England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		30 July 2004

Mr Justice Peter Smith :

INTRODUCTION

1. This trial arises out of a claim for possession brought by the Claimants in respect of the property ("Property") known as 11, Avenue Close, Avenue Road, London NW8.
2. The Claimants seek possession to enforce a Charging Order Absolute, made against the Property on 20^th July 1998. The Charging Order Absolute arises out of sums found due to the Claimants from Jonathan Roger Steinberg, the First Defendant. Those sums arise out of a fees action (1997 P 370) brought by the Claimant, a firm of Solicitors, which has fees due to it and damages and costs arising out of the second action (1998 P 654 / HQ02X01159) (the "Libel Action"). The latter action arises out of allegations, which the Claimants successfully established against Mr Steinberg for deformation.
3. The amount owing to the Claimant by the First Defendant is in excess of £200,000.00.
4. The First Defendant is a Barrister but does not practice as such, but is resident in New York. Although he was aware of the present proceedings and the issue ordered to be determined in these proceedings (he being named by the Second Defendant Sheila Steinberg, his mother) as a part 20 Defendant, he has taken no part.
5. The present trial arose out of the Claimants enforcement of the Charging Order Absolute by originating summons issued on 5^th August 1998. Notice of those proceedings were given to Mrs Steinberg on 25^th September 1998, but she took no part until April this year.
6. The Claimants obtained an order for sale on 14^th October 1998, an order for possession on 4^th January 1999. Further sums were assessed as due and an application was issued for possession and sale of the flat in default of payment on 21srt January 2004. That was heard on 23^rd March 2004, when Master Bragge made an order for sale and possession in default of payment of costs.
7. Mrs Steinberg was notified of the application evidence and order on 29^th March 2004. Upon being notified by the Claimants solicitors of an intention to restore the application for possession to Master Bragge on 15^th April 2004 Mrs Steinberg retained solicitors and asserted for the first time an interest in the Property.
8. On 23^rd April 2004 Mrs Steinberg issued an application for permission to be added as Second Defendant to these proceedings, that she had permission to make a claim under Part 22 for declarations, that she was entitled to a lease or licence for life of the Property rent free or alternatively that the First Defendant holds the Property subject to a constructive trust to permit her to occupy for rent free for her life and that interest constitutes an overriding interest which has priority over the Claimants charge.
9. That application was supported by her first witness statement dated 26^th April 2004. I will deal with the evidence provided by Mrs Steinberg further in this Judgment.
10. As I have said, on 26^th April 2004 as a results of her application she was added by an order of Master Bragge and the possession order was stayed pending the determination of her claim and directions were given with a view to the matter being determined by the trial.
11. The Second Defendants served a Defence and Part 20 Claim on both the Claimants and her son on 11^th May 2004.
12. In that she sought a declaration that she was entitled to occupy the Property rent free for the rest of her life, either as a tenant or as a life tenant.

BACKGROUND TO OWNERSHIP OF THE PROPERTY

13. Mrs Steinberg is eighty-three and suffers from angina.
14. She has occupied the property since 1959, when she and her husband, Harry, first moved in. They have two children namely the First Defendant and a daughter Judith. They all lived together as a family until the children grew up and left. Harry Steinberg died in 1978 and thereafter Mrs Steinberg lived in the Property on her own. The original basis for occupation was an Underlease dated 16^th December 1960, between Avenue Close Limited (1) and Harry Steinberg (2). By that Underlease the Property was demised to Harry for a term of 5 years from 16^th December 1960 at a rent of £1,100.00 per annum.
15. I pause there to observe, as Mr Fancourt QC who represents the Claimants, pointed out in his closing submissions, that lease was not a tenancy protected under any provisions of the Rent Acts. All controlled tenancies had been de-controlled (save very low rent exceptions) by virtue of the provisions of the Rent Act 1957. Control was re-established by the creation of protected tenancies under the regulation of the Rent Act 1965, which came into force on 8^th November 1965. Although there is no clear evidence, it is extremely likely that the rateable value of the Property exceeded £400.00 per annum. That being the case, the lease would not have fallen into the Rent Act regime provided by the 1965 Rent Act for that reason (see section 1 (1) Rent Act 1965).
16. This is confirmed by Mrs Steinberg's evidence, when she indicated that the landlords told her and her husband that when the leased expired, they would either have to get out or buy the Property.

ACQUISITION OF THE PROPERTY

17. In April 1965 negotiations ensued to enable Mr and Mrs Steinberg to acquire the property. It was proposed that the Property would be acquired by an Underlease inconsideration for a premium of £15,500.00 with a term of 99 years from 24^th March 1965, at a rent of £141.00 for the first 14 years rising to £239.14 shillings, in accordance with the schedule.
18. Henry Hyams and Co acted for Mr and Mrs Steinberg on that purchase.
19. Mr and Mrs Steinberg had a business of selling clothing, operating from a shop in Vicker Lane, Leeds. The business was a limited company, Cashdisia Stores Limited ("the Company"), which was incorportated on 24^th July 1956 under the name Langpyle Limited for the purposes of acquiring the undertaking of the previous company known as Cashdisia Stores Limited ("old Cashdisia"). With the acquisition, as is traditional, Langpyle changed its name to Cashdisia Stores the name of old Cashdisia. Cashdisia acquired old Cashdisia assets under an agreement dated 22^nd February 1957. The sale price was £70,000.00. Harry Steinberg was a director of both companies and executed the agreement on behalf of both of them.
20. Mr and Mrs Steinberg and a Mr Vail were the original directors. Until 1973 all of the issues shares were held equally by Harry and Mrs Steinberg. There is some doubt about the amount of the shares. A total of thirty thousand and two shares appear to have been issued, but the were shown as having thirty thousand and two each. Nothing turns on this apparent discrepancy. Some dealings with the shares took place in 1972/73 with the result that thereafter Harry with two other held seven thousand five hundred shares and Mrs Steinberg with two others held twenty-two thousand, five hundred and two shares. This appears to have been the creation of two separate family trusts.
21. In 1974 Jonathan Steinberg was appointed a director and Judith also was appointed to the board so that by the year before Harry's death there were five directors, Harry and Mrs Steinberg, Judith, Jonathan Steinberg and a Mr Marsden. He was the retail shop manager who ran the shop. It is clear that he had no executive role in any of the decisions and he had no shareholding. In the return of 5^th September 1980, after Harry's death the shareholding is shown as being seven thousand five hundred held by a Mr Shaw and a Mr Sinclair (I suspect wrongly described as executors of Harry Steinberg as opposed to the surviving trustees of some family trust settlement) and twenty-two thousand five hundred and two held by Mrs Steinberg and Mr Shaw and Mr Sinclair.
22. By the following year Mrs Steinberg had become a minority shareholder, holding seven thousand five hundred shares and Jonathan and Judith Steinberg are showed as having thirty thousand and two shares each. I have already observed that that is difficult to reconcile in view of the issued share capital of the company, but nothing turns on that.
23. Prior to completing the purchase, Henry Hyams wrote to Harry on 27^th August 1965, indicating that the existing underlease would be surrendered by an exchange of letters plus an undertaking to execute a formal surrender should this be required. There is a hand written note "NB your Underlease is in your favour. The new lease will be in the company OK?". The Underlease was completed on 23^rd September 1965 and the rent under the original Underlease was apportioned.
24. It is clear therefore that Harry's Underlease was surrendered in favour of the Company when it obtained its long leasehold interest of 99 years.
25. The Underlease in favour of the company contains a qualified covenant against assigning (covenant 2(viii)), but is otherwise not of significance.
26. From 1965 until 1981 the Company owned the Underlease and it was listed in its accounts as an asset.

DECLINE IN FORTUNES OF THE COMPANY

27. The Company suffered a decline in its fortunes fairly rapidly after Harry's death. Mrs Steinberg never had any role in the Company. To the year ending 25^th February 1980, the Company made a profit of £22,232.00. Directors' remuneration of £31,786.00 was taken out for the same period. In the next year the Company sustained a loss of £12,445.00 with a directors' remuneration rising to £37,320.00. In the twenty month extended next accounts to 31^st October 2002, the company sustained a large loss of £66,206.00. Directors' remuneration, nevertheless substantially increased to £50,799.00. It was in this financial year that the Company sold the flat to Jonathan Steinberg in circumstances which form the crucial issue in the case. I will deal with this in more detail further in this Judgment. Thereafter the Company ceased to trade. Ultimately on 18^th July 1994 it went into a members voluntary liquidation i.e. it was solvent. It was dissolved on 13^th March 2001, pursuant to a notice dated 13^th December 2000.
28. No records of the Company exist save copies of the statutory accounts.

EVENTS IN 1981

29. Mrs Steinberg has been unable to give any clear evidence as to what happened. Initially no other evidence was called on her behalf. In the closing submissions, I indicated to Mr Halpern who appeared for Mrs Steinberg that any potential deficiencies in Mrs Steinberg's recollection might well have been cured by Judith giving evidence. I should observe that she had been in court at all material times. As a result of that Mr Halpern took instructions, prepared a witness statement signed by Judith, which I granted permission to be used. It did not actually take the matter any further and her evidence was not challenged by the Claimants.
30. The Claimants are of course not in a position to adduce any evidence to contradict what Mrs Steinberg's says happened in 1981.
31. It is clear that the Company got into difficulties in this period. It is also clear (although no one says so) that a decision was made to try and extract the Property from the Company and more particularly its creditors. A plan was hatched whereby Jonathan Steinberg would acquire the Property for an initially expressed purchase price of £22,500.00. Given the fact that the Property had been acquired for £15,500.00 in 1965. It is unrealistic to believe that £22,500.00 in respect of a property in St John's Wood reflected a vacant possession value of that property 16 years later. The acquisition was funded by a mortgage of £20,000.00 obtained from the Halifax Building Society. Jonathan used Pritchard Englefied and Tobin as his solicitors (a Mr Lugg acting). That is not the present firm of Claimants, but it is a predecessor firm of some of the current partners. Mr Lugg was not a partner.
32. The Halifax Building Society required "the tenancy of the sitting tenant to be terminated prior to completion". In addition it required of the other person who was to occupy the property to sign a form of consent to the mortgage. This was of course at about the time of the landmark decision of Williams & Glyn Bank Ltd. –v- Boland [1981] AC 487. There is recorded on a copy of Mr Lugg's letter dated 10^th July 1980 a note that he had spoken to Jonathan Steinberg and informed him that his mother was a sitting tenant and director of the Company, so there are difficulties re the Halifax mortgage offer. A further conversation thereafter passed between Mr Lugg and Jonathan Steinberg which led to a letter from Mr Lugg dated 21^st July 1980, where he says:-

"… the only way to protect your mother and yourself from the shareholders is for you to obtain an independent valuation of the flat with a sitting tenant. If, therefore, following exchange of contracts your mother decides to surrender her tenancy there can be no comeback".

33. The flat was valued at £20,000.00, subject to a statutory tenancy by Kennedy and Dumphy on 26^th February 1981. This was on the basis that Mrs Steinberg had a rent protected tenancy at a rent of £1500.00. As a result of that valuation the purchase price was reduced to £20,000.00 in the contract, with the result that the mortgage became a 100% mortgage and no stamp duty was payable.
34. All of this was clearly a fiction. There has never been any suggestion of Mrs Steinberg (nor Harry for that matter) having had a protected or statutory tenancy in respect of the Property. The only lease they held was the original Underlease which was surrendered in 1965. The purpose of this seems to me to extract the property out of the company assets at a relatively low value. Although it was suggested that this was to protect claims by the shareholders, more realistically in my view, it was done to provide a measure of protection in the event that the Company went into insolvent liquidation.
35. In the following year, there was a resolution passed by shareholders (including Mrs Steinberg) authorising the sale to Jonathan Steinberg.
36. It is somewhat ironic that in 1987 the Company sued the surveyors for negligence on the basis that they ought to have valued the Property subject to a tenancy of £40,000.00. The surveyors compromised this claim by making a payment to the Company of £25,000.00. The irony arises from the fact that the sale of course took place in favour of directors of the Company who obtained an asset at an under value, allegedly by reason of the negligence of the surveyors and then caused the Company to sue the surveyors for negligence sustained by the Company selling the flat to them at an under value. It is not an attractive scenario.
37. The contracts were exchanged on 29^th May 1981 and the matter was completed on 30^th June 1981. On 2^nd September 1981, Jonathan Steinberg charged the Property to Midland Bank Limited. The charge was an all monies charge and HSBC now has the benefit of that charge and as at the date of the trial it is owed £218,961.00. Thus Jonathan Steinberg has substantially encumbered the Property for his own purposes. In addition to that indebtedness and the Claimants charging order secured on the Property, some £100,000.00 is charged by charging orders in respect of arrears of service charges. The Property is therefore subject to at least £500.000.00 worth of debt.
38. On 23^rd December 1981, Mrs Steinberg signed a document in favour of Midland Bank agreeing to postpone any interest she had in the Property to its charge. She does not appear to have had any legal advice before signing that document.

EVIDENCE OF INTENDED TRANSACTION

39. Mrs Steinberg continued to occupy the Property. From her point of view nothing changed and she lived in that house on her own for the next twenty-two years. Jonathan Steinberg wrote a letter dated 1^st January 1982, but not posted until 25^th February 1982, this letter is curious. It is intended to be of some kind of legal effect and is written to given the appearance of having some kind of legal formality, but its purpose is obscure.
40. The letter says this:-

"Please take notice of my present, permanent and irrevocable intention to permit you to remain at 11 Avenue Close, Avenue Road as a contractual (and statutory) tenant on the same terms as you have occupied the said flat since it was purchased on by behalf by the company Cashdisia Stores Ltd.

I recognise herebefore and hereafter that any document which you may have signed purporting to limit your rights to remain at the flat was signed without any consideration of any type and does not in any way limit your statutory or contractual right to remain at the said flat as long as you should desire so to do.

My purchase of the said flat was between myself and Cashdisia Stores Ltd., expressly of the company hereinbefore mentioned should be construed as limiting or purporting to limit any of your rights or the rights of your heirs or assigns, successors in title or successors by transmission in the said flat. This document shall be construed as binding on me and on anyone deriving title in any way under me".

41. This letter of course perpetuates the fiction that Mrs Steinberg had a statutory tenancy. It is obvious why he would wish to perpetuate that fiction bearing in mind the suggestion that she had such a tenancy to justify the sale to him at a reduced price. He would not risk setting out some other arrangement in a different document from that which he would wish to portray to the creditors or shareholders of the company.

MRS STEINBERG'S EVIDENCE

42. Apart from the documents, which I have referred to earlier in this judgment, there is no other contemporary evidence explaining what was intended to happen. In her first witness statement she said that Jonathan purchased the lease and it was sold on the basis that she would be allowed to remain in the flat for the rest of her life or until she wished to leave. It was also, she said, sold strictly on a condition that Jonathan would ensure that his sister Julie got her share of the eventual proceeds. The price was based on the value of the flats "with a sitting tenant". She said that she would not have agreed to sell if her right to live there could be terminated. She went on to say that the agreement was recorded in writing by the letter set out above. She expressed the view that she did not understand what it meant. She admitted that she had not paid any rent. She has never paid any of the outgoings attributable to the flat i.e. the service charge and she has not made any of the payments on the mortgage to the Halifax (which has been paid off).
43. In her second witness statement (paragraph 8) she recounts that she has had the opportunity of discussing the circumstances agreement with Judith and she corrected the statement that there was to be a share of the proceeds of the sale of the flat in favour of Judith agreed at the time of Jonathan's acquisition. That was apparently agreed two years later.
44. Those are the bare facts in this case. It is necessary to consider the legal implications of those bare facts.

MRS STEINBERG'S RIGHTS BEFORE 1981

45. Mr Halpern accepted that Mrs Steinberg had no existing property rights in the Property before it was acquired by Jonathan Steinberg. That is clear given the analysis of the devolution of the title set out earlier in this judgment.
46. He accordingly conceded that the events that took place in 1981 only govern the position. He accepted there was no contractual agreement for the grant of a lease, whether for life or some other basis. No consideration is provided by Mrs Steinberg for any such arrangement.
47. He acknowledged that it is not possible to construe the letter as a declaration of trust in respect of the property, nor an agreement to grant a lease for life (per section 149 (6) Law of Property Act 1925). He submits that the arrangement constituted Jonathan Steinberg, a constructive trustee, to confer on Mrs Steinberg a right to occupy the property rent free for her life. A license would not be sufficient because she would not have an interest which would be capable of being asserted against successes in title, such as the Claimants see Ashburne Anstalt v Arnold [1989] Ch 1 (reversed in part on some points). In his written submissions he also made reference to the decision of the Court of Appeal in Binions v Evans [1972] Ch 359. On that analysis she would become a Settled Land Act tenant for life under the Settled Land Act 1925. That settlement having come into being before the commencement of the Trusts of Land and Appointment of Trustees Act 1996 is preserved. The difficulty about that is that her interest would only be a minor interest and not an over-riding interest (section 86(2) LRA 1925). Nevertheless of course her minor interest would be prior to and binding on the equitable charge created by the charging order in favour of the claimants.
48. Mr Fancourt QC submits that there is no clear evidence showing what the position is. One possible conclusion is that Mrs Steinberg was simply willing to trust Jonathan in whatever he did (that trust being partially justified given her twenty two year occupation). The trust is now of course somewhat diluted given the way in which he has caused her present difficulties by his failure to discharge his debts, which has made her occupation precarious. That explains the signing of the postponement in respect of Midland Bank and in reality Mrs Steinberg had no rights before Jonathan acquired and had no rights thereafter. He merely permitted her to occupy the house. She may have repented of signing the mortgage postponement in favour of Midland but that is in the past and the letter written to assuage her thoughts cannot operate retrospectively.
49. There is in my view no question of Mrs Steinberg having any tenancy whether for life or a protected statutory tenancy. Equally, as I have said, there is no question of any contractual right to occupy the property.
50. If the promise is gratuitous she can only maintain her occupation if she has acted in reliance on Jonathan's assurances such that his conscience is affected to such an extent that the court would impose a constructive trust on him which would prevent him from ending her right of occupation.
51. Such a contention was absent from Mr Halpern's opening and the Defence and Counterclaim. Having considered the matter in argument he submitted that there were two areas where Mrs Steinberg could have been said to have given up rights. First, while she had no right to occupy the property, she could have prevented the sale to Jonathan at an undervalue. She could have done this by either causing the Company not to agree it, or in the event that Judith and Jonathan decided to go through with it, to have brought a derivative action on behalf of the Company to achieve the same result. That of course is not giving up rights she has directly; this is protecting the Company's interest.
52. The second area is in respect of the Deed of Postponement. By agreeing to sign the Deed of Postponement she enabled Jonathan Steinberg to utilise the property for secured advances from Midland Bank (and HSBC thereafter). She had of course no rights in the property at that time but she could have created difficulties. She was in occupation, she was still in a position to cause difficulties to Jonathan Steinberg about the sale and it is undoubtedly the case that Midland would not have advanced any monies to him while she remained as occupier. In response to Mr Fancourt QC's submission that the letter cannot be retrospective, Mr Halpern submits that the arrangements were plainly contemporary, the letter having been written a few days after the deed of postponement was signed by his mother.
53. I am reminded by Mr Fancourt QC and I remind myself again that a case has to be tried on evidence and it is no part of the court to attempt to devise facts or otherwise attempt to fill in the gaps of evidence in order to achieve a result.
54. It is plain that Jonathan made an assurance to Mrs Steinberg that she could occupy the property for her life. The question is whether she abstained from doing anything as a result of that to such an extent that it would be unconscionable to allow Jonathan to go back on that promise. There are of course close parallels between proprietary estoppel and constructive trusts; see Grant v Edwards [1986] Ch 638. Where a constructive trust is alleged however, the person asserting it must also prove they acted in reliance upon the common understanding with the other party; see Grant v Edwards. This is to be contrasted with the doctrine proprietary estoppel where he will be presumed to act in reliance if a reasonable person would have done so; see Greasley v Cooke [1980] 1 WLR 1306.
55. The evidence is unsatisfactory. That is hardly surprising given the passing of time and the age of Mrs Steinberg. I make no criticism of her in that regard. The person who could have thrown the most light on it, Jonathan Steinberg, has not participated in the proceedings. He has written that he supports his mother's claims without explaining further.
56. It seems to me that it is clear that Mrs Steinberg was given an expectation that she could live in the property for her life. I can see no other reason why the transaction should not have taken place. It is clear its purpose was to extract the property out of the Company. The most likely purpose was at the time, to provide for her continued occupation. In addition, it enabled Jonathan to obtain an asset, which he could also use for his own purposes thereafter. Mrs Steinberg would have been in a position to frustrate that arrangement in the way that I have set out above. She abstained from blocking the transaction in response for the assurances given by Jonathan that she could stay there for her life.
57. In those circumstances, it seems to me that the conclusion I can draw from the evidence, is that Jonathan thereby became a constructive trustee of the Property, which imposes on him an obligation to allow his mother to remain the Property rent free for her life. In exchange for that Mrs Steinberg abstained from preventing the transaction taking place via the Company and she also enabled him to use the Property freely for borrowings by signing the consents. That is enough in my judgment to bind Jonathan's conscience and means that she has a right to stay in the property for her life.
58. That interest Mr Fancourt QC acknowledged bound the Claimants, they being equitable chargees later in time. In addition such an interest under constructive trust would constitute an over-riding interest within section 70 (1) (g) LRA 1925.

CONSEQUENCES OF FINDINGS

59. Whilst I determine Mrs Steinberg has a life interest and it is prior to the interest of the Claimants, it does not follow that that should have a paramouncy, which requires the Claimants' legitimate desire to realise their charge should be frustrated. Under the 1996 Act the court has considerable powers in respect of trusts (sections 14 and 15 and Bank of Baroda v Dhillon [1998] FLR 324 and Mortgage Corporation v Shaire [2001] Ch 743).
60. It seems to me that it is appropriate to order a sale. There are a number of reasons which justify such a conclusion. First, the Claimants have a substantial sum which otherwise would be irrecoverable. Whilst the former paramouncy of a creditor no longer exists, it is a factor, which requires consideration. If a sale is not ordered they will be substantially out of pocket. Second, the service charge company has charging orders over the property, which cannot be discharged. It will commence proceedings, I have no doubt to realise those sums. Third, the landlord on discovering that Mrs Steinberg has a life interest in the property (such discovery only occurring in April of this year) has served a notice under section 146 LPA 1925. If that breach is not remedied forfeiture proceedings will ensue and if relief is not granted then the lease will be lost. That will put an end to the life interest the value of the lease and not benefit anyone.
61. There was no formal valuation evidence ordered. There is however, valuation evidence obtained by the Claimants, which suggests a sale of the lease subject to Mrs Steinberg's life interest might achieve a little over £500,000. A sale with vacant possession might achieve as much as £900,000. I am doubtful as to whether or not a buyer can be found subject to her life interest. On those figures it is doubtful whether a sufficient sum will be obtained to pay off all the other interested parties, if that is the case then the reality is that the lease will be lost because of the factors that I have already referred to.
62. A sale with vacant possession will plainly provide enough to pay the Bank and the Claimants.
63. However, I bear in mind the fact that Mrs Steinberg has lived in the property for over forty years. It is appropriate to my mind that there should be a sale and that she should be given a short opportunity if she wishes to find a buyer who will buy subject to her interest. I do not propose giving her an opportunity greater than two months. If no contract is exchanged within that period, I direct that the property should be sold with vacant possession. The actual mechanism of sale can be agreed between the parties and in default I will settle the terms of order. Normally I would expect a person in Mrs Steinberg's position to be entitled to remain there against a suspended possession order subject to undertakings to preserve the property in its present state and condition, to pay all outgoings (but in this case not the arrears of service charge), not to obstruct the sale and to vacate the property upon exchange of contracts.
64. If the property is sold then the priorities for payments will be first HSBC, and then the consideration of Mrs Steinberg's life interest. It seems to me that I can give effect to the constructive trust best by directing that Mrs Steinberg's life interest should be valued actuarially and capitalised accordingly. That sum would then be paid to her absolutely out of the proceeds. Then the Claimants' costs and charges would be paid and finally the service charge arrears would be paid. All of the above payments will be made of course after the cost of the sale.
65. I am of the provisional view that the claimants cots of this action should be added to their security and paid out accordingly on the basis that theirs' and Mrs Stenberg's costs should be paid by Jonathan Steinberg out of his share. If there is a surplus after all off the secured creditors and Mrs Steinberg are paid out then he is entitled of course to that sum subject to that order.
66. I will provide in any order that if he wishes to challenge it he should apply within seven days of the order being served on him but in default be debarred from making any later challenge to the terms of the order by application back to me or any other first instance judge.