeals to follow if permission were granted. The issue on that application is whether there is a real prospect of demonstrating that the judge was wrong not to postpone the sale of the Property, so as to preserve the benefit of the development value of the Property. It is common ground that the sale of the Property on the order of the court would trigger the right of pre-emption.

    The Appeal Hearing

23. Everybody was represented at the adjourned hearing of the applications for permission, except the trustee in bankruptcy. In order to save costs he sent in written submissions asserting that the right of pre-emption is vested in him and that he has never re-assigned it to Mr Reeves. Mr Reeves has now dropped his original contention that if, contrary to primary submission, he was divested of the right on his bankruptcy, the trustee had expressly re-assigned it to him so as to give him the requisite status to contest Mr Dear's claims.

24. Initially, Mr Higgins, on behalf of Mr Reeves, objected to the court entertaining argument on an issue which the court below had not decided. Although he could not claim that it was a new point, since it had been raised by the judge himself in the court below, he submitted that the appeal should be dismissed without deciding this point and leaving it for decision by another court, possibly in other proceedings, with the prospect of yet more appeals. He submitted that this court's decision on that point would not affect the outcome of Mr Dear's attempt to appeal against the judge's refusal of the declaration, as Clarke LJ had already refused permission to appeal on the offer notice points on which the judge had decided the case against him. A ruling on the bankruptcy point would not produce a different result, as the trustee does not seek to have the decision of the judge reversed and Mr Dear has already failed in his attempts to appeal the decision.

25. It was pointed out (and Mr Higgins accepted) that the bankruptcy point can be decided without more evidence. Mr Higgins also agreed that the point will have to be decided by a court at some time. After taking further instructions from his client he agreed that this court should decide the point at this hearing. I am in no doubt that this is the sensible course. Time and costs will be saved in a case in which the total legal costs already exceed the likely value of the equity in the Property.

26. It was also agreed that the application for permission to appeal against the order for sale should await the decision on the bankruptcy point, in the hope that, once it is known whether the right is vested in Mr Reeves or the trustee, it will be easier to reach a compromise on the future of the Property. As an encouragement to those negotiations we announced our decision at the close of argument. It is that the pre-emption right is vested in the trustee. The outstanding application was adjourned by consent, on the basis that the written reasons for this decision would be handed down before the resumed hearing of that application (assuming, of course, that it has not been settled in the meantime).

    The Bankruptcy Point

27. Mr Higgins contended that the right of pre-emption is not property. There is no property capable of vesting in the trustee unless and until Ms Robinson and Mr Dear serve a valid offer notice. That has not happened. There is nothing that Mr Reeves can do to make that happen. The grantor of a right of pre-emption is under no positive obligation to sell. He is only under a negative obligation to refrain from selling the property without first giving the grantee the opportunity to purchase it in preference to any other buyer. The grantee is free to accept or reject the offer as he chooses. Until the grantor decides to sell there is only a possibility or hope that the grantee might have an interest. That possibility or hope is insufficient to amount to either a thing in action or a future or contingent interest incidental to property capable of vesting in the trustee.

28. The judgments of this court in Pritchard v. Briggs [1980] Ch 338 were relied on in support of the proposition that a right of pre-emption does not create an interest in land from the time of its creation. Until there is at the very least a decision to sell, it is no more an item of property, either vested or contingent, than, for example, the hope of a person who is a beneficiary under a will of a living testator. Templeman LJ, after identifying points of similarity and difference between an option and a right of pre-emption, said at p.418

    "The grant of the right of pre-emption creates a mere spes which the grantor of the right may either frustrate by choosing not to fulfil the necessary conditions or may convert into an option and thus into an equitable interest by fulfilling the conditions.....The holder of a right of pre-emption is in much the same position as a beneficiary under a will of a testator who is still alive, save that the holder of the right of pre-emption must hope for some future positive action by the grantor which will elevate his hope into an interest...."

    Goff LJ rejected counsel's contention that a right of pre-emption created an interest in land " because it fetters one of the important rights inherent in ownership, that of freedom of alienation ." He said at p.389

    " I cannot accept that, however, because a right of pre-emption gives no present right, even contingent, to call for a conveyance of the legal estate. So far as the parties are concerned, whatever economic or other pressures may come to affect the grantor, he is still absolutely free to sell or not. The grantee cannot require him to do so, or demand that an offer be made to him. Moreover, even if the grantor decides to sell and makes an offer it seems to me that so long as he does not sell to anyone else he can withdraw that offer at any time before acceptance."

29. At p. 390 he cited and adopted the following passage from the judgment of Street J in the Australian case of Mackay v. Wilson (1947) 47 SR (NSW) 315 at p.325

    " But an agreement to give the first refusal or a right of pre-emption confers no immediate right upon the prospective purchaser. It imposes a negative obligation on the possible vendor requiring him to refrain from selling the land to any other person without giving to the holder of the right of first refusal the opportunity of purchasing it in preference to any other buyer. It is not an offer and in itself imposes no obligation on the owner of the land to sell the same. He may do so or not as he wishes. But if he does decide to sell, then the holder of the right of first refusal has the right to receive the first offer, which he also may accept or not as he wishes. The right is merely contractual and no equitable interest in the land is created by the agreement."

30. At p.394 Goff LJ concluded that, unlike an option to purchase, a right of pre-emption does not create an interest in land. Stephenson LJ agreed with Templeman LJ at p.423B.

31. It is important to note two points. First, Pritchard v. Briggs was not an insolvency case. The issue on the nature of a right of pre-emption arose for decision in a dispute over the priority of two registrations on the Land Charges Register, one of an option to purchase land, the other of a right of pre-emption of the same land. The decision was that, as the right of pre-emption did not create a present or contingent interest in land, it did not take precedence over an option which was an interest in land; and that the registration of the option under the Land Charges Act 1925 accordingly took priority over the prior registration of the right of pre-emption.

32. Secondly, the reasoning in Pritchard v. Briggs has been forcefully criticised as "technically questionable" and as leading to an unjust result in that case. Megarry & Wade on The Law of Real Property (6th Edition by Charles Harpum) criticises the decision at para 12-062 for

    " .....introducing the novel conception of a contingent interest in land which ranks as such not from its creation but only from the occurrence of the contingency. The court stressed that the differentiating factor in a right of pre-emption was its dependence upon the owner's own volition, i.e. his willingness to sell; but it is difficult to see why that should make it so different from numerous other contingencies, volition-dependent or otherwise which the law allows to be attached to interests in land."

33. A footnote to this passage adds this comment-

    " It is not explained whether every volition-dependent condition is incompatible with an interest in land. If A gives to B an option to purchase if A or his successors cease to reside on it within 20 years, can this bind the successor?"

34. In the following paragraph 12-063 it is pointed out that the legislation on registration implies that a right of pre-emption should rank as an interest in land from the time of its creation, like an ordinary option, and doubts the validity of the distinction drawn between the two in what, it is suggested, are only obiter dicta in Pritchard v. Briggs.

35. Mr Higgins also cited the judgment of Knox J in Re Campbell [1997] Ch 14, an insolvency case in which it was held that the prospect of receiving an award of compensation from the Criminal Injuries Compensation Board for injuries suffered as a result of a criminal assault was not a thing in action and was not "property" within the meaning of section 436 of the 1986 Act. The applicant for compensation was adjudicated bankrupt. When, 2 years later, she was awarded compensation, it was paid to her. She refused to hand it over to the trustee, who claimed that it was part of her estate which had vested in him on his appointment. This contention was rejected by Knox J who said at p.18

    " Treating the matter purely as a matter of construction I am quite unable to accept that the word "property", when it is used in that definition of property, is intended to describe anything other than an existing item. In other words I do not accept that it is susceptible of referring to something which has no present existence but may possibly come into existence in the future."

36. He distinguished between, on the one hand, the case in which there is in existence property ( e.g .a trust fund) in respect of which there is a contingent and future interest and, on the other hand, "the possibility of achieving an interest in something which presently does not exist but may exist in the future." The former falls within the definition of property, but not the latter. He concluded at p.22 that the bankrupt's pending application for compensation was a hope of receiving an award which fructified two years later, but it

    "...was not at the date when she became bankrupt part of her property in such a way as to vest in the trustee when she became bankrupt."

37. Mr Higgins submitted that in this case there was no property in existence at the date when Mr Reeves was adjudicated bankrupt, to which the right of pre-emption might attach. Unless and until a valid offer notice was served there was only a possibility of achieving an interest in something.

    Conclusion

38. I am in no doubt that the right of pre-emption conferred by the deed of 1 August 1988 is "property" within the definition in section 436 of the 1986 Act and that it is accordingly vested in the trustee. The judge was wrong in treating it as still vested in Mr Reeves.

39. In Bristol Airport PLC v. Powdrill (supra) at p. 758 H-759B Sir Nicolas Browne-Wilkinson stated that, on the correct approach to construction, it is legitimate and necessary to bear in mind the "manifest statutory purpose" of the provisions and, if the words permit, to adopt the meaning "which gives effect to, rather than frustrates, the statutory purpose." The purpose of divesting the bankrupt of his property, with certain express statutory exclusions, and vesting the bankrupt's title to it in the trustee is to enable the trustee to realise the bankrupt's estate for the benefit of the creditors and to distribute it among the bankrupt's creditors in accordance with the statutory scheme contained in Chapter IV of Part IX of the 1986 Act. The right of pre-emption does not fall within any of the express statutory exclusions.

40. The distinguishing feature of a right of property, in contrast to a purely personal right, is that it is transferable : it may be enforced by someone other than the particular person in whom the right was initially vested. This right of pre-emption has that feature: it is expressly made assignable by clause (4) of the Deed. It is true that it may be difficult to put a value on it, as the grantor may never decide to sell the Property, but it is not necessary for a right to have any present or immediate value for it to be "property" within section 463. The relevant question is whether it is, in its legal nature, property. If it is, it only falls outside the bankrupt's estate by some specific exclusion: see de Rothschild v. Bell [2000] QB 33 at p.48H-49B. As a matter of common sense (if that factor is allowed to feature in these proceedings) I would add that the very fact that (a) Mr Dear and Mr Reeves are in dispute about the continuing validity of the right and that (b) Mr Reeves and the trustee are in dispute about entitlement to the right indicates that the right must be worth litigating about and that it is considered by those most concerned to have a value.

41. It is a "thing in action" in the sense that

    i) there exists a negative obligation, which would not exist but for the Deed of pre-emption;

    ii) it is binding on the grantor, who obliged not to sell the Property to anyone without first making an offer to the grantee;

    iii) in the event of a decision of the grantor to sell the Property, the obligation is enforceable by legal action by the grantee or his assignee;

    iv) in such an action the grantee could obtain an injunction to restrain sale of the Property to another person, until the grantor has first made an offer to the grantee and the grantee has failed or refused to take up the offer; and, if the grantor sells the Property to another person without first offering it to the grantee, he may be liable in damages to the grantee for breach of contract.

42. I am also of the view that the right of pre-emption conferred on Mr Reeves can properly be described as an "interest" which is "future.....contingent... [and]....incidental to property" within the meaning of section 436. This is not a case like Re Campbell where there was no property in existence at the date of the appointment of the trustee. In this case the Property existed at that date. The right to first refusal of it , when a decision is made to sell it, can properly be characterised as a "future" interest, as it can only vest in possession at a future date when the grantor decides to sell the Property; and it is a "contingent" future interest in the Property in the sense that it is entirely dependent on a future contingency which is uncertain, as the grantor may never decide to sell the Property.

43. I would distinguish Pritchard v. Briggs (supra). It is a decision on the construction of the Land Charges Act, which has a different statutory objective and the provisions referring to an "interest" are more narrowly drafted than those in the 1986 Act. It has not been contended on this appeal that that case was wrongly decided. It is neither necessary nor appropriate for this court to hold that it was wrongly decided. I would accept, however, that the reasoning in the judgments in Pritchard v. Briggs may require re-consideration. I see the force of the criticisms quoted from Megarry &Wade. I would add that I also see difficulties in regarding a right of pre-emption as similar to the hope of a person who is a beneficiary in the will of a living testator. Under the general law there is no fetter on the freedom of a testator during his lifetime to decide on whom he wishes to include as a beneficiary in his will and whom he wishes to exclude from it. He cannot be prevented from deciding to change his will and he will not incur any legal liability for so doing. In the case of a right of pre-emption, the grantor is free to decide not to sell the property, but, if he decides to sell it, he is legally bound to offer it first to the grantee. If he does not do so, he is liable to the grantee for breach of contract.

    Result

44. I would vary the order of the judge by declaring that the right of pre-emption vested in the trustee in bankruptcy of Mr Reeves and by adding the trustee as party. Counsel should prepare a draft order for the consideration of the court.

    LORD JUSTICE MAY:

    I agree

    ORDER: As per minute of order, prepared by counsel. (Order does not form part of approved Judgment)