England and Wales Court of Appeal (Civil Division) Decisions

IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT, CHANCERY DIVISION
MR ROBIN KNOWLES CBE, QC
HC08CO1471

		Royal Courts of Justice Strand, London, WC2A 2LL
		20/07/2010

LORD JUSTICE CARNWATH :

1. Area Estates ("the Vendor") appeals against the order of Mr Robin Knowles QC sitting as a Deputy High Court judge, dated 18 December 2009, granting Mr Weir ("the Purchaser") summary judgment on his claim to rescind a contract for sale of a property at 22-24 St Andrew Street, Hertford ("the Property").

Factual background

2. On 29 January 2008, the Purchaser contracted with the Vendor to purchase the registered freehold property at a price of £400,000 subject to a £40,000 deposit. The property had been subject to a lease in favour of a Mr Airey, granted on 28 April 2004 for a term of 9 years. The existence of the lease was apparent from the schedule to the freehold title. However, Extra Special Condition 7 ("ESC 7") of the contract of sale provided:

"The Lease dated 28 April 2004 and referred to on Title Number HD431124 determined by operation of law on 31 August 2006. The Buyer shall accept the position and shall not be entitled to require any further proof of the determination or raise any objection or requisition with regard thereto".

3. Unfortunately, the statement that the lease had "determined by operation of law on 31 August 2006" was not correct. What had happened was that the lessee, Mr Airey, had moved out of the Property, purporting to surrender the lease. However, that purported surrender was ineffective in law, because he was at the time subject to a bankruptcy petition, presented on 8 August 2006. The consequence was that any disposition of property was void unless made with the consent of the court (Insolvency Act 1986 s 284). The petition was duly registered against the leasehold title under section 86 of the Land Registration Act 2002 on 11 August 2006. A bankruptcy order was made on 11 October 2006, and was registered against the leasehold title on 2 November 2006.
4. Notice to complete was served on 7 March 2008. In response the Purchaser sought to rescind the contract because of the encumbrance in the form of the leasehold interest. On 16 May 2008, the Vendor secured a disclaimer of the lease from Mr Airey's trustee in bankruptcy. By claim issued on 4 June 2008, the Purchaser sought the return of the £40,000 deposit plus interest, and by application dated 5 March 2009 applied for summary judgment. The application came before the Deputy Judge on 22 October 2009.
5. The Vendor advanced in substance three defences:

i) Insolvency Act 1986 s 284(4)(a) which provides an exception for property "received before the commencement of the bankruptcy in good faith, for value and without notice that the petition had been presented";

ii) Condition ESC 7;

iii) That the defect was a "technical conveyancing defect".

6. The judge rejected all three defences, and by order dated 18 December 2009 ordered repayment of the deposit with interest and costs. Permission to appeal was granted by Lloyd LJ.

The issues on the appeal

7. At the start of the hearing Mr Loveday, for the Vendor, indicated that he was no longer pursuing the first issue. This leaves two issues:

i) Whether condition ESC 7 prevents the Purchaser relying on the continued existence of the lease as a ground for rescission;

ii) If not, whether the existence of the lease should be treated as a "technical conveyancing defect" insufficient to justify rescission.

8. I remind myself that this is an application for summary judgment, and that we must take the facts at their most favourable from the Vendor's point of view. Thus, we must assume that at the time of the contract the Vendor acted in good faith, and in the belief that the lease had come to an end by operation of law.

Condition ESC 7

The judge

9. The judge looked at ESC 7 in the context of the other provisions of the contract. He referred in particular to General Condition 4.3:

"Unless otherwise stated in the special conditions the seller sells with full title guarantee except that:

(a) all matters recorded in registers open to public inspection are to be treated as within the actual knowledge of the buyer …"

and Extra Special Condition 1:

"Vacant possession will be given on completion…"

10. He held

"(1) On its true construction Special Condition 7 required Mr Weir to accept as factually accurate the proposition that the Lease had determined by operation of law on 31 August 2006.

(2) This requirement was not an exception to the "full title guarantee" basis of the sale, under General Condition 4.3(a). Rather, it was an affirmation of it in this particular.

(3) Consistently with the requirement, Special Condition 7 ruled out Mr Weir's being entitled to require any further proof of the determination, or to raise any objection or requisition with regards to it.

(4) Although the Land Register and the Land Charges Register (both registers under General Condition 4.3(a)) revealed the Lease and the bankruptcy petition, and did not mention any determination of the Lease, the position remained that Mr Weir was contractually required to accept that there had been a determination. It transpired that there had not."

11. He rejected an argument that the Purchaser (by clause 4.3(a)) was fixed with notice of the bankruptcy petition, and therefore able to work out the true position. He did not see how that could help the Vendor on the question whether they were able "to convey at completion the unencumbered title they had contracted to convey."

The submissions

12. Before us, Mr Loveday argues that the judge's interpretation of ESC 7 was too narrow. The vendor is permitted to protect himself against the possible uncertainty of the title, particularly with regard to the inevitable uncertainty surrounding the concept of surrender by operation of law. The plain meaning of the condition was that the risk of such uncertainty was transferred to the purchaser, who could not complain about an incumbrance on the title even though the surrender was found to be void.
13. For the Purchaser, Miss Evans-Gordon submits that the condition did not prevent the Purchaser objecting if, as it emerged, the lease had not in fact been surrendered. Its effect was only that he was not entitled to require further proof from the Vendor, or to take objection with regard to lack of such proof. This was confirmed by ESC 1, which required "vacant possession" on completion and was inconsistent with the existence of someone with a better title to immediate occupation.
14. Further, she submits, even if the condition would otherwise be construed as the Vendor proposes, that construction cannot overcome two obstacles, one derived from statute and one from case-law:

i) Law of Property Act 1925 section 42(3), which would make a condition as so construed void;

ii) The principle (established by cases such as Re Banister (1879) 12 ChD 131) that such a condition cannot be relied on if it is misleading, or there has been less than full disclosure (see Emmet and Farrand on Title (2010) para 5.008).

Discussion

15. I have not found this an easy question. I do not share the judge's confidence that the condition is to be read as simply affirming the "full title guarantee" basis of the sale. I see some force in Mr Loveday's contention that it is designed to transfer risk to the Purchaser: to draw specific attention to the issue of the lease, to express the Vendor's position in respect of it, and to require the Purchaser to accept that position without objection. Furthermore, since the Purchaser was taken to have actual knowledge of anything in the register (condition 4.3(a)), he could not claim to be unaware of the potential problem created by the bankruptcy petition. Although I agree with Miss Evans-Gordon that, taken on its own, the condition requiring "vacant possession" would be inconsistent with the existence of an occupational lease, even if the premises were in fact vacant at the time of sale (see e.g. Cumberland v Consolidated Holdings Ltd [1946] KB 264, 270-1), that general provision does not necessarily override the specific provision made by ESC 7 in respect of the lease.
16. It is necessary therefore to consider the two points presented by Miss Evans-Gordon as obstacles to the effectiveness of ESC 7. Neither is entirely straightforward. I will deal with the case-law principle first, since the ground is much better-trodden.
17. It is well-established, by authorities going back over a century and a half, that a condition which purports to exclude the vendor's ordinary obligation to give good title may not be always be effective. However, the cases do not speak with one voice as to the test to be applied. The important issue, for present purposes, is the necessary state of mind of the vendor. Does the principle apply only when he had actual knowledge of the defect, or is it enough that he had the means of knowledge? Banister itself, as I read it, was a case where the representation in the conditions was contradicted by facts of which the vendor had actual knowledge:

"… conditions which... contained representations, either expressed or implied, which are untrue, and were untrue to the knowledge of the vendor at the time those conditions were framed." (12 ChD at p 142, per Sir George Jessel MR).

18. The passage in Emmet and Farrand to which Miss Evans-Gordon refers, has some useful illustrations from the authorities. I note the following, commenting on the effect of a condition that the property is sold "subject to any general incumbrances or defects in title which may exist":

"Further, such a condition will apparently not be sufficient where there are incumbrances or defects of which the vendor ought reasonably to have known (Heywood v Mallalieu (1883) 25 Ch D 357, where the vendor's solicitor would have discovered the existence of an easement if he had made fuller enquiries into certain claims)" (para 5.008)

19. Reference is made in the same passage to Becker v Partridge [1966] 2 QB 155, where the contract for sale of an underlease provided that the vendor's title "has been accepted… and the purchaser shall raise no requisition or objection thereto". This was held to be ineffective, when it emerged that there had been breaches of covenant in the superior lease giving grounds for forfeiture. Although the vendor did not have actual knowledge, he was held to have had "constructive notice", because his solicitor had neglected to inspect the superior lease, as he would have been entitled to do when taking the underlease.
20. There is a clear statement of principle to similar effect in Megarry and Wade 7^th Ed para 15-072, commenting on the effect of a general exclusion such as "subject to any existing rights and easements of whatever nature":

"However, it is a fundamental rule of equity that the vendor cannot rely on such a condition to cover a latent defect in title of which he knew or ought to have known…"

A number of cases are referred to in the footnote, including Becker v Partridge. (Reference is also made to an interesting article by Charles Harpum, editor of the current Megarry and Wade, in [1992] CLJ: Exclusion Clauses and Contracts for the Sale of Land.)

21. For present purposes the proposition as stated by Megarry and Wade seems to me sufficiently supported by the decision in Becker v Partridge, which is binding on us. In that case, as I have said, the exclusion was held not to protect the vendor against defects which his solicitor could and should reasonably have discovered. (I note that the facts, and in particular the basis of the finding of "constructive notice", are more fully stated in the All England report: [1966] 2 All ER 266, 269.) However, in holding that the exclusion was ineffective the judgment was clear:

"There is no doubt that by a clearly drawn condition put in the contract by a vendor who acts in good faith, and disclosing a possible defect in the title, the purchaser may be compelled to accept the title offered by the vendor. But the vendor must have disclosed the defects of which he knew. In this case he did not know of the breaches which would give rise to forfeiture. But he ought to have known that such breaches might exist…" (p 171G-172A)

Thus the knowledge which the vendor's solicitor should have had, and which the vendor would have had if properly advised, was treated as equivalent to actual knowledge. The present case seems to me indistinguishable. The vendor, properly advised, could and should have known that the purported surrender, unsupported by any order of court, was ineffective.

22. I accept that general statements, such as that in Megarry and Wade, need to be read in the context of the particular clause in question. In this case the exclusion is more specific than those considered in most of the cases, in that it is directed at the particular issue of the lease. However, this works both ways. On the one hand it may be said to have drawn the Purchaser's attention to the potential issue of the lease. On the other hand, it did not simply alert him to a problem; it contained an unqualified assertion that the problem had ceased to exist. A properly advised vendor would or should have known that the statement was untrue. Nor does it assist the Vendor, in my view, that the Purchaser may also have had the means of knowledge, through his assumed notice of the contents of the register. Mere knowledge of the bankruptcy petition was not conclusive, since it did not rule out a valid surrender with consent of the court. In any event, by the unqualified terms of the representation, in my view, the Vendor impliedly represented that he had taken reasonable steps to confirm its accuracy.
23. This conclusion makes it unnecessary to reach a firm view of the effect of section 42(3). However, I will comment briefly on what appears to be a surprisingly novel proposition (suggested, it seems, by an enterprising pupil in Miss Evans-Gordon's chambers). The sub-section reads as follows:

"A stipulation contained in any contract for the sale or exchange of land made after the commencement of this Act, to the effect that an outstanding legal estate is to be traced or got in by or at the expense of a purchaser or that no objection is to be taken on account of an outstanding legal estate, shall be void." (emphasis added)

Miss Evans-Gordon submits that under the second part of the sub-section ESC 7 is ineffective, in so far as it purports to rule out any objection on account of the existence of the lease (being a legal estate).

24. The sub-section has attracted very little attention – remarkably little, if it has the effect for which she argues. It does not appear to have been cited in any reported cases. It attracts little comment in any of the modern textbooks; it is not even mentioned in the current edition of Megarry and Wade. According to a contemporary textbook (Dart's Vendors and Purchasers (8th ed, 1929), vol 1, pp 150-151) section 42(3) marked a shift from previous practice:

"A condition binding a purchaser, if he considered the legal estate outstanding, to be at the expense of getting it in, was, formerly, not uncommon, and was held to throw on him the risk of making out in whom the legal estate was vested; but by [s 42(3)] such a condition is nugatory."

In Wolstenholme & Cherry 13^th Ed (1972) (which is often a useful guide to the thinking of the original draftsmen), there is the following note:

"A condition that a legal estate should be left outstanding would have meant that the vendor had a bad title. It does not mean that the vendor cannot sell subject to a legal term, a legal mortgage, a legal rentcharge or a legal easement…"

25. Mr Loveday suggests that the most likely explanation for the provision is that it was related to the simplification of legal and equitable estates which was a central feature of the 1925 Act reforms, but of little practical concern today. He refers by analogy to section 39(2), which as part of the elaborate transitional provisions in the first Schedule, provided for the discharging or getting in of "outstanding legal estates".
26. Whether or not it is so limited, it seems to me more likely that the reference to an "outstanding legal estate" was intended to refer to the quality of the interest to be transferred, rather than of any potential incumbrance. I find it hard to see any reason, as a matter of legislative policy, for the introduction of a strict avoidance provision relating only to those incumbrances which happen to be "legal estates" under the 1925 Act scheme. That seems to me consistent with the note in Wolstenholme & Cherry. Fortunately, I need not explore this topic further for the purposes of this case.

Technical defect

27. I can deal with this point shortly, because I agree entirely with the judge. He said:

"26. In my judgment this submission is unsustainable. Either a successful application to the Court seeking ratification of the surrender would be required, or a successful request to Mr Airey's trustee in bankruptcy to disclaim. The outcome of neither can have been a foregone conclusion at the time. Neither was in Area Estates' sole power, control or grant. Area Estates had no right that would enable it is insist on ratification or disclaimer.

27. Indeed it is hard to see why the Court would have ratified a surrender by Mr Airey when a bankruptcy petition was pending. As for disclaimer, the outcome of the request would depend on the trustee's assessment at the time whether, in one form or another, there was value to be had for the bankrupt estate from the Lease.

28. Of course a trustee's assessment will vary from case to case. Even if it is impossible that an assessment by the trustee in the present case would have concluded that there was value, the Property was still subject to a lease and Area Estates had no right to remove it. I cannot treat the presence of a subsisting lease encumbering freehold property sold with vacant possession as a 'technical conveyancing defect'."

28. Mr Loveday seeks comfort in the judge's acknowledgement of the "powerful and … commercially persuasive" picture, arising from the facts of the case, in which the premises had stood empty for more than a year with no rent being paid, and the trustee would be only too pleased to rid himself of the liability. He also referred to the various cases mentioned in Emmet and Farrand para 5.005, which, it is said, have left the test as one of "uncertain degree".
29. However, like the judge I think the best guide is to be found in the leading case MEPC Ltd v Christian-Edwards [1981] AC 205, in which Lord Russell of Killowen at 220C-D said:

"[I]f the facts and circumstances of a case are so compelling to the mind of the court that the court concludes beyond reasonable doubt that the purchaser will not be at risk of a successful assertion against him of an incumbrance, the court should declare in favour of a good title shown."

30. The judge commented:

"34. There is no prospect in the present case of such a conclusion being appropriate. For all the argument about degree of risk, on which views will differ, Area Estates simply cannot show that as at the date for completion there was no risk of the trustee in bankruptcy asserting successfully that the Lease subsisted. The present case is a far cry from that before the House of Lords, where it was concluded that there was no risk of a claim for specific performance being upheld on the basis of a contract some 70 years old which had been abandoned some 50 years before."

I agree.

31. For these reasons, I would dismiss the appeal.

LORD JUSTICE MOORE-BICK :

32. I agree.

LORD JUSTICE WILSON :

33. I also agree.