England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand. London. WC2A 2LL
		13 October 2005

The Honourable Mr Justice Kitchin:

Introduction

1. This is an application by the second and third defendants against the claimant for security of costs in an action concerning a freehold property called 'Claregate' which is situated at Great North Road, Littleheath, Potters Bar ('Claregate'). The freehold to Claregate belonged to a Mr J Harness until his death in October 2003. In 2002 the claimant ('Love & Care') negotiated with Mr Harness about taking a lease of Clare gate and maintains that those negotiations led to an agreement 'subject to contract' to take a 125 year lease at £20,000 per annum rent ('the lease'). In late November 2002 Love & Care found a caution had been registered against the property by the first defendant ('Mr Kiernan') to protect an alleged option agreement in Mr Kiernan's favour ('the option'). The option was for a 999 year lease at a peppercorn rent for a premium of £500,000. Love & Care contends that it was assured by Mr Harness that he had never granted such an option and, on the strength of that assurance, it proceeded to enter into the lease with Mr Harness on 30 January 2003.
2. Thereafter Love & Care sought to register the lease at HM Land Registry but Mr Kiernan objected. In the event the Land Registry indicated that the only way to resolve the dispute between Love & Care and Mr Kiernan was for proceedings to be issued in the Chancery Division of the High Court and that the Land Registry was likely to direct one or other of the parties to do so. Love & Care decided to issue proceedings without waiting for such a direction and, accordingly, it commenced these proceedings on 20 April 2004. On 27 April 2004 the Land Registry issued a direction to Mr Kiernan stating that unless he issued proceedings by 22 June 2004 his caution might be cancelled. Mr Kiernan did not comply with that direction, filed a defence to the action, but no counterclaim, and applied to strike out the claim. Love & Care informed the Land Registry about the failure to comply with the direction to issue proceedings and pointed out that it was not the case that Mr Kiernan had effectively commenced proceedings by filing a defence because not only had he not made a counterclaim but was seeking to strike out the claim itself. Accordingly, on the 9 August the Land Registry cancelled Mr Kiernan's caution for failure to comply with its direction of the 27 April.
3. Mr Kiernan appealed against the cancellation of the caution. On the 16 August Patten J ordered a stay ex parte of the cancellation direction and Mr Kiernan then amended his pleading to include a counterclaim On the return date for the appeal against the cancellation direction a consent Order was made reciting that Mr Kiernan had agreed to withdraw his application to strike out the claim and to the effect that the hearing of the appeal against the cancellation direction be adjourned to come on at the same time as the trial with the stay of the cancellation direction continuing in the meantime.
4. At this point the state of play between Love & Care and Mr Kiernan may therefore be summarised as follows. Love & Care. claims that it has a valid 125 year lease at a rent of £20,000 per annum and that its claim against the freehold is not subject to Mr Kiernan's option to acquire a 999 year lease at a premium of £500,000. Mr Kiernan maintains that the freehold is subject to the option but not the lease. Against this background Love & Care took the view that the estate of Mr Harness should be joined into the proceedings so that it would be bound by the - result of the contest between Love & Care and Mr Kiernan and that it should have the opportunity, if so advised, to be heard on the matter. Accordingly the estate was joined to the proceedings on 12 August 2004. The 2^nd and 3^rd Defendants are the personal representatives of the estate and were appointed in November 2004 ('the Estate').
5. A case management conference took place before Master Bragge on 5 May 2005. At that hearing Mr Kiernan made an application for security of costs against Love & Care. The Master dismissed the application with costs. One of the arguments advanced by Love & Care was that even if the claim were to be stayed, the action would have to continue because of the direction of the Land Registry that Mr Kiernan bring proceedings in the Chancery Division to resolve the dispute between him and Love & Care. He would be in breach of that direction if he - abandoned his counterclaim. The Master dismissed the application on the basis, as he put it, that as between Love & Care and Mr Kiernan there were 'mirror' claims.
6. Once joined into the proceedings the Estate had the option of taking an essentially passive role and, in due course, accepting the result of the dispute between Love & Care and Mr Kiernan. In the event, however, the Estate has chosen to contest the claims made by both Love & Care and Mr Kiernan. In short, the Estate contends that the lease was an unlawful transaction and is not binding on the Estate because it constitutes an unconscionable bargain and is the result of undue influence exerted on Mr Harness by Love & Care.
7. Against this background the Estate now seeks an Order for security for its costs against Love & Care.

The application

8. The application is based upon the belief that Love & Care would be unable to pay the costs of the Estate- if it is unsuccessful. It is made under CPR 25.13(1) and (2)( c) and s. 726(1) of the Companies Act 1985. In support of the application the Estate relies upon the following matters.
9. First, the financial position of Love & Care is not good. On 31 July 2004 it had a negative asset balance of £61,272 and the amount falling due to creditors within one year stood at £87,537. Further, it does not appear that Love & Care has any particular trading activity and, as at 31 July 2004, it had an operating loss of £33,071. I need to say no more on this aspect because in a witness statement of a Mr Shah dated 16 September 2005 and filed on behalf of Love & Care it is apparently accepted that an order for security would be appropriate if the financial position of Love & Care were the only relevant consideration.
10. Secondly, it was emphasised during the course of the application before me by counsel on behalf of the Estate that there is no suggestion that an order for security would stifle the claim made in these proceedings by Love & Care.
11. Thirdly, the Estate relies upon the merits of its defence and counterclaim and upon the following matters in particular:

i) the rent is fixed throughout the 125 year term;

ii) there is a quantified tenant's repairing covenant;

iii) there is no covenant to rebuild or otherwise improve the property;

iv) the landlord has no ability to control any alterations to the property (including its demolition);

v) although there were at the time competing claims from Mr Kiernan in respect of his alleged option there is nothing in the lease protecting Mr Harness in respect of these.

12. Moreover, it is said, Mr Harness received offers to purchase the property for around £1.25 million in May 2001 and, in the light of this, the initial rent of £20,000 seems extraordinarily low.
13. All these circumstances, taken together with the age of Mr Harness at the time of the negotiations, are said by the Estate to give rise to a good prospect of establishing that the agreement between Love & Care and Mr Harness constitutes an unconscionable bargain and was the result of undue influence being exerted upon Mr Harness by and on behalf of Love & Care.
14. I am satisfied that there is reason to believe that Love & Care will be unable to pay the costs of the Estate if ordered to do so and accordingly must go on to consider whether, having regard to all the circumstances of the case, it is just to make such an order.
15. I have taken careful account of all the matters raised on behalf of the Estate and which I have referred to above. I am also conscious of the fact that it appears that Love & Care was incorporated subsequently to the negotiations with Mr Harness for the acquisition of the lease and that it appears to exist solely for the purpose of that acquisition. Nevertheless, I have come to the conclusion, for the reasons which I set out below, that it would not be appropriate to order Love & Care to provide the security requested.
16. First, although it is fair to say that most of the allegations made by the Estate to which I have referred are raised in the defence, I accept the submission made on behalf of Love & Care that, in substance, these allegations go to support the counterclaim for a declaration that the lease is of no effect and not binding on the Estate. In this regard it is important to have in mind-that the Estate was only-joined in the proceedings so as to be bound by the result of the dispute between Love & Care and Mr Kiernan. In the claim itself Love & Care does not seek any substantive relief against the Estate at all. As I have indicated, once joined, the Estate had the option of adopting a passive role, in which case it would have incurred no substantive costs and certainly not costs of anything like the order of £50,000 sought on this application. In the event, however, the Estate has chosen to make a positive case against both Love & Care and Mr Kiernan that neither the lease nor the option is binding upon the Estate.
17. Secondly, if the claim of Love & Care against the Estate is struck out because it has failed to provide security then the dispute between Love & Care and Mr Kiernan will continue. So also will the counterclaim raised by the Estate against Love & Care. Striking out the claim by Love & Care against the Estate would therefore make no difference to the costs incurred by the Estate.
18. Thirdly, during the course of the hearing I invited counsel for the Estate to specify precisely the order that the Estate sought. In response to that invitation I was invited to make an order that "unless security is given as ordered, on production by the Second and Third Defendants of evidence of default, there be judgment for the Second and Third Defendants without further order with costs of the claim to be the subject of a detailed assessment". In short, it was submitted that the Estate would be entitled to judgment on the counterclaim. It is of course not appropriate to order security for costs against a defendant and the framing of this Order confirms, to my mind, that in substance that is what is sought by the application before me.
19. Accordingly, I have reached the conclusion that the application for security must be dismissed.