England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
(Application of Claimants for Permission to Appeal)

		Royal Courts of Justice Strand London WC2 Wednesday, 7th August 2002

Wednesday, 7th August 2002

1. LORD JUSTICE PARKER: This is an application by Britel Corporation NV ("Britel") and Meretz Investments NV ("Meretz"), the claimants in the action, for permission to appeal against the refusal of His Honour Judge Seymour QC to continue until trial or further order interlocutory injunctions which the judge had previously granted against the first and second defendants in the action, First Penthouse Limited ("FPL") and ACP Limited ("ACP"), who are the respondents to this application.
2. The judge refused to continue the injunctions until trial or further order on the ground that the applicants had no cause of action against the respondents. He also refused permission to appeal. However, by his order dated 25th July 2002, the judge continued the interlocutory injunctions for one day only, to enable the applicants to apply to this court for permission to appeal, which they duly did. On the following day, 26th July 2002, Robert Walker LJ, dealing with the matter on the papers, adjourned the application for permission to appeal to be heard on notice as vacation business (on the applicants continuing their cross-undertaking as to damages) and continued the injunctions until the disposal of that application.
3. Accordingly, the application comes before us today on notice. Mr Machell appears for the applicants (he did not appear before the judge), and Mr Dutton appears for the respondents.
4. The background to the application is, in summary, as follows.
5. Both Britel and Meretz are companies incorporated in the Netherlands Antilles. Meretz is an associated company of Britel. Both companies have common shareholders.
6. The claim in the action arises out of a development project for the construction and sale of five penthouses on the roof of a block of flats at Albert Court, Prince Consort Road, London SW7 ("the Property"). At all material times prior to 17th May 2000, Britel was the freehold owner of the property.
7. In early 1996, Meretz introduced ACP to Britel as the company to carry out the development project. ACP is a subsidiary of FPL.
8. On 7th March 1996, the following documents were executed:

1. An Introduction Agreement between Meretz and ACP, which provided for Meretz to be paid a commission by ACP for introducing ACP to Britel.

2. A Preliminary Agreement between Britel and ACP, which provided for ACP to carry out the development project and to be granted a lease of the property by Britel to enable it to do so.

3. A Deed of Guarantee whereby FPL agreed to Britel that ACP would comply with its obligations under the Preliminary Agreement.

9. Under the Introduction Agreement, Meretz is entitled to a commission of 50 per cent of the total net proceeds of sale of the penthouses above £6 million. The remaining terms of the Introduction Agreement are not material for present purposes.
10. The Preliminary Agreement contains the following material provisions. Clause 5 provides for the grant by Britel to ACP of a long lease ("the Development Lease") of the roofspace of the Property at a premium of £1 and at an annual rent of £1. Clause 5.2 provides that the Development Lease is to be in a form which will enable ACP, if it needs or desires to do so, to execute a first legal mortgage of the Development Lease "in favour of any commercial lender in respect of a capital amount of up to £1,500,000". By clause 7.1, ACP agrees to use all reasonable endeavours to dispose of the completed penthouses at prices which it considers to represent their open market value. Clauses 7.1 and 7.2 contain provisions for Britel to approve the prices at which penthouses are sold. By clause 9, provision is made for the payment by ACP to Britel of a "Site Payment" representing 22.5 per cent of the aggregate net sales proceeds of the penthouses (up to a maximum net sales proceeds figure of £5.4 million). Hence the maximum Site Payment is £1.215 million. Clause 9 contains provisions as to how the net proceeds of sale are to be calculated, and for payment on account in respect of the Site Payment as penthouses are sold off on a phased basis over a period of time.
11. Clause 12 provides a timescale for the project, and for what is to happen if ACP fails to meet that timescale. Clause 12.2 obliges ACP to use all reasonable endeavours to progress the project in accordance with the prescribed timescale, subject to any variations approved by Britel (such approval not to be unreasonably withheld or delayed). Clause 12.2.5 provides that all works in respect of the project (except any outstanding snagging items) shall be completed within 54 months, that is to say, by 5th September 2000. Clause 12.3 provides for an extension of time in the event of delays beyond ACP's control. Clause 12.4 provides that if ACP is in breach of its obligations under clause 12.2.5 (that is to say, its obligation to use all reasonable endeavours to achieve substantial completion by 5th September 2000) then Britel has the right under clause 12.4.2 to serve notice on ACP requiring it to grant to Britel, at a premium of £1, a sublease of so much of the roofspace as remains undeveloped at an annual rent of £1. Clause 12.4.2 also provides that ACP shall procure that any necessary consent to the grant of the sublease is granted by any first mortgagee of the Development Lease. Clause 12.4.3 provides that if any penthouses remain undisposed of 12 months after the service of the notice under clause 12.4.2, they shall be deemed to have been disposed of at market value, and a Site Payment shall thereupon become due in respect of them.
12. Clause 14 provides that ACP will not sell, transfer or otherwise dispose of the Development Lease before the completion of the project, save with Britel's prior written consent (such consent not to be unreasonably withheld).
13. I turn next to the Guarantee. As already noted, the parties to the Guarantee are FPL (defined as "the Guarantor") and Britel (defined as "the Freeholder"). The Guarantee recites (in recital B) that it is intended that ACP (defined as "the Developer") and Britel should enter into the Preliminary Agreement (a draft of which is annexed). Recitals C and D of the Guarantee are in the following terms:

"C Consequent upon the Preliminary Agreement being entered into it is intended that the Developer should act as a Developer in respect of the Project (as therein referred to) subject to and in accordance with the terms of the Preliminary Agreement which may result in the granting of a Development Lease ('the Lease') being granted to the Developer in the form of the draft annexed hereto.

D In consideration of the Freeholder entering into the Preliminary Agreement at the request of the Guarantor in favour of the Developer, the Guarantor has agreed to enter into this Deed upon the terms and conditions set out below".

14. Clauses 1 and 2 in the operative part of the Guarantee are central to the issues which arise on this application, and I quote them in full:

"1. Subject to the Preliminary Agreement being entered into (at the request of the Guarantor) by the Freeholder and the Developer and with effect therefrom, in consideration of the premises the Guarantee HEREBY COVENANTS with the Freeholder that the Developer or the Guarantor will duly perform and observe all the covenants and conditions on the part of the Developer contained in the Preliminary Agreement and (subject to and with effect from the same being granted) the Lease and in particular that the Developer or the Guarantor will duly pay the monies falling due thereunder and payable to the Freeholder and the Guarantor HEREBY FURTHER COVENANTS to indemnify and keep indemnified the Freeholder from and against all losses, damages, costs and expenses arising directly or indirectly out of any default by the Developer in the performance and observance of any such covenants and conditions as aforesaid.

2. The Guarantor HEREBY FURTHER COVENANTS with the Freeholder that the Guarantor is to be regarded as being jointly and severally liable with the Developer for the fulfillment of all the obligations of the Developer under the Preliminary Agreement and under the Lease and agrees that the Freeholder in the enforcement of its rights pursuant to the terms of the Preliminary Agreement and/or the Lease may proceed against the Guarantor as if the Guarantor were named as the Developer in the Preliminary Agreement and/or the Lease".

15. On 17th May 1996, Britel assigned to a company called NUBBH Limited the benefit of the Preliminary Agreement and of the Deed of Guarantee as security for the indebtedness of Britel to NUBBH Limited. NUBBH Limited is joined as the third defendant in the action, but no relief is sought against it.
16. On 4th November 1996, Britel granted the Development Lease to ACP for a premium of £1. The Development Lease demises to ACP the roofspace and roof surface of the Property for a term of 1,005 years from the 25th December 1995, at the annual rent of £1. Clause 2(iii)(b) contains a covenant by the Lessee:

"... not to assign or transfer the Premises as a whole without the previous consent in writing of the Lessor Provided however that if the Lessee shall comply with the provisions of sub-clause (iv) of this Clause such consent shall not be unreasonably withheld".

17. On 11th August 1997, ACP granted to FPL a first legal charge over the Development Lease to secure an initial sum of £40,000, together with any additional monies made available to ACP by FPL.
18. On 20th April 1999, a Deed of Priorities and Further Charge was entered into by (among others) Britel, Meretz, FPL and ACP. The Deed refers (among other things) to FPL's first charge over the Development Lease, and records that Britel has agreed to extend the completion date for the project to 7th September 2002. I shall have to return to the terms of this Deed later in this judgment.
19. On 17th May 2000, Britel transferred the freehold of the Property to a third party, Chancelane Limited.
20. The evidence is that as at 22nd July 2002, being the date of commencement of the proceedings, only three penthouses had been sold by ACP, and that the total net proceeds of these sales exceeded £6 million. Hence, under the Introduction Agreement, Meretz is entitled to a commission from ACP equal to 50 per cent of the net proceeds of any further sales.
21. In the proceedings, the applicants seek quia timet injunctions restraining the respondents from selling, transferring or otherwise dealing with the Development Lease.
22. By their Particulars of Claim, they allege that it is unlikely that ACP will be able to meet the revised completion date of 7th September 2002, and that this is due to ACP's failure to use its reasonable endeavours, as required by clause 12.2 of the Preliminary Agreement. Under the heading "the current position", paragraphs 22 to 25 of the Particulars of Claim plead as follows:

"22. If practical completion is not achieved by 7th September 2002, because of ACP's failure to use reasonable endeavours to achieve practical completion by then, clause 12.4 of the Preliminary Agreement will entitle the party with the benefit of the right under that clause to serve notice on ACP requiring a sublease to be granted to Britel in respect of such part of the roofspace which has not been developed by ACP ("the Sublease Right").

23. The Claimants fear that ACP or First Penthouse proposes to sell, transfer or otherwise dispose of the Development Lease. If First Penthouse does sell the Development Lease, the Claimants also fear that the purchaser will not be bound by the Sublease Right. The Sublease Right was protected by the registration of a caution against the registered title to the Development Lease after the First Penthouse Charge was registered.

24. If ACP was to sell, transfer or otherwise dispose of the Development Lease that would be a breach by ACP of its covenants in the Preliminary Agreement and the Introduction Agreement.

25. If First Penthouse was to sell, transfer or otherwise dispose of the Development Lease that would be a breach by First Penthouse of its covenants in the Guarantee. It would also be a breach by First Penthouse of the covenants on the part of ACP in the Preliminary Agreement and the Introduction Agreement. Those are both collateral agreements containing tenant covenants in relation to the Development Lease. Those covenants would bind First Penthouse if First Penthouse as mortgagee in possession took possession with a view to selling the Development Lease".

23. Paragraph 26 of the Particulars of Claim, under the heading "Quia timet injunction sought", is in the following terms:

"26. The claimants therefore seek a quia timet injunction to restrain First Penthouse and ACP from breaching those covenants by selling, transferring or otherwise disposing of the Development Lease before the issue of the certificate of practical completion in respect of the project".

24. The applicants accordingly claimed:

"An injunction restraining the first and second defendants from selling, transferring or otherwise disposing of the Development Lease".

25. Immediately on the issue of the proceedings, the applicants applied to His Honour Judge Seymour QC, without notice, for injunctions in the terms of the injunction sought in the proceedings against FPL and ACP until trial or further order. The judge granted injunctions in the terms sought until 4 pm on 25th July 2002, that being the return date when the application was to be renewed on notice.
26. On 24th July 2002 (the day before the return date) FPL notified the applicants that in the exercise of its power of sale under its legal charge it had, on 19th July 2002, exchanged contracts for the sale of the Development Lease.
27. On the return date (25th July 2002) when the application came back before the judge on notice, there was before the judge a witness statement from Mr Roger Hawkins of Berwin Leighton, FPL's solicitors. In paragraph 5 of his witness statement, Mr Hawkins states that ACP's indebtedness to FPL under its charge exceeds £3 million, despite demands having been made for payment. Mr Hawkins goes on to say that 19th July 2002, in the exercise of its power of sale, FPL exchanged contracts for the sale of the Development Lease for £1.2 million, and he exhibits a copy of the contract. He states that, so far as he is aware, the purchaser, Mr Fahad al Tamimi, is not connected with either ACP or FPL (save that Mr Tamimi has bought one of the penthouses). Mr Hawkins also exhibits a valuation by Messrs Savilles to support the assertion that the sale is at a market value.
28. Before the judge, Mr Jourdan (who appeared on that occasion for Britel) put the case for the continuation of the injunctions on three bases. In the first place, he submitted that by virtue of clause 2 of the Guarantee, FPL became, in effect, a party to the Preliminary Agreement, together with ACP, and liable to perform ACP's obligations under it; and that the sale of the Development Lease by FPL would be a breach of ACP's obligations under the Preliminary Agreement in that it would make it impossible for ACP thereafter to use its reasonable endeavours to complete and sell the remaining penthouses within the prescribed timescale. In this connection, Mr Jourdan relied on a passage from the judgment of Lord Atkin in Southern Foundries v Shirlaw [1940] AC 701 at p.717 where Lord Atkin cites a dictum of Cockburn CJ in Stirling v Maitland 5 B&S 840 at p.852 to the effect that where a party enters into an arrangement which can only take effect by the continuance of an existing state of circumstances, there is an implied engagement on his part that he will do nothing of his own motion to put an end to that state of circumstances. Secondly, Mr Jourdan submitted that ACP's failure to keep up payments under the legal charge was in itself a breach of its obligation to use its reasonable endeavours to compete the development, and hence of FPL's obligations under clause 2 of the Guarantee. Thirdly, Mr Jourdan submitted that FPL was bound by the prohibition of alienation contained in clause 14 of the Preliminary Agreement.
29. Mr Dutton (for FPL) submitted that the injunctions should not be continued since the applicants had no cause of action against the respondents. He submitted that clause 2 of the Guarantee did not have the effect of adding FPL as a party to the Preliminary Agreement in the full sense contended for by Britel; rather, it merely rendered FPL liable for the consequences of any breach of the Preliminary Agreement by ACP.
30. It was, however, common ground before the judge (as it is in this court) that should FPL's submissions be rejected, then the contracting purchaser would have to be added as a defendant in the proceedings, and that the application for interlocutory injunctions would have to be stood over to a further hearing, with the injunctions continuing in the meantime.
31. As I related earlier, the judge accepted Mr Dutton's submissions and refused to continue the injunctions beyond one further day, to allow the applicants to apply to this court for permission to appeal.
32. (The full transcript of the judge's judgment is not yet available, but I take the terms of the judgment from a detailed note prepared by the applicant's solicitor, which has been agreed by the respondents.)
33. After setting out the facts, the judge continued (according to this note):

"Mr Dutton submitted that neither Claimant had any cause of action. Mr Jourdan submitted that under clause 2 of the Guarantee, First Penthouse became a party and therefore was bound by clause 14 of the Preliminary Agreement. Therefore it was not able itself to alienate by transfer or other disposal the Development Lease. Mr Jourdan submitted that the effect of exercising the power of sale would mean that ACP became unable to perform its obligations under the Preliminary Agreement and would be in breach of its obligation to use all reasonable endeavours and exercising the power of sale would give rise to a breach of the Preliminary Agreement by ACP. He relied on a principle to which Lord Atkin had referred in Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701, 717 that First Penthouse is bound by the general obligation not to do anything 'to put an end to that state of circumstances, under which alone the arrangement can be operative'. Mr Dutton submitted that it was established that a guarantee is to be construed strictly in favour of the guarantor and the effect of clause 2 was not that First Penthouse became a party to the Preliminary Agreement but was only to be regarded as a party for the purpose of enforcement if there was a breach. The selling by First Penthouse as mortgagee in possession could not be a breach by ACP even if the effect was that ACP thereafter would be unable to perform its obligations. I accept the submissions of Mr Dutton as to the proper construction of the Deed of Guarantee. I note that the Deed of Guarantee is dated the same day as the date the Preliminary Agreement was made. If First Penthouse were to be a party why were they not a party to the Preliminary Agreement. The inference is irresistible that the parties established their arrangements so that First Penthouse was not a party to the Preliminary Agreement. Clause 2 of the Guarantee does not have the effect of making First Penthouse a party to the Preliminary Agreement. Rather it gives effect to Mr Dutton's intention. The clause does not say the guarantor is 'to be jointly and severally liable' but is 'to be regarded as being jointly and severally liable for the fulfillment of all the obligations ...'. This is a different concept correctly identified by Mr Dutton. Words were carefully chosen to produce the effect in the Guarantee that if there were a breach by Britel then Britel could proceed directly against First Penthouse as if they had been a party to the Preliminary Agreement. It is incorrect to consider that First Penthouse were directly undertaking to be liable for obligations of the nature set out under clause 14, as having to obtain the Freeholder's consent. Mr Jourdan's alternative argument is by reason of the exercise of First Penthouse's power of sale as mortgagee a breach of contract would occur by ACP of the provisions of clauses 7.1 and 12.2 of the Preliminary Agreement. In my judgment that submission is not well founded. The second question is whether as a consequence ACP was unable to perform its obligations under 7.1. That would depend on the terms of the sale. Whilst it is not a likely possibility it is a theoretical possibility that the terms of sale would reserve to ACP an entitlement to continue works to the roofspace at Albert Court.

The two concepts are different. In my judgment the Claimants have no cause of action against the Defendants and in those circumstances the Injection should not be continued".

34. I can now turn to the arguments on this application.
35. In support of the application, Mr Machell, in his written skeleton argument, submits firstly that the judge was wrong in his interpretation of clause 2 of the Guarantee. He submits (as he did before the judge) that on the judge's construction, clause 2 is effectively otiose since clause 1 already makes FPL liable for a breach of the Preliminary Agreement by ACP. He submits that clause 2 is plainly intended to go further than that. He submits that clause 2 makes FPL jointly and severally liable with ACP for the fulfillment of all ACP's obligations under the Preliminary Agreement, to the same effect as if FPL had been named as a party to the Preliminary Agreement. On that basis, he submits that FPL is bound by the prohibition of alienation contained in clause 14 of the Preliminary Agreement.
36. Mr Machell further submits, in his written skeleton argument, that by selling the Development Lease FPL will make it impossible for ACP to carry out its "reasonable endeavours" obligations under clauses 7 and 12 of the Preliminary Agreement. He relies once again on the principle enunciated in Southern Foundries v Shirlaw, to which I have just referred. He submits that, although the judge referred to that principle, he failed to apply it to the facts of the instant case. So applied, submits Mr Machell, the result is that FPL is under an implied obligation to do nothing of its own motion which will prevent the project being completed within the prescribed timescale; and a sale of the Development Lease by FPL would have precisely that effect. As to the judge's observation that it would theoretically be possible for the terms of sale to reserve to ACP the right to complete the development, Mr Machell points to the terms of the contract into which FPL has in fact entered, which include no such reservation.
37. Mr Machell further submits in his written skeleton argument that, had the chargee been a commercial lender, rather than ACP's parent company, ACP would have been obliged by clauses 7 and 12 of the Preliminary Agreement (the "reasonable endeavours" clauses) to keep up the payments due under the Charge. By virtue of clause 2 of the Guarantee, that would also have been the obligation of FPL. Hence, by selling the Development Lease in exercise of its power as chargee, FPL is placing itself in breach of its own obligations to Britel.
38. Mr Machell also has a further argument based on section 15 of the Landlord and Tenant (Covenants) Act 1995, the effect of which, if correct, would, as I understand it, be to render clause 14 of the Preliminary Agreement binding on FPL.
39. For FPL, Mr Dutton effectively repeats the submission which he made to the judge, and which the judge accepted. As to clause 2 of the Guarantee, he accepts that the true effect of the clause is not entirely clear, but he submits that what is clear is that FPL's obligations are those of a guarantor. He submits that the effect of clause 2 is that Britel is permitted to bring proceedings against FPL as if it were a party to the Preliminary Agreement, but only for the purpose of "the enforcement of its rights pursuant to the terms of the Preliminary Agreement".
40. Further, he submits that it was plainly in the contemplation of the parties that the Development Lease would be mortgaged, and hence that the mortgagee might at some stage exercise its power of sale. In that event, the likelihood must be that there would be a call under the Guarantee. But, he submits, it is not enough to found a claim under a guarantee that default by the principal debtor is likely; there must be actual default.
41. He further points out that clauses 7 and 12 of the Preliminary Agreement (the "reasonable endeavours" clauses) relate to compliance with the prescribed timescale. He submits that the most that can be said is that the risk of default under clause 12.2 is greater than it might be.
42. As to clause 14 of the Preliminary Agreement, he submits that that clause does not prohibit the creation of legal charges over the Development Lease, and that it cannot have been in the contemplation of the parties that a chargee would be unable to realise its security.
43. As to the argument based on section 15 of the 1995 Act, Mr Dutton submits that this question only arises if Britel's contentions as to the effect of clause 2 of the Guarantee are accepted. Further, he submits that in any event clause 14 imposes a personal obligation on ACP, which is not binding on its successors.
44. I can now state my conclusions.
45. In my judgment, the issue as to the true construction of clause 2 of the Guarantee is plainly an arguable one. There is, of course, force in the submission (which was accepted by the judge) that had the parties intended FPL to be liable as if it had been named as a party to the Preliminary Agreement, it would have been only too easy to include FPL as a party to that agreement. On the other hand, clause 2 of the Guarantee must presumably have been intended to add something to clause 1, which makes FPL liable as guarantor.
46. Assuming then that Britel were to succeed on that issue, with the result that FPL is liable as if it had been named as a party to the Preliminary Agreement, the next issue is whether it is arguable that FPL would be in breach of its obligations under the Preliminary Agreement in exercising its power of sale as chargee.
47. As to that, the starting point is that the Preliminary Agreement expressly contemplates the possibility that ACP may mortgage the Development Lease (albeit to a third party commercial lender), and hence that a mortgagee might at some time in the future exercise its power of sale, thereby rendering completion of the project by ACP impossible. So the issue is whether the position is arguably different when the mortgagee happens to be FPL.
48. If Britel is right in its submission that FPL cannot realise its security by exercising its power of sale, then the effect of FPL's charge is plainly seriously compromised, yet the Deed of Priorities and Further Charge, to which both Britel and Meretz were parties, expressly recognises FPL's charge as an effective charge: effective, that is, according to its terms, which include a statutory power of sale. The recitals to the Deed refer to charges over the freehold granted by Britel and to charges over the Development Lease granted by ACP, including (by recital F) the charge in favour of FPL, which is defined as "the First Penthouse Charge". It also recites that a company called Varlet International Limited is proposing to purchase one or possibly two of the penthouses to be constructed by ACP and in connection therewith is proposing to take a charge (defined as "the Varlet Charge") over the Development Lease by way of security. The operative part of the Deed provides (by clause 1) that during such time as the Varlet Charge should remain extant and any money should remain owing thereunder it should be regarded as substituting and replacing the First Penthouse Charge, and subject as provided in the Deed, should take priority over the other charges over the Development Lease. Clause 2 of the Deed is in the following terms, so far as material:

"Consequent upon the Varlet Charge being discharged, then the First Penthouse Charge shall ... once again come into full force and take effect and shall automatically be reinstated as the first charge (ranking ahead of all the other charges over the Lease in terms of priority) provided always that in those circumstances shall the amount secured by the First Penthouse Charge exceed £1.5 million".

49. Thus, as I read that Deed, the parties to it, which included both Britel and Meretz, clearly acknowledged that FPL's charge was effective to create a valid security over the Development Lease according to its terms. It seems to me therefore that the submission now made on behalf of Britel and Meretz to the effect that FPL is unable to exercise its central power of realising its security under the charge is flatly inconsistent with the terms of that Deed. Given the terms of the Deed, the submission made by Britel and Meretz to that effect seems to me to be completely unsustainable. I have accordingly come to the conclusion that, even assuming Mr Machell is right on the issue of construction of clause 2 of the Guarantee, that is to say that clause 2 has the same effect as if FPL had been named as a party to the Preliminary Agreement, nevertheless that cannot prevent FPL, in its capacity as chargee under its charge, from realising its security. The terms of the Deed of Priorities and Further Charge, and in particular the terms of clause 2 which I have just quoted, seem to me to place an insuperable obstacle in the way of the applicants' case for the continuation of the injunctions. It follows, in my judgment, the proposed appeal would for that reason have no real prospect of success. I would accordingly refuse permission to appeal.
50. LORD JUSTICE CHADWICK: I agree that permission to appeal should be refused, but in the circumstances that this may be seen as the last step in a commercial dispute relating to this lease, I think it right to add some observations of my own to the judgment which my Lord has given.
51. The relief claimed in these proceedings is an injunction restraining the first and second defendant from the selling, transferring or otherwise disposing of a lease, the Development Lease, granted on 4th November 1996, of property at Albert Court, London SW7, adjacent to the Royal Albert Hall. The second defendant, ACP Limited, is the lessee under that lease. The property demised by the lease was the surface of the then- existing roof of the building and the space above that roof. The purpose of the lease was to enable ACP to develop the property by constructing five penthouses above the then-existing roof. The lease contains an absolute covenant by the lessee not to charge, assign or transfer any part of the demised premises and a qualified covenant not to assign or transfer the premises as a whole without the consent of the lessor.
52. On 11th August 1997, ACP charged the lease by legal charge to the first defendant, First Penthouse Limited, to secure all monies and liabilities owing by ACP to FPL. The legal charge provided that section 103 of the Law and Property Act 1925 should not apply to the security and that the statutory power of sale and other powers should be exercised at any time after demand.
53. On 19th July 2002, in the exercise of its power as mortgagee under section 101 of the Law and Property Act 1925, FPL entered into a contract to sell the lease to a third party buyer. The immediate question is whether FPL can be restrained by injunction from completing that sale.
54. For the purposes of this application, I am content to assume, without deciding, that by granting the legal charge in August 1997, ACP was in breach of its covenant under the lease and of its obligations under an agreement dated 7th March 1996, the Preliminary Agreement, made with the first claimant, Britel Corporation NV, and was also in breach of its obligations under an agreement made on the same day, the Introduction Agreement, with the second claimant, Meretz Investments NV.
55. Clause 5.2 of the Preliminary Agreement can, I think, be construed as an agreement by ACP that it will not charge the Development Lease, which was to be granted under the Preliminary Agreement, to anyone other than a commercial lender, and FPL, which is the parent company of ACP, does not fit that description. The provisions of the Preliminary Agreement were incorporated in the Introduction Agreement and so became enforceable against ACP by Meretz.
56. I am content also to assume that, by taking the legal charge in August 1997, FPL was in breach of its covenants in the guarantee which it gave on 7th March 1996 securing to Britel performance of ACP's covenants under the Preliminary Agreement and the lease. At the least, I am prepared to assume that that is arguable.
57. It follows on those assumptions that Britel, but not I think Meretz, must have been entitled, but for the subsequent Deed of Priorities, to restrain FPL from exercising its power of sale under the 1997 legal charge; but, as my Lord has pointed out, the position changed on the execution of the Deed of Priorities, executed on 20th April 1999. The purpose of that deed, to which FPL, ACP, Meretz and Britel was each a party, was to subordinate the 1997 legal charge, described as the "First Penthouse Charge" in that deed to a new charge to be granted in favour of Varlet International Limited, but it was declared in clause 2 of that deed that, consequent upon the Varlet charge being discharged, then the First Penthouse Charge:

"Shall subject to clause 19.1 and 19.2 hereof being complied with once again come into full force and take effect and shall automatically be reinstated as the first charge (ranking ahead of all the other charges over the lease in terms of priority) provided always that in no circumstances shall the amount secured by the First Penthouse Charge exceed £1.5 million".

58. If the parties to the Deed of Priority in 1999 intended that the 1997 First Penthouse Charge was to come into full force and take effect, then, in the absence of some strong contraindication, they must be taken to have intended that the mortgagee would have and could exercise the statutory power of sale conferred by that 1997 charge. A charge which confers an unrestricted power of sale which cannot be exercised, because of some collateral contractual arrangement between mortgagor and mortgagee and a third party, cannot sensibly be said to have full force and effect. The parties plainly addressed their minds to the enforceability of the charge, see the limitation of the sum secured to £1.5 million imposed by clause 2, and the further limitations in clause 19.2 of the Deed of Priorities.
59. It must have been appreciated by the parties when they entered into the agreements in March 1996 that a sale of the Development Lease by a mortgagee before completion of the development would have, or would be likely to have, the effect of denying Meretz the opportunity of sharing in the anticipated development profit (that it to say the profit to be anticipated if the development was completed) but that was a risk which they were prepared to take if the potential mortgagee was a commercial lender and the amount of the secured loan was limited to £1.5 million. No doubt, it was thought that ACP and FPL were unlikely to allow circumstances to arise in which the development in which they themselves were interested would be taken out of their hands through a failure to discharge a mortgage to a commercial lender limited to that amount. It was never contemplated in March 1996 that FPL would itself be a secure lender.
60. That, I think, is the reason why the Development Lease, a draft of which was annexed to the Preliminary Agreement, takes the form that it does, and that is why I think that Britel would have been entitled to object to the grant of the 1997 legal charge in favour of FPL and would have been entitled immediately after the execution of that charge to obtain orders restraining FPL from exercising its powers as mortgagee.
61. But Britel did not, so far as we are aware, object to the 1997 legal charge when it became aware of it, and when it was necessary to deal with it in the context of providing priority to Varlet in respect of a charge which Varlet was to take, in conjunction with its proposed purchase of two of the penthouses then yet to be constructed, did not insist on an express provision which restricted FPL's right to exercise the power of sale which had been conferred by the 1997 legal charge.
62. It said that there was no need to insist on an express provision to that effect. All that the parties were doing under the 1999 Deed of Priorities was to provide for the priorities as between existing charges and a contemplated future charge. They were not intending to alter rights under the existing charges.
63. But that, as it seems to me, ignores three factors. First, the position which had arisen on the grant of the 1997 legal charge, as must have been appreciated by anyone who gave their mind to the status of that charge in 1999, had not been contemplated when the 1996 agreements were made. It was not then intended that FPL should be a chargee, so what was to be done now that it had become a chargee?
64. Second, the parties clearly did give attention to the status of the 1997 charge. They made express provision for it and for the limitations of the loan which it could secure in clause 2 and clause 19.2 of the Deed of Priorities. Third, they chose in unequivocal words to confirm that the 1997 charge was, on the discharge of the Varlet Charge, once again to come into full force and take effect.
65. In those circumstances, it seems to me impossible now for Britel or Meretz to say that they are entitled to rely on some collateral contractual arrangement under which FPL is restricted from exercising the rights conferred on it by the 1997 charge. The time to raise that point was before the 1999 Deed of Priorities was executed, and had that point been raised, then it might or might not have been expressly provided for; but to execute a deed which confirms the full force and effect of the 1997 charge is quite inconsistent with their contention that the power of sale under it could never be exercised while the development remained uncompleted.
66. For those reasons, like my Lord, I am satisfied that an appeal against the refusal of the judge to grant an injunction restraining FPL from completing its sale would have no real prospect of success and that the application for permission to appeal must be refused. If the application for permission is refused, there is no basis upon which to continue any interim injunction.
67. MR DUTTON: My Lord, that leaves one question. That is the question of costs.
68. I am aware, of course, that on many cases of applications for permission to appeal a respondent's presence is sometimes welcome, but never necessary. This is, however, a case, as Chadwick LJ indicated, because relief of an injunctive nature is sought, the effect of this application was in fact an application for the continuation of the injunction, to which there is specific provision in the Practice Direction relating to part 52.
69. LORD JUSTICE CHADWICK: Notice was given to you.
70. MR DUTTON: It was and it was directed that we --
71. LORD JUSTICE CHADWICK: And you had to be here, because it would have been impossible to continue this injunction without hearing from you.
72. MR DUTTON: Indeed, my Lord.
73. LORD JUSTICE JONATHAN PARKER: For my part, I do not think you need to explain why you are here.
74. MR MACHELL: My Lord, I cannot oppose an order for costs in those circumstances.
75. LORD JUSTICE JONATHAN PARKER: The applicant to pay the costs of First Penthouse Limited.
76. Are you asking for a summary assessment?
77. MR DUTTON: My Lord, no, and there is a direction for detailed assessment of the costs in front of the judge, so it would be dealt with at the same time, my Lord.
78. LORD JUSTICE CHADWICK: Very well. Then we will order a detailed assessment of these costs as well.