England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		12 January 2006

Mr Richard Sheldon QC (sitting as a Deputy Judge of the High Court):

1. In this action, the Claimant ("Warnborough") seeks specific performance of a contract for the sale of two leasehold properties in Southampton, pursuant to the exercise by Warnborough of an option granted to it by the Defendant ("Garmite") to purchase the properties for £ 130,000. The two properties in question are 31 and 32 Canute Rd, and 157 Albert Road, Southhampton, Hampshire and are registered at H.M Land Registry under a single title ("the Property").
2. In summary, Warnborough seeks to enforce the bargain that was entered into by it and Garmite as contained in the written agreements signed by the parties.
3. Garmite resists the action principally on the following grounds:

i) That the option to purchase the Property granted to Warnborough is unenforceable on the ground that it is "a clog on the equity of redemption" ("the Clog Defence");

ii) That Warnborough is estopped from enforcing the option on the basis of assurances given by Warnborough that it would not enforce its rights ("the Estoppel Defence");

iii) That the conditions for the exercise of the option in August 2001 had not been satisfied ("the Unsatisfied Conditions Defence"). In particular Garmite contends that the relevant payment was, as a matter of fact and law, made when the cheque was sent by post (in the period before the option became enforceable) rather than the date when it was received by Warnborough (by which time the option had become enforceable). Garmite contends that it was Warnborough which bore the risk of a delay in the post.

iv) That the option is in the nature of a penalty or provision for forfeiture and that the Court should grant relief from forfeiture ("the Relief from Forfeiture Defence").

4. There are other points taken by way of Defence which it is convenient for me to deal with in the course of considering the principal heads of defence summarised above.

The Facts

5. I shall begin by summarising the essential facts which are not materially disputed. I should emphasise that this is a summary only in order to set the scene for the determination of the issues which have arisen (which requires me to consider certain facts in more detail).
6. Warnborough is a company incorporated in Jersey with directors in Jersey. It is a property investment company. I was told that it has some 30-40 properties which it lets. Warnborough uses Central and Residential Properties Ltd ("CRP") as its managing agents. Mr David Thomas ("Mr Thomas") is a director of CRP and in that role has had the conduct of most of the dealings with the Property which are the subject of these proceedings. Warnborough is owned by a family trust of which Mr Thomas is a potential beneficiary.
7. Warnborough acquired the head lease of the Property in the 1970's. It was for a term of 84 1/2 years commencing on 1 January 1959 to expire on 30 June 2043. The freehold is owned by the Borough of Southampton. The Property comprised offices and a cold store for which it had a permitted user. In about 1994 or possibly slightly earlier, the Property became vacant and attempts were made to find a new sub-tenant on the basis that the Property could be used as offices and for storage. With a view to realising the Property's development potential, Mr Thomas approached the Borough of Southampton to find out whether it would sell the freehold or grant a longer lease but these approaches were rejected. The Property – in particular the cold storage area – was in poor condition and it was proving difficult to let.
8. Mr Graham Nye ("Mr Nye") is in the film making and editing business (including video and television). In the early 1990's, following his involvement in a failed business venture, he set up his own business – Southern Studios - from his home in Shirley Avenue, Southampton. In June 1994, Garmite was incorporated and traded as Southern Studios. Mr Nye has at all relevant times been – and still is - the sole shareholder in and director of Garmite. Trading from home was becoming difficult. Mr Nye started looking for suitable premises and became interested in the Property which appeared to have the potential to meet his requirements.
9. Mr Nye did not want to rent premises. Mr Nye accepts in his witness statement that a commercial mortgage was not available to him in view of his trading record and his inability to fund a deposit. I would add that it is also clear to me from the evidence I have heard that the cashflow from Mr Nye's business was insufficient and too irregular for him to obtain a commercial mortgage.
10. Even though the Property was marketed as only available to let, Mr Nye pursued his interest. On 3 October 1995, he, on behalf of Garmite, wrote a letter to Warnborough's estate agents making an offer to purchase the Property. In that letter, Mr Nye wrote:

We are grateful to your client for accepting that our cash flow situation is insufficient to allow for the usual route of commercial mortgage to be taken. We have stated this from the outset in order to avoid wasting both yours, ours, and your clients' time, and will continue this course of honesty throughout future, further negotiations.

Our business is still a young one, but having continued growth throughout the last few years recession, we are now at the stage where future growth and further market penetration can only be realised through moving to the correct location.

In considering the following rough proposal, and it is just that, we are mindful that over-commitment on our behalf would be self-destructive to the business, which benefits no-one. We do however accept that your client needs a return on his investment and his risk in effectively investing in us.

We are confident therefore that our predicted trading over the next two years will not only allow us to honour our proposals, but will also strengthen our market position to ensure our longevity.

The letter continued by making an offer of £160,000 for the Property to be paid over a period of 12 years in instalments, with no instalments payable for the first six months and then at a gradually increasing level over four years before reaching a steady level to make a total paid after twelve years of £244,800. For the purposes of his offer, Mr Nye allowed an interest rate of 10.2% which was stated to be 2.21% above the then current base rate.

11. The offer had been made on the basis that the period remaining on the lease of the Property was 67 years: the correct period was in fact 47 years which led to Mr Nye reducing the offer to £130,000. Negotiations for the sale of the Property were protracted. Consents were required from Southampton City Council to the alterations to the Property proposed by Mr Nye and to its proposed change of use, and the funding arrangements between Warnborough and Garmite needed to be finalised. Mr Nye was keen to move in to the Property and, whilst the negotiations continued, was permitted by Warnborough to occupy the Premises on 24 May 1996 under a Tenancy at Will paying just £10 per day. I was told that Garmite had difficulty in paying even this modest sum on time.
12. For present purposes, it is unnecessary for me to set out in detail the course of the negotiations, although I refer to certain of the correspondence later in this Judgment.
13. Completion of the sale of the Property took place on 30 August 1996. Warnborough transferred the Property to Garmite for £130,000. The entire purchase price was left outstanding, secured on the Property by a Legal Charge dated 30 August 1996 ("the Original Charge"). The Original Charge provided for repayment by monthly instalments on the first day of each calendar month with no instalments payable for the first six months, monthly payments of interest only for at least the next 6 months and then at the stated levels consisting of principal and interest. The sums there set out were gross sums and it was for Garmite to deduct from such sums income tax required to be deducted by law (Warnbourough being a Jersey company) and account for these to the Revenue. The rate of interest on outstanding amounts was fixed at 10 per cent. By Clause 3.2 of the Original Charge, Garmite covenanted to repay to Warnborough all sums paid by Warnborough in effecting insurance of the Property, such sums to be paid within 14 days of demand.
14. Also on 30 August 1996, Garmite granted Warnborough an option ("the First Option") to repurchase the Property for £130,000. The First Option was exercisable only if certain conditions were satisfied. So far as material, these conditions were that: (i) the principal sum currently outstanding under the Original Charge was not less than £65,000, and (ii) any payments covenanted to be made by Garmite to Warnborough under the Original Charge were in arrears and unpaid for 35 days. The First Option gave Warnborough the right to set off the whole of the sum currently outstanding on the security of the Original Charge against its obligation to pay the purchase price of £130,000. In effect, therefore, leaving aside interest paid by Garmite under the Original Charge, on completion of the purchase consequent upon the exercise of the First Option the parties would be restored to their original positions. Warnborough would once again own the Property, and Garmite would have been repaid (in the form of the balance of the purchase price on the repurchase, after allowing for set off) the amount which it had paid towards the purchase price on the original purchase. Payments of interest would be retained by Warnborough.
15. Garmite was unable punctually to pay the monthly instalments due under the Original Charge. Warnborough finally lost patience when Garmite's cheque to clear some of the arrears was returned unpaid by its bankers. On 27 July 1999 Warnborough exercised the First Option. There is no dispute that as at that date the conditions for its exercise were satisfied. More than £65,000 remained outstanding under the Original Charge and there were arrears in the monthly repayments due which had been unpaid for more than 35 days.
16. In the event, however, the repurchase was never completed. Mr Nye procured the arrears to be paid off by Garmite (a sum of £10,259) and pleaded with Warnborough to withdraw the exercise of the First Option. On 2 November 1999 Warnborough and Garmite entered into a written agreement ("the 1999 Agreement"), the substantial effect of which was to put the parties back in the position they were in before the First Option was exercised, albeit at a price payable by Garmite.
17. The 1999 Agreement recites that on Warnborough's exercise of the First Option Garmite became bound to sell and Warnborough bound to purchase the Property at the option price of £130,000. It goes on to provide for the assignment by Warnborough to Garmite of all Warnborough's rights under the First Option for a consideration consisting of (a) £15,000 (which Garmite could, at its election, either pay in cash or retain as a loan secured on the Property by a further Legal Charge); (b) a sum of £629.80 to cover Warnborough's legal costs of exercising the First Option; and (c) the grant by Garmite to Warnborough of a further option to purchase the Property ("the Second Option").
18. Completion of the 1999 Agreement took place forthwith. Garmite elected to retain the £15,000 as a loan, and it accordingly executed a further legal charge ("the Supplemental Charge"). The Supplemental Charge is dated 2 November 1999 and provided for the £15,000 to be treated as an addition to the capital sum outstanding and payable under the Original Charge.
19. The Second Option is also dated 2 November 1999. It is in the same terms as the First Option, save only that it varies the condition in the First Option referred to above by providing that in calculating whether the amount outstanding under the Original Charge is not less than £65,000 the sum secured by the Supplemental Charge shall be brought into account.
20. Garmite encountered further difficulties in paying the monthly instalments on time. The cashflow from the business was erratic, and Garmite's creditors were frequently not being paid on time. A winding-up petition was presented as a result of which Garmite's bank account was frozen. Although the winding up petition was eventually dismissed, its bank account was no longer used and Mr Nye used his personal account to receive and make payments relating to his business. The spectre of a further winding up petition loomed from time to time. By the beginning of July 2001, there were arrears on the mortgage instalments for April (in part), May, June and July and payment for the insurance premium on the Property for the year from 31 March 2001 of £1,331.14, which had fallen due on that date, was also outstanding
21. On 6 August 2001 Warnborough purported by written notice to exercise the Second Option ("the First Notice"). Garmite disputed its entitlement to do so. I consider the facts surrounding the exercise of the First Notice, some of which are disputed, in more detail later in this Judgment.
22. On 29 October 2001 Warnborough commenced the present action. In the light of the dispute as to whether Warnborough was entitled to serve the First Notice, Warnborough served a further written notice exercising the Second Option on 15 June 2005 ("the Second Notice"). By this date, Garmite had not paid any sums due since about January 2003 and the amount outstanding was in excess of £65,000. The Second Notice was expressed to have been served without prejudice to Warnborough's contention that the First Notice was valid. On 7 November 2005, Mr Justice Lindsay gave Warnborough permission to amend its Particulars of Claim to plead service of the Second Notice as an alternative basis for the relief sought. Garmite disputes that the Second Notice was validly served.
23. Garmite had earlier applied for summary judgment under CPR Pt 24 on the grounds that the Second Option was unenforceable as it constituted a "clog on the equity of redemption". The application was dismissed by Master Bowman on 2 August 2002 but Garmite's appeal was allowed by Mr Nicholas Davidson QC, sitting as a Deputy High Court Judge, on 22 January 2003. Warnborough appealed, by way of second appeal, to the Court of Appeal. The appeal was allowed by the Court of Appeal on 5 November 2003 and Garmite's application for summary judgment was dismissed (see [2003] EWCA Civ 1544).
24. Since it is unnecessary for the purposes of the trial to establish the precise current value of the Property, the parties sensibly agreed to proceed on the basis that the current market value of Garmite's long leasehold interest in the Property is £272,000 (i.e. its investment value based on the capitalisation of projected profit rent) and that the current value of Garmite's interest including "marriage value" (which takes into account development potential) is in the range of £327,000 to £460,000.
25. Warnborough produced evidence that the amount required to redeem the mortgage as at 30 November 2005 was £137,244.63, including all interest. Mr Nye produced a schedule of payments which showed that as at 1 November 2005 the amount was £129,594.65. He produced another schedule which indicated that the amount required to redeem the mortgage as at 30 November 2005 was £120,719.90. The difference between the two schedules was not explained to me but appears to relate to tax deductions on payments of interest. For the purposes of deciding the issues between the parties at this stage, it is not necessary to determine the precise amount.

The Clog Defence

26. Mr Galway-Cooper, who appeared for Garmite, submitted that the First Option, and hence also the Second Option, was unenforceable on the grounds that it constituted a "clog on the equity of redemption". This expression denotes an objectionable restriction on the rights of a borrower who has mortgaged his property as security for the debt. Thus, a mortgagee is not at the time of the loan entitled to enter into an agreement to purchase the security for a fixed price in the event of default.
27. The relevant authorities (Samuel v Jarrah [1904] AC 323; Davies v Chamberlain [1909] TLR 26 Dec 9; Kreglinger v New Patagonia Meat [1914] AC 25; Lewis v Frank Love [1961] 1 All ER 446) were extensively reviewed by Lord Justice Jonathan Parker in the Court of Appeal in the present case (at paras 42 – 71). That review shows that, though often criticised, the rule against "clogs" survives. In his judgment (with which Lord Justice Judge and Lord Justice Simon Brown agreed) Lord Justice Jonathan Parker concluded:

"73. … it is in my judgment glaringly clear from the authorities that the mere fact that, contemporaneously with the grant of a mortgage over his property, the mortgagor grants the mortgagee an option to purchase the property does no more than raise the question whether the rule against 'clogs' applies: it does not begin to answer that question. As has been said over and over again in the authorities, in order to answer that question the court has to look at the 'substance' of the transaction in question: in other words, to inquire as to the true nature of the bargain which the parties have made. To do that, the court examines all the circumstances, with the assistance of oral evidence if necessary.

74. Against that background of authority, I return to the instant case.

75. In relation to the First Option, Garmite invites the court to conclude, by reference only to the bare transaction documents, that if the action went to trial the court would be bound to conclude that the First Option is a 'clog'. With all respect to the deputy judge, that seems to me to be an invitation which the court cannot possibly accept, for the reasons expressed so cogently by the Master in his judgment. Indeed, as I ventured to suggest in argument, it seems to me that if any party were in a position to seek to summary judgment by reference only to the transaction documents it would be Warnborough and not Garmite.

76. Although it would clearly not be appropriate to attempt to lay down any absolute rule, it does seem to me that where the option to purchase which is sought to be challenged as a 'clog' is granted against the background of a sale of the property by the grantee of the option, as owner of the property, to the grantor for a price which is to be left outstanding on mortgage, there must be a very strong likelihood that, on an examination of all the circumstances, the court will conclude, as it did in Davies v. Chamberlain, that the substance of the transaction is one of sale and purchase and not one of mortgage. At all events, if one is limited to a consideration of only the bare transaction documents (as we have been) that seems to me to be the provisional conclusion to which they point. On the face of the transaction documents (and leaving aside any other factor) to describe the sale as 'incidental' to the loan seems to me, with respect to Mr Galway-Cooper, to turn the transaction completely on its head.


77. Nor do I derive any assistance from Mr Galway-Cooper's suggested analogy with a sale by a vendor as mortgagee, where the sale price is left outstanding on mortgage. That would be a different case; and if one thing is clear on the authorities it is that each case must turn on its own facts. The question to be asked in each case is: What was the true nature of the transaction?"

(My emphasis)

28. It is apparent from the passages I have emphasised that the Court of Appeal took the view that the transactional documents pointed to the substance of the transaction as being one of sale and purchase and not one of mortgage. On that basis the rule against "clogs" would not apply in the present case.
29. Despite the views expressed by the Court of Appeal in the present case, Mr Galway-Cooper valiantly pursued his argument. He submitted that the position in the present case was no different from a situation in which a third party mortgagee in possession of mortgaged property sells the property to a buyer on terms that the whole of the purchase price is to remain outstanding, secured on the property. The sale in such a case, he submitted, was incidental to the loan. But these were the same submissions which he made to, and found no favour, with the Court of Appeal.
30. Mr Galway-Cooper also sought to distinguish Davies v Chamberlain on the basis that, unlike the present case, the trigger for the exercise of the option was not dependent on any breach of the terms of the mortgage. He also pointed to one of the triggering events for the exercise of the First Option, namely the failure to perform the covenant as to repairs contained in the Original Charge, as suggesting that the substance of the transaction was one of mortgage. The short answer to these points is that they appear on the face of the transactional documents, yet the Court of Appeal found that these documents pointed to the substance of the transaction as being one of sale and purchase. Further, as I set out more fully below, it seems to me impossible to characterise the Second Option as being a term of, or referable to, the Original Charge rather than as being a term of, or referable to, the contract of purchase and sale.
31. As the Court of Appeal pointed out, the question nevertheless remains whether having examined the circumstances as a whole, I should conclude that the substance of the transaction was one of sale and purchase, as suggested by the transactional documents, or one of mortgage. Mr Galway-Cooper was unable to point to any evidence which I had heard which should lead me to form a view of the substance of the transaction different from that which appeared from the transactional documents. Indeed, having heard the evidence as to the circumstances in which the transaction was entered into, I have formed the clear conclusion that the provisional view expressed by the Court of Appeal should be confirmed.
32. For example, Mr. Thomas gave evidence, which I accept, that Warnborough's preference was to let the Property (its business being that of letting property) but, in view of the difficulties in finding a tenant, was prepared to enter into the arrangements with Garmite as "the best of a bad job". Whilst Mr Thomas viewed the terms of repayment as being favourable to Mr Nye and Garmite, he also recognised the possible benefit to Warnborough in terms of an increase in the value of the Property arising from the change of user and the works proposed to be undertaken by Mr Nye to restore it to good condition. When asked whether the purpose of the option was to secure payment of instalments under the Original Charge, Mr Thomas explained that from his point of view the arrangements were a package and that the purpose of the First Option was to make sure that if Garmite defaulted Warnborough would not lose the Property – Warnborough wanted the Property back if Garmite did not pay. According to Mr Thomas, the deal involved Mr Nye making the Property usable – to Garmite's benefit if it paid and to Warnborough if it did not.
33. It seems clear to me that the purpose of the £65,000 condition (£65,000 being one half of the purchase price) was that the benefit of any increased value to the Property would enure to Warnborough in the event of default whilst that sum was outstanding (and the First Option exercised) and would enure to Garmite once half of the purchase price had been paid by Garmite to Warnborough (at which point the First Option would cease to be exercisable). It is to be noted that Mr Nye's solicitors, in a letter dated 13 June 1996, advised him that Warnborough's right to repurchase the Property under the First Option arose irrespective of the actual market value at the time of its exercise and enabled Warnborough "for commercial purposes" to take back the Property rather than rely on the usual rights of sale as mortgagee in the event of default. The latter point arises from the fact that a mortgagee cannot sell to himself (at least without a court order).
34. It seems to me clear that the substance of the transaction with which I am concerned is a sale and purchase. Warnborough's position as seller seems to me crucial. This is not a case where a third party lender obtains a mortgage and an option to purchase. The conditions to be satisfied to enable the sale to take place included the provision of the Original Charge and the First Option. The First Option formed part of the sale package and cannot in my view be regarded as referable wholly or even mainly to the provision of the Original Charge. The correct characterisation is that the First Option was a term of – and referable to - the contract of sale and purchase and not of the Original Charge.
35. Accordingly, I reject Garmite's contention that the First Option is unenforceable as being a "clog".
36. Mr Gadd, who appeared for Warnborough, accepted that if the First Option were a "clog" then it would follow that the Second Option would similarly be unenforceable. In the light of this concession, Mr Galway-Cooper did not pursue separate defences which had been pleaded in relation to the Second Option based on mistake and misrepresentation which were in any event premised on a finding that the First Option was a clog. Further, Mr Galway-Cooper did not seek to challenge the suggestion of Lord Justice Jonathan Parker (at para 80) that the enforceability of the Second Option would depend on whether the First Option was itself enforceable.

The Estoppel Defence

37. This line of Defence falls into two parts. The first part concerns alleged assurances or representations made from time to time before 24 July 2001 to the effect that Warnborough would not enforce its strict rights under the agreements if payments were made late. The second part concerns specific assurances or representations alleged to have been made by Mr Thomas during the course of a telephone conversation with Mr Nye on 24 July 2001 shortly before the First Notice was served.

Pre 24 July 2001

38. I deal with the position in the period before 24 July 2001 quite shortly. It is common ground between the parties that during the course of the negotiations leading up to the sale of the Property in August 1996, Mr Nye was quite open about his own financial position and that of Garmite. Mr Thomas knew that Mr Nye and Garmite were not in position to obtain a commercial mortgage. Mr Thomas knew that Mr Nye's financial history was such he was "undesirable" to a commercial lender, and Garmite had only recently been established.
39. In his witness statement Mr Nye described his first meeting with Mr Thomas on 20 October 1995 as follows:

David Thomas asked me many questions about my past, my financial situation and bank accounts, and discussed at length my business plan. I discussed all of these openly and honestly, keeping nothing from him…. We discussed the likelihood of projections falling short, as they sometimes do, or of cash flow difficulties.

I openly stated that in these events I would determine the scale of the problems, realistically assess the timescale of recovery from it and immediately advise them that I had a problem and how I would go about solving it. I asked for David Thomas' view on late payments. David Thomas stated then that he respected my answer and that if he was kept in the picture regarding any problems encountered, he would always be supportive. He stressed that if I did not communicate with him, however, he would not be able to help…

Shortly before the end of the meeting, I asked David Thomas why he appeared to be so supportive of what was effectively a new business with little track record, undercapitalized from the outset and an ambitious business plan. David Thomas' response was that he respected my honesty and integrity, believed me to be very creative, and had always believed in supporting the Arts. He looked me straight in the eyes and stated that if he accepted my offer, and gave the go-ahead, he was backing me rather than my business plan."

Mr Thomas did not dispute the accuracy of these statements.

40. In its statements of case, Garmite relies upon this meeting to support a case of estoppel, asserting that Mr Thomas on behalf of Warnborough thereby represented that Warnborough would not enforce its strict rights if payments were made late. This assertion is hopeless.
41. Similar assertions are made in relation to subsequent correspondence (see Answer 6 to the Replies to the Claimant's Request for Further Information dated 14 June 2002). It is unnecessary to go into detail. Suffice it to say that the correspondence there referred to does not even begin to get a case of estoppel off the ground. In his closing submissions, Mr Galway-Cooper made particular reference to a letter from Warnborough received by Garmite on 23 February 1999 in which Warnborough stated:

"…we must mention that the total overdue instalments up to and including January 1999 now amount to £6,963 gross or £5,570.40 after tax and, adding the February instalment will increase the outstanding gross to £8,795 if no payment is made. This is far too high and we have to say with some regret that we cannot allow arrears of this magnitude to continue for any length of time. Indeed, although we have been forbearing for a long period, we consider that the time is now fast approaching when we shall have to insist that your payments be brought up to date if the mortgage is to continue."

42. Mr Galway-Cooper submitted that this constituted a representation that Warnborough would allow arrears of a lesser magnitude to continue and that if the arrears were reduced Warnborough would not enforce its rights. I reject that submission.
43. I would add that, even if representations of the type contended for had been made, the effect of the correspondence in May to July 2001 which I describe below was to withdraw them.
44. In any event, it is clear to me from the evidence of Mr Nye that he neither understood representations to have been made in the terms contended for, nor relied on any such representations. For example, when giving evidence about a conversation with Mr Thomas at about the time the Second Option was entered into, Mr Nye said that he asked Mr Thomas what would happen if he got into trouble with his finances – would he be in the same situation (i.e. would the option be exercised) or would there be a possibility of cooperation, a possibility of legroom? Mr Nye described Mr Thomas' response as follows: "Mr Thomas did not say fine. He gave me a stiff lecture but said that if there were problems he would do his best to be supportive depending on the circumstances." This reflected other answers given by Mr Nye in cross examination: although he believed Warnborough would be flexible in its dealings, he knew he would not be able to "push his luck".
45. Mr Galway-Cooper also relied on the course of conduct, relying on the fact that arrears in the monthly repayments built up from time to time and that Warnborough did not take steps to enforce its rights. Even if this were the case, this is insufficient to found an estoppel. But it is not the case: when Garmite's cheque to clear some of the arrears was returned by Garmite's bankers, Warnborough served the First Notice on 27 July 1999.
46. I conclude that the there is no basis for the estoppel defence prior to 24 July 2001.

24 July 2001 and surrounding events

47. The second part of the estoppel defence relates to what was said or agreed during the course of a telephone conversation between Mr Nye and Mr Thomas on 24 July 2001. I heard conflicting evidence on this. Before resolving the disputed issues of fact, I should briefly set out the background which led to this conversation.
48. In about the summer of 2000, Mr Nye decided to form a joint venture with two business associates. The intention was that Mr Nye was to become a 60% shareholder in two new companies, one of which (Mayhem Ltd) was to buy the Property from Garmite. One of the associates would provide funding for the new business which was to be an amalgam of the film video and media business run by Mr Nye and of the music business run by the associates. The negotiations were very protracted and in evidence before me Mr Nye expressed frustration at the behaviour of his associates who he came to believe were "stringing him along".
49. The solicitors for Mayhem Ltd were concerned to ensure that the Second Option would not be exercised before the proposed sale by Garmite to Mayhem Ltd took place. Warnborough's solicitors became involved.
50. In the meantime, Garmite continued to struggle to meet the mortgage repayments. Further, on 17 March 2001, CRP wrote to Garmite to advise that payment for insurance was due on 31 March 2001 in the sum of £1331.14 and asked for payment in good time.
51. On 15 May 2001, Warnborough's solicitors wrote to Garmite's solicitors in connection with the proposed sale to Mayhem Ltd. The letter included the following:

First of all, our client was not entirely pleased to find itself involved in this further correspondence when (a) it has shown considerable indulgence to your client to date, (b) our earlier request for an undertaking for fees has gone unanswered; and (c) the mortgage repayment due on 1^st May and the insurance repayment due on the March renewal both remain unpaid – in respect of which our client reserves all rights.

52. On 6 July 2001, Warnborough's solicitors wrote a letter to Garmite's solicitors which included the following:

Our client is most concerned that the mortgage repayments due on 1^st May, 1^st June and 1^st July are all unpaid and that the insurance renewal premium, on the renewal at the end of March, is also still outstanding.

Please convey to your client that, unless all outstanding payments are made to Central and Residential Properties Limited, our client's UK agent, by Friday 20 July our client will exercise the rights to which it is entitled under the Option Agreement and/or Mortgage without further notice.

53. Mr Nye claims that his solicitors did not convey to him the message as had been requested, and that he was not made aware of the letter of either 15 May 2001 or 6 July 2001. He explained that the partner dealing with the matter was ill at the time and shortly thereafter had to be replaced by another partner. I accept Mr Nye's evidence. However, Warnborough had made its position clear and, if Mr Nye's solicitors failed to draw these matters to his attention as they should have done, that was not the fault of Warnborough or its solicitors.
54. In any event, on 20 July 2001, Warnborough's solicitors wrote again to Garmite's solicitors by fax, a copy of which was faxed to Mr Nye on the same day. The letter stated:

….we believe our client has already made it clear:

1. That if the outstanding mortgage repayments and insurance renewal repayment are not made to its UK agent today, it will enforce its rights without further notice.

55. Upon receipt of a copy of this letter, Mr Nye attempted to contact Mr Thomas as a matter of urgency. He finally spoke to Mr Thomas by telephone on 24 July 2001.
56. The conversation was wide ranging, including discussion about the difficulties with the proposed sale to Mayhem and Mr Nye's disillusionment with his proposed joint venture associates. There was also a discussion of why Mr Nye had not contacted Mr Thomas earlier. In the course of that discussion, Mr Thomas told Mr Nye about the letter of 6 July 2001. So far as relevant to the issues in the present proceedings, there is a dispute about what was said as regards the way forward.
57. In his witness statement, Mr Nye says:

376. During this conversation David Thomas confirmed the amounts in arrears as £124.00 outstanding from April 2001 together with the May and June instalments of £2,182.00 each: a total of £4,488.00. A further payment was now outstanding for July at £2,182.00, however, this was for the current month whereas the sum of £4,488 was long outstanding and more urgent. I promised that I would send him a cheque that evening for £4,488.00

377. David Thomas first assured me that under no circumstances would the Claimant exercise the Second Option without him first being informed, when he would then immediately inform me, thereby giving me time to resolve the situation

378. David Thomas then assured me that in any case the Claimant would not exercise the Second Option if funds arrived as promised, namely that the cheque for £4,488.00 would be posted that day, and providing that the July 2001 payment of £2,182.00 was sent within two weeks of that date, that is by 7^th August 2001. This was an unequivocal statement from David Thomas and one upon which I totally relied.

379. We discussed these points in great detail, as having spent 4 days since the TWM notice of 20^th July 2001 extremely anxious as to whether or not I had lost the property I was most anxious to establish exactly where I stood.

380. During that same conversation we discussed outstanding insurance, when once again David Thomas stated that this played no part in any agreements with the Claimant, that it had already been paid by Central and Residential, and that it was acceptable for it to be paid by instalments as in previous years, though he did firmly state that he hoped this wouldn't be too protracted.

58. In the course of cross examination, Mr Nye said that he did not remember the exact words used by Mr Thomas but that the gist of the conversation was that an agreement was reached that he (Mr Nye) would get funds in the post that night; that he (Mr Nye) gave a commitment as to when the outstanding arrears would be paid, namely that the outstanding July instalment would be paid within 2 weeks or 14 days. Mr Nye said that the 35 day period referred to in the Second Option was not in his mind and that there was no reference to this during the course of the conversation. Mr Nye was adamant that an agreement had been reached in the terms described in his witness statement. Mr Nye denied making any statement at the end of the conversation to the effect that he intended to pay the July and August instalments as late as possible.
59. In his witness statement, Mr Thomas describes the conversation on 24 July 2001 as follows:

36. On 24 July 2001 Mr Nye rang me; he was anxious not to have the Second Option enforced. I explained that the Claimant had placed the matter in the hands of solicitors and that I had no authority to delay matters. I did tell him that if he made the payments by the due date the Option could not be enforced. I also said that if all the mortgage payments were cleared I thought it unlikely that the Claimant would pursue its Option if only the reimbursement of the insurance premium remained outstanding but I never gave him any assurance or made any promise that the Option would not be enforced. I distinctly recall Mr Nye saying that he intended to leave the July and August payments to the last moment; this struck me as a most unwise statement and, indeed, altered my attitude to his difficulties. I had always been prepared to give Mr Nye the benefit of the doubt but this remark made it clear to me that he was not prepared to act in the best interests of the Claimant.

60. In cross examination, Mr Thomas repeated that he told Mr Nye that the matter was now in the hands of Warnborough's solicitors. From his own perspective, Mr Thomas said that he no longer had influence over Warnborough by that stage, Warnborough having written to Mr Nye independently through its solicitors. Mr Thomas stressed that he clearly told Mr Nye in strong terms that he should pay on time because he was aware by then that Warnborough wanted to get out of the arrangement. He said that he told Mr Nye that if all the arrears were paid off Warnborough would not be able to exercise the Second Option. He accepted that he also said that if all the mortgage arrears were paid off and only the insurance money was outstanding he did not believe that Warnborough would exercise the option but gave no assurances to that effect. Mr Thomas stated that Mr Nye was aware of the 35 day period referred to in the option. Mr Thomas did not recollect whether Mr Nye had mentioned sending the July payment within two weeks – what Mr Thomas did remember was that he said that payment had to be on time. Mr Thomas also gave evidence in cross examination to similar effect to that stated in the penultimate sentence of his witness statement referred to above.
61. Before making my determination on these conflicting accounts, it is convenient to summarise what happened after the discussion on 24 July 2001 since this has some bearing on the issue.
62. Later, on 24 July 2001, Mr Nye sent a personal cheque to Mr Thomas for £4,488.00 representing the arrears outstanding from April, May and June. In an undated letter which accompanied the cheque, Mr Nye stated: "I realise that July still remains outstanding which I will pay within the next 2 weeks, by which time I will only have the August payment outstanding."
63. The cheque was received by Mr Thomas on 26 July 2001 and forwarded to Warnborough in Jersey that day.
64. Mr Nye sent a personal cheque because, as I have already mentioned, Garmite's bank account had been frozen some time earlier as a result of the presentation of a winding up petition and, despite the ultimate dismissal of that petition, had not by this time become operational again. At this time Garmite still had outstanding creditors who had not been paid on time. Mr Nye accepted that he was at this stage having carefully to "stage manage" his bank account but had an arrangement with his bank which allowed him to draw on cheques which had not yet been cleared. Mr Nye produced his personal bank statements which showed the tight cashflow position. There were insufficient funds in his account, even taking into consideration uncleared cheques, to pay the cheque for £4,488.00 which he had sent to Mr Thomas. However, he explained to me that he knew that cheques received from him by Mr Thomas would be forwarded to Warnborough in Jersey and typically would take at least 9 days, usually more, to be banked and processed through the banking system before his account was debited. Mr Nye realised that he needed funds as a matter of some urgency both to enable the cheque for £4,488.00 to be met and to fund the outstanding July mortgage payment.
65. On 30 July 2001, Mr Nye had a meeting with Andrew Slightam, a business acquaintance and friend of some years standing. Mr Slightam appeared as a witness and explained how he agreed to lend £4,400 to Mr Nye. He made out a cheque for that sum and went with Mr Nye to his bank to pay it in. (Mr Nye's bank statements show a credit to the account that day of £6,466.20 which he said included Mr Slightam's cheque – there is no subsequent credit in the relevant period of a sum of £4,400 or more). They then returned to the Property where he saw Mr Nye write out a cheque and put it in an envelope. Mr Slightam witnessed Mr Nye posting the envelope at about 6.00 pm that day. Mr Nye says that this cheque represented the outstanding July instalment which was sent by post to CRP, marked for the attention of Mr Thomas, on that day – this evidence is challenged by Warnborough and I deal with this below.
66. The cheque was dated 1 August 2001 and made out in favour of Warnborough in the sum of £2,182.00. It was drawn on Mr Nye's personal account. Also in the envelope was an undated slip of paper which had Garmite's name, address and telephone number stamped on it and the following in Mr Nye's handwriting: "David, As promised, warmest regards, Graham".
67. On 5 August 2001, the 35 day period after the July instalment fell due expired. The First Notice, exercising the Second Option, was personally delivered by hand to Mr Nye's assistant at Garmite's registered office at about 6.00 pm on 6 August 2001.
68. The envelope containing the cheque for £2182.00 representing the July instalment was received by Mr Thomas the following morning, on 7 August 2001.
69. In a fax to his solicitors dated 7 August 2001, which was referred to by Mr Nye in his witness statement and disclosed, Mr Nye explained the events surrounding the service of the First Notice "ensuring that they had accurate facts on events leading up to 6 August 2001" (Mr Nye's witness statement para 430). In that fax, having referred to service of the First Notice at Garmite's premises, Mr Nye continued:

"… I immediately rang D. Thomas, UK Agent (Central and Residential Properties) whose wife informed me that Warnborough is now dealing directly with solicitors TWN, and that he was no longer involved…

Having had large outstanding arrears over the last few months while the sale [to Mayhem Ltd] was being processed, I paid £4,488.00 by cheque on the 25 July which left only July outstanding, which was due on July 1^st. I sent a further cheque for £2,182.00 on August 1^st, as I had promised, before the 34 days came into play.

I believed redemption figures to be very imminent, and having been assured by their UK agent that Warnborough were keen on the sale going through, and had no interest or intention of taking up their option, and bearing in mind the recent dialogue, I do not understand their action.

I do not know if the UK agent David Thomas has advised TWM of my payment last week, which should have been received before the 34 days came into force."

(The dates set out in the second paragraph are, as Mr Nye accepted, incorrect: the cheque for £4,488.00 was sent on 24 July, the further cheque for £2,182.00 was, according to Mr Nye, sent on 31 July 2001 and the 34 day period was in fact a 35 day period.)

70. Having set out the sequence of events, I now have to make findings as to what was said during the conversation on 24 July 2001. I begin by setting out my general impression of the evidence given by Mr Thomas and Mr Nye.
71. Mr Thomas was an impressive witness. I find that the evidence he gave was honest, truthful and reliable. He gave evidence in a clear and consistent manner. In his closing submissions, Mr Galway-Cooper submitted that Mr Thomas at times was less than frank, shifted his ground or was wrong. I reject that submission. I would also point out that the submission is at odds with Mr Nye's own evidence when he said (at para 385 of his witness statement): "I have always had the greatest respect for David Thomas and have always found him to be honest and truthful, highly professional, a man of honour and of his word – unusually so – and in all respects a gentleman."
72. Mr Nye came across as essentially honest and well intentioned. However, I formed the clear impression that at times his approach to the considerable difficulties which he faced, financial and personal, lacked reality. On the face of his witness statement, he made numerous promises to Mr Thomas which in the event he was unable to meet. Although he emphasised that he was always straightforward and open in his dealings with Mr Thomas, he failed to tell Mr Thomas of a severe spinal injury which he suffered in September 1998 and which required surgery in March 1999. This adversely impacted on his business and his ability to pay the mortgage instalments. In a letter to Mr Thomas dated 2 March 1999, Mr Nye referred to the cause of his ongoing problems as being a bad debt of £36,500 which in evidence to the court Mr Nye said was understated – the correct amount was about double that figure.
73. I consider that the lack of reality on the part of Mr Nye has also resulted in his mischaracterisation of certain of his dealings with Mr Thomas. Thus, the indulgences granted by Warnborough have been elevated to "assurances" or "representations" that Warnborough would not rely on its strict rights (see the earlier section of this judgement). As regards the discussion on 24 July 2001, I find that Mr Nye did indeed promise to pay the April, May and June arrears that day and also promised to pay the July instalment within 14 days. But I also find that there was no binding agreement that Warnborough would not exercise the Second Option if these promises were adhered to. The unilateral promises made by Mr Nye have in my judgment been elevated in his mind to agreements or assurances on the part of Mr Thomas when this was not in fact the case.
74. I also consider that the fax sent by Mr Nye to his solicitors on 7 August 2001 is more consistent with Mr Thomas' account of the meeting. The fax only refers to what Mr Nye had "promised" – there is no reference to an agreement. If an agreement had been broken, as Mr Nye now so vehemently maintains, I would have expected him to say so loud and clear in this fax. It is also to be noted that the fax refers twice to the period before the option could be exercised (incorrectly referred to in the fax as 34 days). This suggests to me that Mr Nye had this period well in mind and had thought that he had sent the cheque for the July instalment in good time before the period expired.
75. At this point (7 August 2001), Mr Nye did not know that the cheque for the July instalment had only arrived that morning. Even after he had become so aware and sent a long letter on 24 August 2001 to Warnborough he again referred to promises which he had made rather than the agreement which he now says was reached. In that letter Mr Nye does refer to a promise on the part of Mr Thomas that "nothing would happen without him giving me prior notice" (which is to similar effect to para 377 of his witness statement referred to above). However, I consider that it is inherently implausible that Mr Thomas would have made such a promise – if nothing at all had been paid by Mr Nye after the discussion with Mr Thomas on 24 July 2001, there seems to be no conceivable reason why Mr Thomas should give Mr Nye prior notice of the proposed exercise of the Second Option.
76. For these reasons, I accept the evidence of Mr Thomas. Both in relation to the discussion on 24 July 2001 and, so far as is material, more generally, where there is a conflict between the evidence of Mr Thomas and that of Mr Nye I prefer the evidence of Mr Thomas.
77. For these reasons, the Estoppel Defence fails.

The Unsatisfied Conditions Defence

78. It is common ground that at the time of the exercise of the Second Option on 6 August 2001 the amount outstanding under the Original Charge and Supplemental Charge exceeded £65,000. Thus, one of the conditions for the exercise of the Second Option was met
79. As for the other conditions of the Second Option which needed to be satisfied, Warnborough contends that, as at 6 August 2001, the following payments covenanted to be made by Garmite were in arrear and unpaid for 35 days:

i) The sum of £2182 representing the monthly mortgage instalment which had fallen due on 1 July 2001 ("the July instalment"); and/or

ii) the sum of £1331.14 in respect of the insurance of the Property which had fallen due on 31 March 2001 ("the Insurance payment").

80. Garmite disputes that these conditions were satisfied.

The July instalment

81. Garmite contends that the July instalment was, as a matter of fact and law, paid when the cheque was sent by post (said to have been on 31 July 2001) rather than the date when it was received by CRP as Warnborough's agent (namely 7 August 2001). Garmite contends that it was Warnborough which bore the risk of a delay in the post.
82. The first issue which arises is when the cheque for the July instalment was sent. Mr and Mrs Thomas gave evidence that the postmark on the envelope which contained the cheque bore the date 6 August 2001. They retained the envelope – the original of which was produced in court - but suggested that the ink on the postmark had since faded. On the basis that the envelope bore the postmark dated 6 August 2001, Mr Gadd for Warnborough suggested that the cheque had in fact been posted on 6 August 2001 – after the First Notice had been served. When I commented during the course of the hearing that I found the postmark to be largely illegible and inconclusive, I was told that forensic evidence had been obtained to similar effect.
83. I find that the envelope enclosing the cheque and slip bearing Mr Nye's manuscript writing was posted on 31 July 2001 – the same day as Mr Slightam's cheque to Mr Nye was credited to the latter's account. The envelope bore a first class stamp but did not reach CRP until the morning of 7 August 2001.
84. These facts give rise to a mixed issue of fact and law as to who bore the risk of delay in the post. I deal firstly with the law. In Chitty on Contracts (29^th Edition) the following is stated at para 21-056 under the heading "Loss in post" (citations omitted):

Where a banknote, cheque or other negotiable instrument is sent to the creditor by post, this does not normally amount to payment if it is lost in the post. Where, however, a creditor expressly or impliedly authorises his debtor to transmit the amount of the debt by cheque through the post, the debtor is discharged if he complies with the authority by sending the cheque in a letter properly addressed to the creditor, even though it does not reach him. The necessary authority is not to be implied from the mere fact that the previous dealing between the parties has been to send cheques by post, though very little evidence of authority is required in addition to evidence of such a course of dealing…"

85. In Pennington v Crossley (1897) 77 L.T. 43, which is cited in Chitty, the action was for goods sold and delivered. The defendants pleaded payment on the basis that a cheque had been posted to the plaintiff, though never received by the latter. The parties had been in business relations for some twenty years and the defendants had habitually sent cheques to the plaintiffs by post. From this, it was claimed by the defendants that it was to be inferred that the plaintiff had requested payment in that way and agreed to run the risk of loss in transmission. In rejecting that claim, Lord Esher MR said:

"The course of business was merely that the defendants sent cheques to the plaintiff by post, and the plaintiff never objected to being paid in that way. It would be outrageous for the court to infer from that that the plaintiff ever requested the defendants to send cheques by post, and agreed to run the risk of loss in the transit."

86. On the other hand, in Tankexpress A/S v Compagnie Financiere Belge des Petroles SA [1949] AC 76, the terms of a charterparty provided that payment for the hire of the vessel should be "in cash, monthly, in advance, in London". The arbitrator's finding of fact was that "the accepted method between the parties during the currency of the charter with regard to the payment of hire" had in fact been by sending a cheque and the payment of hire had been regularly and properly paid on its due date in this manner until the cheque in question had been delayed in the post due to the outbreak of war. The owners purported to cancel the charterparty on the grounds of late payment and withdrew the vessel from service. The House of Lords unanimously decided that, in view of the findings of the arbitrator as to the accepted method of payment by the parties, no right of withdrawal arose on the ground of the non arrival in time of the letter containing the cheque. However, as Mr Gadd pointed out, four of the Law Lords said that had the owners given due notice to terminate the accepted method of payment, the provisions in the charterparty as to the method of payment could have been restored.
87. This latter point was picked up by Mocatta J in Zim Israel Navigation Co Ltd v Effy Shipping Corporation ("The Effy") [1972] Ll LR 18, which had similar facts to the Tankexpress case save that the accepted method of payment of hire for a vessel was by a series of bank transfers. The charterers gave notice to withdraw the vessel when one payment of hire was delayed in the banking system beyond the due date. Mocatta J remitted the case to the umpire to consider whether a telex sent by the owners had the effect of altering the previously accepted method of payment.
88. On the basis of these authorities, Mr Gadd submitted that the present case was on all fours with Pennington v Crossley and in the alternative, relying on Zim, that the letter of 20 July 2001 brought any previously accepted method of payment by sending a cheque in the post to an end.
89. Mr Galway-Cooper submitted that on the facts the accepted method of payment was by sending a cheque in the post and that was sufficient for payment to be deemed to have been made by that method.
90. I make the following findings of fact as regards the method of payment. The first monthly instalment fell due in March 1997. At about this time there was a discussion between Mr Thomas and Mr Nye for the instalments to be paid by standing order. This was not set up until 30 April 1997 and the May instalment was paid using this method. The March and April instalments had been paid by cheque, albeit late. Problems were soon encountered with the standing order. Garmite's erratic cash flow meant that it could not be sure that there would be sufficient funds in place on the first day of the month to meet the standing order. There was also a certain amount of confusion as to the correct amount of income tax to be deducted by Garmite and, consequently, the net amount which was to be remitted to Warnborough under the standing order. As a result the standing order arrangement broke down. Mr Thomas said in evidence that he would have preferred to continue with the standing order but was prepared to accept payment by cheque. He suggested to Mr Nye that rather than sending the cheques directly to Warnborough in Jersey he should send them to CRP, so that he could keep track on the payments. He also told Mr Nye that the date when CRP received the cheque would be treated as the date it was received by Warnborough. Mr Nye could not specifically recall the details of these discussions and did not dispute Mr Thomas' evidence in this respect. Of some significance is that neither Mr Thomas nor Mr Nye recalled any specific discussion of the method of sending the cheque or mention of the use of the post. Mr Nye candidly accepted that it might well have been the case that he himself chose to send the cheques in the post.
91. From June 1997, the usual method of payment of the instalments was by cheque sent in the post by Mr Nye to Mr Thomas at CRP. On a number of occasions the payments were made late. However, when a cheque for the June 1999 instalment (sent late in July 1999) was returned by Mr Nye's bankers, Warnborough exercised the First Option. The arrears were cleared on 29 July 1999 when Mr Nye arranged for the payment of £10,259.30 by CHAPS transfer directly into Warnborough's bank account in Jersey. Thus, not all payments were made by cheque and it seems to me clear that Mr Nye chose to clear the arrears by electronic transfer in order to ensure that Warnborough received the arrears promptly with a view to looking favourably on his plea that the exercise of the First Option should be cancelled.
92. I bear in mind the distance separating the parties. CRP carried on business in Mere, Wiltshire and the Property was at Southampton, some 48 miles apart. However, I do not think that it follows from this that there must be implied a request by Warnborough to send cheques by post. In Pennington, the parties carried on business in Bradford and Halifax respectively. Although closer to each other than in the present case, delivery by post would no doubt have been the more convenient method, yet the Court of Appeal considered that no such request should be implied.
93. In the light of these facts, it seems to me that, as regards the July instalment, the "normal" position referred to in the first sentence of the passage in Chitty which I have cited applies and that it was Mr Nye who bore the risk of the cheque being delayed in the post. I conclude that there was no request by Warnborough, express or implied, that the cheques should be sent by post. The fact that this was the method that was usually adopted is insufficient: Pennington v Crossley. Further, it was not the only method that was used by Mr Nye – he made payment direct to Warnborough by electronic transfer when he considered it important to ensure it received payment promptly. I also consider that the fact that Mr Thomas stated that the date the cheque was received by CRP would be treated as the date it was received by Warnborough supports the conclusion I have reached.
94. On the face of it, there does seem to be some tension between the decision in Pennington and the decisions in Tankexpress and Zim (in neither of which does Pennington appear to have been cited). However, in Tankexpress and Zim, a method of payment (namely payment in cash) was expressly provided for in the contract whereas there was no such agreement, express or implied, in Pennington. In Tankexpress and Zim, the accepted method of payment in practice differed from the contractual provision. In Zim, Mocatta J observed (at p 29):

It is difficult to be sure under what heading of legal principle the Tankexpress case was decided; the accepted method of payment cannot have been treated as a binding contract between the parties, since, had this been the case, unilateral withdrawal of termination of that method could not have ended it. In my judgment, the right view is to regard the case as an example of what is sometimes called equitable estoppel.."

So viewed, by their course of dealing in accepting an alternative method of payment to that contractually provided for, the owners could be said to have been estopped by their conduct from relying on their strict contractual rights. But where, as in the present case on the findings I have made, there was no agreed method of payment express or implied, the question of estoppel does not arise, unless the conduct of Warnborough in accepting payment by post could be said to have amounted to a representation, upon which Garmite relied, to the effect that Garmite was authorised to transmit cheques by post. On the facts as I have found them, no such case can be made out.

95. However, even if I were wrong on this point, and Warnborough had impliedly authorised cheques to be transmitted by post or made a representation to such effect, I accept Mr Gadd's alternative submission, based on Zim, that such authority was withdrawn by the letter from Warnborough's solicitors dated 20 July 2001. On 6 July 2001 they had made formal written demand for payment for all outstanding payments to be made to CRP by 20 July 2001. In their faxed letter dated 20 July 2001 they made it clear that Warnborough would enforce its rights without further notice if the outstanding payments were not made to CRP "today". The letter later refers to Garmite bringing "all outstanding payments into order today". It seems clear to me that the mere act of posting a cheque that day would not have complied with the demand to make payment "today" and it follows that any authority given by Warnborough to make payments by transmitting cheques by post was thereby withdrawn.
96. Accordingly, I find that as at 6 August 2001, when the Second Option was exercised, the July instalment was in arrear and unpaid for 35 days. The conditions for the exercise of the Second Option were therefore satisfied and Warnborough was entitled to serve the First Notice.

The Insurance payment

97. Warnborough also contends that, whatever the position as regards the July instalment, the Second Option was also exercisable on 6 August 2001 by reason of the outstanding Insurance payment.
98. Garmite did not dispute that the Insurance payment had been outstanding for more than the 35 day period stipulated in the Second Option. Instead, Garmite contended that the insurance arrangements played no part in any agreement with Warnborough. Garmite contended that the insurance arrangements had been effected by CRP for the benefit of Garmite on the basis that CRP was able to obtain competitive rates on its block insurance policy on its properties and that Garmite had been asked by Mr Thomas to reimburse CRP directly, not Warnborough. These contentions lack substance. It seems to me clear that in effecting the insurance on the Property, CRP was acting as Warnborough's agent, not as agent for Garmite. Warnborough, at least as mortgagee, had an insurable interest in the Property. The insurance policy was in the name of Warnborough. When CRP made demand for payment on 17 March 2001 it did so "as agents for the Owners" but I think it is clear that this was intended to be a reference to Warnborough, not Garmite (and this is expressly so stated in later demands for insurance payments). Further, the letters of demand sent by Warnborough's solicitors dated 20 May, 6 July and 20 July 2001 all made it clear that the outstanding Insurance payment was due to Warnborough, and that that payment should be made to its agent, CRP.
99. Garmite also asserted that Warnborough's ability to rely on the Insurance payment was contingent on such sum having been paid by Warnborough itself and that there was no evidence that Warnborough had reimbursed CRP. I reject this assertion. Warnborough can rely on a payment by its agent, CRP, and its liability to reimburse its agent even if it had not itself yet made the payment. I would add that, although Mr Thomas had no specific recollection, he said that he thought it likely that in view of the length of the period between 31 March 2001 (when the Insurance payment fell due) and 6 August 2001 (the date of the First Notice), CRP would by then have been reimbursed by Warnborough for the Insurance payment.
100. It follows that, even if I had decided the July instalment point in favour of Garmite, Warnborough was still entitled to serve the First Notice on the grounds of the outstanding Insurance payment.

Waiver

101. In its pleaded Defence, Garmite asserted that Warnborough had waived its right to rely on the First Notice by accepting mortgage repayments thereafter. In the light of the evidence at trial, this point was not pursued by Mr Galway-Cooper in closing. In cross examination, Mr Nye accepted that he knew that, notwithstanding acceptance by Warnborough of the mortgage repayments after August 2001, Warnborough intended to enforce the exercise of the Second Option – "I was well aware that they had not given up".

The Second Notice

102. In view of my findings on the First Notice, the issues relating to service of the Second Notice may be academic. Since I heard evidence on the matter, I should nevertheless deal with them.
103. Garmite did not dispute that at the time the Second Notice was allegedly served (on 15 June 2005) the conditions for the exercise of the Second Option were satisfied. Garmite owed more than £65,000 and had not made any mortgage repayments or payments for insurance since about January 2003. Garmite did, however, dispute that the Second Notice had been served.
104. Evidence of service of the Second Notice was given by Mr Timothy Caton, a principal of TWM Solicitors LLP, Warnborough's solicitors. He said that he attended the Property shortly after 6.00pm on 15 June 2005 with a sealed envelope containing the Second Notice, a spare copy and a return stamped addressed envelope. He knocked at the door at the front of the Property but there was no answer. He then pushed the sealed envelope through the letterbox.
105. Mr Caton's evidence was challenged by Garmite. The basis of the challenge was that Mr Nye and his daughter (who was living at the Property) gave evidence that they never received the sealed envelope. It was suggested to Mr Caton that he may have placed the envelope in the wrong letterbox.
106. I have no hesitation in accepting the evidence of Mr Caton. He was familiar with the Property, having been there previously on some four occasions. I find that he placed the sealed envelope containing the Second Notice through the correct letterbox.
107. If follows from this finding that, as Mr Galway-Cooper conceded if I were to accept the evidence of Mr Caton, the Second Notice was properly served at Garmite's registered office (being the Property): see Companies Act 1985, s 725.
108. It is therefore unnecessary for me to make any findings as to what became of the sealed envelope. Mr Nye and his daughter thought it extremely unlikely that it would have become lost but they could not exclude that possibility altogether. I should record that I accept their evidence that they did not receive the sealed envelope. In any event, Mr Nye accepted that he received a copy of the Second Notice from his solicitors a few weeks later.

The Relief from Forfeiture Defence

109. It follows from my earlier findings that the Second Option had been validly exercised by service of the First Notice and, even if that were not so, was validly exercised by service of the Second Notice.
110. By its Re-re-re-Amended Defence and Part 20 Claim, Garmite pleaded a new defence to the effect that the Second Option was in effect a penalty and/or a provision for forfeiture and claimed relief from forfeiture. An earlier re-re amendment to the Defence and Part 20 Claim had pleaded that it would be unconscionable to permit Warnborough enforce the Second Option. I deal with the latter point first in the general sense in which it is pleaded, although it also falls to be considered in the context of forfeiture clauses.

Unconscionability

111. There are a number of well established areas of the law where equitable relief is available against harsh or unconscionable bargains, such as in the law relating to penalties, forfeitures and relief against unconscionable bargains with persons suffering from some form of bargaining disadvantage. As regards the general plea of unconscionability, Browne-Wilkinson J in Multiservice Ltd v Marden [1979] Ch 84, stated (at page 110F):

..a bargain cannot be unfair and unconscionable unless one of the parties to it has imposed the objectionable terms in a morally reprehensible manner, that is to say in a way which affects his conscience.

There has been no suggestion by Garmite that Warnborough has acted in a morally reprehensible manner. There is no plea in the statements of case that Warnborough acted in bad faith or in an underhand manner nor did the evidence I heard begin to suggest that this might have been the case. The contractual arrangements were freely entered into after Mr Nye took advice from his solicitors and accountants (in the case of the sale and purchase contract, Original Charge and First Option) or had the opportunity of taking such advice (in the case of the Second Option and Supplemental Charge). There was a faint suggestion in cross examination that Warnborough's requirement for an option was only raised at the time Garmite went into possession under the tenancy at will, but Garmite's solicitors acknowledged in correspondence with Mr Nye that the option had already been raised in earlier correspondence (which was not produced at trial).

112. More recently, in Union Eagle Ltd v Golden Achievement Ltd [1997] AC 514, Lord Hoffmann, delivering the judgment of the Privy Council, referred to authority which rejected, as a "beguiling heresy", the notion that the court's jurisdiction to grant relief against contractual penalties and forfeitures was "unlimited and unfettered". At p 519B-D, he explained why:

The principle that equity will restrain the enforcement of legal rights when it would be unconscionable to insist upon them has an attractive breadth. But the reasons why the courts have rejected such generalisations are founded not merely upon authority (see per Lord Radcliffe in Campbell Discount Co. Ltd v Bridge [1962] AC 600, 626) but also upon practical considerations of business. These are, in summary, that in many forms of transaction it is of great importance that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced. The existence of an undefined discretion to refuse to enforce a contract on the ground that this would be "unconscionable" is sufficient to create uncertainty. Even if it is most unlikely that a discretion to grant relief will be exercised, its mere existence enables litigation to be employed as a negotiating tactic. The realities of commercial life are that this may cause injustice which cannot be fully compensated by the ultimate decision in the case.

113. I should record that I consider that there is nothing in the terms of the First Option or the Second Option, or in the contractual arrangements as a whole, which would justify them as being characterised as unconscionable. Indeed, in view of Mr Nye's chequered financial past and the recent start-up of the business, the contractual arrangements entered into in August 1996 could be viewed as favourable to Mr Nye, although there were clearly also benefits for Warnborough. In this connection, it is to be noted that Mr Nye made a number of attempts to remortgage the Property (and thereby remove the threat posed by the Options) with high street lenders but without success, one of the problems being the erratic cashflow from the business. As regards the Second Option, it does not seem to me to be remotely unconscionable for Warnborough to exact a price for giving up their rights under the First Option. Mr Thomas told me that he had obtained an informal valuation of the Property at the time of, from what he could recall, £160,000, representing an increase in value over the original purchase price of £30,000. Having initially asked Mr Nye for £25,000, Warnborough agreed the lower amount of £15,000 which, as it happened, represented an equal split of the increase in value. Had Warnborough pursued its rights under the First Option it would prima facie have been entitled to the benefit of the whole of the increase in value. The compromise of rights as reflected in the 1999 Agreement, Second Option and Supplemental Charge cannot in my view be characterised as unsconscionable.

Penalty/ forfeiture

114. In closing, Mr Galway-Cooper did not pursue the plea of unconscionability in the general sense. Instead he focussed on the issue of forfeiture and/or penalty. He submitted that the Second Option was in effect a penalty and/or provision for forfeiture. In so submitting he naturally focussed on whether the First Option (which was replicated in the Second Option with certain additional terms) had such effect. He submitted that the Court had jurisdiction to grant relief from forfeiture and in the exercise of its discretion should grant such relief.
115. Mr Gadd submitted that the First Option and the Second Option were not penalty clauses and that the Court had no jurisdiction to grant relief from forfeiture in this case. He further submitted that, even if the court had such jurisdiction, it should as a matter of discretion refuse to grant relief.
116. I propose to deal firstly with the question of whether the court has jurisdiction in the present case to grant relief from forfeiture and whether the Options are in effect penalty clauses. I shall deal separately with the question of discretion to grant relief.

Penalty clauses and forfeitures: the distinction?

117. As is stated in Snell's Equity (31^st Ed at paras 11-01 and 11-02), there is a strong similarity between penalty clauses and forfeiture clauses and the boundaries of each jurisdiction are becoming increasingly blurred. In Jobson v Johnson [1989] 1WLR 1026, Nicholls LJ described the legal principles applicable today regarding such clauses as stemming from a common origin (p 1038D). At p 1041F – 1042B, he said:

As the law has developed, a distinction has arisen between the enforcement of penalty clauses in contracts and the enforcement of forfeiture clauses.  A penalty clause will not be enforced beyond the sum which equals the actual loss of the innocent party.  A forfeiture clause, of which a right of re-entry under a lease on non-payment of rent is the classic example, may also be penal in its effect.  Such a clause frequently subjects the defaulting party, in the event of non-payment of rent or breach of some other obligation, to a sanction which damnifies the defaulting party, and benefits the other party, to an extent far greater than the actual loss of the innocent party.  For instance, the lease may be exceedingly valuable and the amount of unpaid rent may be small.  But in such a case the court will lend its aid in the enforcement of the forfeiture, by making an order for possession, subject to any relief which in its discretion the court may grant to the party in default.  Normally the granting of such relief is made conditional on the payment of the rent with interest and costs.  If that condition is not complied with, and subject to any further application by the tenant or other person in default for yet more time, the forfeiture provision will be enforced.  Thus the innocent party is in a better position when seeking to enforce a forfeiture clause than when seeking to enforce a penalty clause in a contract.


This is not the occasion to attempt to rationalise the distinction.  One possible explanation is that the distinction is rooted in the different forms which the relief takes.  In the case of a penalty clause in a contract equity relieves by cutting down the extent to which the contractual obligation is enforceable: the 'scaling-down' exercise, as I have described it.  In the case of forfeiture clauses equitable relief takes the form of relieving wholly against the contractual forfeiture provision, subject to compliance with conditions imposed by the court.

118. In submitting that the First and Second Options were in the nature of forfeiture clauses and/or penalty clauses, Mr Galway-Cooper said that it was not necessary to distinguish between the two, although he said that they were probably forfeiture clauses. The latter is more consonant with the nature of the relief which Garmite is seeking. In paragraph 20B of the Re-re-re-amended Defence it is pleaded that: "the Court can secure to [Warnborough] everything to which it is properly entitled by granting relief from enforcement of the option on terms which will ensure that it recovers all sums due to it under the Charge and the Supplemental Charge" and the relief claimed in the Part 20 Claim is: "Relief from enforcement of the Second Option on such terms as this Honourable Court shall consider just".
119. The nature of Warnborough's rights under the Second Option is also more consistent with it being potentially in the nature of forfeiture clause rather than a penalty clause. A penalty clause is normally in the nature of a punishment for breach of contract in the sense that it imposes an additional liability on breach (which exceeds a genuine estimate in advance of the loss likely to be suffered on breach), whereas forfeiture normally involves the loss or determination of an interest in property or a proprietary right in consequence of a breach.
120. Whilst recognising that the distinction between penalty clauses and forfeiture clauses is blurred, I consider it convenient to consider first the court's jurisdiction to grant relief from forfeiture.

Forfeiture

121. The leading case on the court's inherent jurisdiction to grant relief from forfeiture is Shiloh Spinners Ltd v Harding [1973] AC 691. The issue arose not in the common context of relief from forfeiture by the exercise of a landlord's right of re-entry (where statutes applying between landlord and tenant come into play), but in the context of a right of re-entry which had been reserved on the assignment of leasehold property in order to reinforce certain covenants as to fencing and support taken for the benefit of adjoining land retained by the assignor. These facts made it necessary for the court to consider the court's inherent equitable jurisdiction to grant relief from forfeiture. Lord Wilberforce (with whom the rest of the House of Lords agreed) stated (at p 222A – B):

There cannot be any doubt that from the earliest times courts of equity have asserted the right to relieve against the forfeiture of property. The jurisdiction has not been confined to any particular type of case. The commonest instances concerned mortgages, giving rise to the equity of redemption, and leases, which commonly contained re-entry clauses; but other instances are found in relation to copy holds, or where the forfeiture was in the nature of a penalty. Although the principle is well established, there has undoubtedly been some fluctuation of authority as to the self-limitation to be imposed or accepted on this power.

122. Lord Wilberforce went on to identify three heads of the jurisdiction, the first two of which were said by him not to have given rise to much difficulty. The first was:

"where it is possible to state that the object of the transaction and the insertion of the right to forfeit is essentially to secure the payment of money, equity has been willing to relieve on terms that payment is made with interest, if appropriate, and also costs".

This head of jurisdiction, which I shall describe as "the first head" is the one on which Mr Galway-Cooper relied.

123. The second head is where there is fraud, accident, mistake or surprise. This has no application in the present case.
124. Lord Wilberforce continued by saying (at 722E):

Outside of these there remained a debatable area in which were included obligations in leases such as to repair and analogous obligations concerning the conditions of property, and covenants to insure or not to assign.

125. Having reviewed the authorities, Lord Wilberforce identified the third head as follows (at p 723G-H):

... it remains true today that equity expects men to carry out their bargains and will not let them buy their way out by uncovenanted payment. But it is consistent with these principles that we should reaffirm the right of courts of equity in appropriate and limited cases to relieve from forfeiture for breach of covenant or condition where the primary object of the bargain is to secure a stated result which can effectively be attained when the matter comes before the court, and where the forfeiture provision is added by way of security for production of that result.

126. I would emphasise that Lord Wilberforce described this third head as applying only in "appropriate and limited cases". Lord Wilberforce went on to hold that on the facts of Shiloh Spinners, it fell within the class of case in which it would be possible for a court of equity to intervene: the power of re-entry was inserted to reinforce the contractual obligation to fence and support. "Failures to observe the covenants having occurred, it would be right to consider whether the assignor should be allowed to exercise his legal rights if the essentials of the bargain could be secured and if it was fair and just to prevent him doing so." (p 725E – my emphasis). However, on the facts relief from forfeiture was not granted. I emphasise the phrase "if the essentials of the bargain could be secured" because, it seems to me, this reflects Lord Wilberforce's formulation of the third head itself.
127. In Shiloh Spinners, Lord Simon described the jurisdiction to relieve against contractual forfeitures and penalties as "unlimited and unfettered". However, this was not the view of the rest of the House of Lords, who agreed with Lord Wilberforce. This view was also rejected by the Privy Council in Union Eagle in the passage I have cited above.
128. In subsequent cases, the House of Lords has upheld the jurisdiction to grant relief from forfeiture, but limited it to contracts concerning the transfer or creation of proprietary or possessory rights as opposed to merely contractual rights (Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (The Scaptrade)[1983] 2 AC 69; Sport International Bussum BV v Inter-Footwear Ltd [1984] 1 WLR 776), including proprietary rights in chattels or their proceeds of sale under court order (On Demand Information plc v Michael Gerson (Finance) plc [2003] 1 AC 368).
129. Mr Gadd submitted that the First Option and the Second Option were not forfeiture provisions. He submitted that if the repurchase price had been fixed, as at the date of the exercise of the Second Option, by reference to the current value of the Property as determined by an independent valuer, there would be no reason for the intervention of equity. It should make no difference that the repurchase price was fixed by reference to the original purchase price. The value of the Property could have decreased or increased. The condition in the First and Second Option that at least £65,000 had to be outstanding meant that, until the amount outstanding had been reduced to that sum, the benefit of any increased value in the Property would enure to Warnborough but once it had been so reduced such benefit would enure to Garmite. He submitted that there was nothing unfair about that. Although a number of these points have considerable force, and I return to them below, it seems to me that prior to the exercise of the Second Option, Garmite unquestionably had an interest in the Property which was to be transferred to Warnborough upon the Second Option being exercised. In that limited sense, particularly in circumstances where the option price may be at an undervalue, provisions of the type contained the Second Option are capable of operating as a forfeiture. The real issue in my view is whether the actual provisions of the Second Option fall within one of the recognised heads of the court's jurisdiction to grant relief from forfeiture and/or is to be regarded as a penalty clause.
130. In my judgment, the present case does not fall within Lord Wilberforce's first head. In order to do so, it would be necessary to find that the object of the First Option and the Second Option and of the insertion of the right to forfeit was essentially to secure the payment of money. For the reasons which I have already given, the true nature of the transaction as a whole is that of sale and purchase, as was strongly suggested by the Court of Appeal in the present case. The First Option was a condition of that sale and purchase. The security that was provided for the payment of money was the Original Charge. The additional sum of £15,000 payable in return for the unwinding of the exercise of the First Option and its replacement by the Second Option was secured by the Supplemental Charge. Relief from forfeiture would ordinarily be granted as regards the enforcement of a mortgage – in this case the Original and Supplemental Charge. But enforcement of the First Option and the Second Option is of a different nature: it is the enforcement of a provision entered into as a condition of the sale and purchase. Its underlying object was, in the event of the conditions for its exercise being satisfied, to restore the Property to Warnborough to deal with it as owner in whatever way it wished.
131. I do not think it is possible to state that the object of the Options and the right to re-purchase was "essentially" to secure the payment of money. That was the object of the Original and Supplemental Charge. It seems to me that my conclusion is also, to some extent, supported by the £65,000 condition. If the essential object of the Options had been to secure the payment of money, one might have expected the Options to have been exercisable on default whilst any sums were still outstanding. As I have already stated, the purpose of this condition was to enable, in the event of default, any increase in value in the Property to enure to Warnborough if the amount outstanding was more than £65,000 and to Garmite once it fell to less than this amount. For these reasons I conclude that the first head has no application in the present case. (I should add that in reaching this conclusion I bear in mind the judgment of Nicholls LJ in Jobson v Johnson [1989] 1 WLR 1026 which is more conveniently dealt with below.)
132. In the circumstances of the present case, the third head for granting relief from forfeiture formulated by Lord Wilberforce does not assist Garmite. It seems to me that, applying that formulation, on the facts of this case it raises the same issues which arise under the first head. This is because the primary object of the bargain (i.e. the First and Second Option) is either to secure the payment of money (in which case it would fall under the first head) or some other result which can effectively be attained when the matter comes before the court (and where the forfeiture provision is added by way of security for the production of that result). Having rejected the submission that the primary object of the Options was to secure the payment of money, I can discern no other object which would fall within the third head. As I have found, the underlying object of the Second Option was, in the event of the conditions for its exercise being satisfied, to restore the Property to Warnborough to deal with it as owner in whatever way it wished. That result cannot be attained by way of the court granting relief from forfeiture on terms.
133. I also consider it important that the third head was said by Lord Wilberforce only to arise in appropriate and limited cases. I was referred to no past authority where the third head was applied to a case such as the present one.
134. Mr Galway-Cooper submitted that the contractual arrangements in this case could have been structured as a contract to purchase the Property by instalments. He submitted that it is clearly established that if, under a contract to purchase land by instalments, the purchaser defaults in payment of an instalment, the court has jurisdiction in a proper case to grant relief against a clause providing for forfeiture of the instalments already paid by granting an extension of time within which to pay the outstanding instalments. Such jurisdiction undoubtedly does exist (see eg Starside Properties v Mustapha [1974] 1 WLR 816, where such a clause was described as "penal"). But the present case is readily distinguishable. The forfeiture in the present case is of Garmite's interest in the Property and not, in substance, of the instalments already paid. The Second Option gives Warnborough the right to repurchase the Property for £130,000 – the original purchase price. All payments of capital made by Garmite will in substance be returned to it under the terms of the repurchase. It is true that the payments of interest by Garmite will be forfeited but that cannot in my view be regarded as penal because it is the return to Warnborough on its loan to Garmite of £130,000 representing the original outstanding purchase price. There was no suggestion that the rate of interest was penal. In addition, the payments of interest might be regarded as a form of rent in return for Garmite's occupation of the Property.
135. In this context, Mr Galway-Cooper, in the course of his closing submissions, handed me a copy of the decision of the High Court of Australia in Stern v McArthur (1988) 165 CLR 489. Somewhat unhelpfully, he did not develop any submissions based on this decision despite my invitation to him to do so. Nor was I referred to the decision in Union Eagle in which Stern v McArthur was discussed.
136. In Stern v McArthur, the purchasers agreed to buy a plot of land in 1969 for A.$ 5,250 payable by way of a deposit of $250 and thereafter by monthly instalments of not less than $50. If the regular monthly instalments had been paid without the making of additional payments, the purchase price would have been paid in full sometime in 1983. Under the contract, on default in paying instalments for more than four weeks, the balance of the purchase price became due and the vendor could then serve a notice to complete within 21 days making time of the essence. The purchasers built a house on the land but defaulted on the instalments payable and failed to comply with a notice to complete. The value of the land had significantly increased. The purchasers subsequently tendered the balance of the purchase price and claimed relief by way of specific performance. The vendor offered restitution by way of compensation for their improvements to the land. By a majority of 3 to 2, the High Court granted the relief claimed by the purchasers.
137. The majority comprised Dean and Dawson JJ (who delivered a joint judgment) and Gaudron J. Dean and Dawson JJ stated that:

13. The circumstance in the present case which warrants relief being granted is not only that the forfeiture provision was by way of security for the payment of the purchase moneys, but also that the contract as it was carried into effect was essentially an arrangement whereby the [vendors] undertook to finance the [purchasers'] purchase upon security of the land. In other words, there was a close and obvious parallel between it and a purchase with the aid of a mortgage….

14… The [vendors] retained the legal estate as security for the payment of the instalments and the provision for forfeiture was by way of further assurance. Had there been a mortgage, equity would have regarded the [purchasers] as entitled to their equity of redemption without regard to any stipulation as to time. The maxim pacta sunt servanda would not have prevailed. That being so, there seems to us to be no good reason why equity should not extend a similar remedy in a transaction of such a similar character or why that similarity should not provide the justification for refusing to hold the [purchasers] strictly to their bargain…"

In the light of this characterisation of the transaction, it seems to me that the decision falls squarely within Lord Wilberforce's first head which I have considered above on the facts of the present case. It is also worth noting the relevant default provisions in Stern v McArthur (Clause 15 of the contract) contained provisions which bore similarities with the rights of a mortgagee. But in any event, it seems to me that in the present case it would be wrong to characterise the First and Second Option as being analogous to a mortgage in circumstances where the parties had in fact also entered into a mortgage (the Original and Supplemental Charge) whose purpose was to secure the payment of the outstanding purchase price.

138. Dean and Dawson JJ also found further justification for the exercise of the jurisdiction to grant relief in the circumstance that they held that it was the purchasers who had the reasonable expectation of benefiting from any increase in the value of the land with the passage of time. They said that the forfeiture of the purchasers' interest in the land "would truly result in a windfall" to the vendors. The same cannot be said in the present case. The terms of the First and Second Option made it clear that, as long as £65,000 remained outstanding, the benefit of any increase in the value of the Property would be for Warnborough and once the outstanding amount was less than this figure the benefit would enure to Garmite.
139. Gaudron J based her decision on a finding that the actions of the vendors in bringing Clause 15 – the default provisions – into operation and insisting on their strict contractual rights amounted to "unconscionable conduct" (see paras 39 - 43). For example, by that time a house had been erected on the land and the balance of the purchase price was a relatively insignificant amount, the total amount paid having greatly exceeded the amount then outstanding. As I have already stated, reliance on a general concept of "unconscionability" is not one that has found favour with the English courts.
140. Mason J, in his dissenting judgment, viewed the transaction as a contract of sale and was unable to identify any aspect of the vendors' conduct which could be described as unconscionable. Brennan J., also dissenting, rejected the analogy of a contract of sale with a mortgage, describing the distinction between them as "critical". He stated (at para 21):

"It is the vendor's general law right to rescind which distinguishes his position from that of the mortgagee. Some may think it desirable to eliminate the distinction and to assimilate the position of an unpaid vendor to the position of an unpaid mortgagee. But that is not the present law, and the present law is what parties have relied on in entering into conveyancing transactions." (see also para 22)

141. In Union Eagle, Lord Hoffmann characterised the difference of opinion in Stern v McArthur as follows:

Equity has always regarded the question of whether a transaction is a mortgage as depending upon substance rather than form, so that the difference of opinion in Stern v McArthur can be regarded as concerning the proper analysis of the nature of the transaction rather than the scope of the jurisdiction to relieve against forfeiture.

In the present case, I have already found, as the Court of Appeal strongly suggested, that the nature of the transaction is one of sale and purchase and not a mortgage.

142. In Union Eagle (see at p 523A-B), there was no question of any penalty, or of the vendor being unjustly enriched by improvements made at the purchasers' expense, or of the vendor's conduct having contributed to the breach, or of the transaction being in substance a mortgage.
143. I am of the view that no such problems arise on the facts of the present case. For reasons which I have already given, the transaction was not in substance a mortgage. Nor, for reasons which I develop below, was it in the nature of a penalty. There is no question of Warnborough's conduct having contributed to the breach. That leaves the question of whether Warnborough has been unjustly enriched by improvements to the Property made at Garmite's expense.
144. In Paragraph 20 of the Re-re-re-Amended Defence particulars are given of expenditure on the Property by Garmite said to total £20,850. In his witness statement (paragraph 84), Mr Nye gives more detail of the work he carried out to the Property but no evidence was adduced at trial as to the sums expended on improvements or as to the increased value to the Property arising from such improvements. Nor were any submissions made to me by Mr Galway-Cooper based on improvements to the Property made by Garmite (as to which I intend no criticism). It is important to note that, with one material exception, the works to the Property which Garmite intended to carry out were discussed between the parties before the contractual arrangements were entered into. For example, at the first meeting with Mr Thomas on 20 October 1996, Mr Nye produced outline plans for alterations and repairs, and on 20 December 1996 Mr Nye wrote to Mr Thomas giving certain details. Thus, before the contractual arrangements were entered into, both parties anticipated that improvements would be carried out and the negotiations proceeded on this basis. As Mr Thomas said, the deal involved Mr Nye making the Property usable – to Garmite's benefit if it paid and to Warnborough if it did not. In these circumstances, I do not see how any question of unjust enrichment can arise.
145. The exception to which I have referred relates to the conversion of part of the premises to a residential flat. In about September 1997, Mr Nye and his wife agreed to divorce. Mr Nye had from time to time previously slept at the Property but this now became permanent. From about mid 1999, Mr Nye carried out works to the top front floor offices to convert them into a flat which would be suitable to accommodate his two children whom he had agreed to look after. Although no evidence was adduced as to the amount expended on the flat conversion, a figure of £2,500 is pleaded. Mr Thomas stated, and I accept, that he was unaware of these conversion works until some time after they were carried out. There is no evidence that the value of the Property has increased as a result of the flat conversion. There is an open question, which I am unable to resolve, as to whether appropriate planning consents were obtained. On the basis of the evidence I have heard, I consider that there is no basis on which I could find that Warnborough has been unjustly enriched as a result of the improvements carried out to the Property.

Penalty

146. In his closing submissions, Mr Galway-Cooper placed heavy reliance on the decision of the Court of Appeal in Jobson v Johnson [1989] 1 WLR 1026. In that case, by an agreement in writing, two brothers agreed to sell 62,666 shares in Southend United Football Club Ltd (some 44.9% of its then issued share capital) to the defendant's nominee for £40,000. By a side letter of the same day, written by the defendant to the two brothers and countersigned by them, the defendant agreed to pay the brothers an additional sum of £311,698 by six half yearly instalments of £51,948. Paragraph 6 of the side letter provided (a) that if the defendant defaulted in the payment of the first instalment he would transfer or procure the transfer of not less than 44.9% of the issued share capital of the club to the brothers subject to payment to him of £15,666; and (b) that if the defendant defaulted in respect of any subsequent instalment he would transfer or procure the transfer of not less than 44.9% of the issued share capital of the club to the brothers subject to payment to him of £40,000. The defendant paid £40,000 and the shares were transferred. He defaulted on payment of the first instalment but a variation agreement was entered into substituting £300,000 for the £311,698 and providing for that sum to be paid by two instalments of £50,000 and quarterly instalments of lesser sums thereafter. The defendant paid the two instalments of £50,000 but failed to make further payments. The plaintiff, an assignee for value from the two brothers, sought specific enforcement of the re-purchase of the shares under paragraph 6(b) of the side letter.
147. The defendant pleaded in his defence that paragraph 6 of the side letter was a penalty and therefore unenforceable. By his counterclaim he sought in the alternative relief from forfeiture of the shares. At first instance, Harman J held that paragraph 6(b) was a penalty clause but that the effect of it was not that it was unenforceable and that other things being equal the defendant might in the discretion of the court be granted relief under the counterclaim. Having adjourned the hearing of the counterclaim, the defendant failed to comply with orders for disclosure which led to the counterclaim being struck out by an order which was not appealed.
148. On appeal, the defendant argued that paragraph 6(b), being a penalty clause, was unenforceable and therefore he did not need to rely on his counterclaim. The plaintiff (the respondent on the appeal) did not challenge the judge's ruling that paragraph 6(b) was a penalty clause. The Court of Appeal, for reasons to which I shall refer, considered that the ruling was right. Thus the particular issue with which the Court of Appeal had to grapple (and on which it was divided) was the appropriate form of relief where there was a penalty clause but, unusually, relief from forfeiture was not available. That particular issue is not one with which I am concerned because, unlike Jobson v Johnson, relief from forfeiture is claimed in the present case in addition or in the alternative to the plea that the Second Option is in the nature of a penalty clause.
149. In Jobson v Johnson, Dillon LJ (at 1031 F – H) found that that the judge's ruling that paragraph 6(b) was a penalty clause was "plainly right" for a combination of two reasons:

(1) the repurchase of the shares under cl 6(b) was to be at the fixed price of £40,000 if there was default in payment of any instalment, without regard to how much the defendant had already paid - it would make no difference if the default was in the payment of the second, the last, or an intermediate instalment, and

(2) there was also cl 6(a) of the side-letter providing for repurchase at an even lower price than £40,000 in the event of default in the payment of the first instalment under the side-letter i.e., default when the defendant had only paid the £40,000 under the sale agreement.  The plain reading of cl 6 is therefore that the defendant was to be punished for any default by being bound to retransfer substantially all the shares to the [brothers] at a fixed price which was bound to be less, and could be very much less, than the defendant had paid.  The retransfer price under either part of cl 6 could not have been based on a genuine pre-estimate either of the [the brothers'] loss or of the value of the shares.

150. The First and Second Options have neither of these features. As to the first feature, although the re-purchase price was fixed at £130,000, regard would be had to how much Garmite had paid and there would be a difference if the default was in payment of an earlier or later instalment. Thus, payments of instalments which represented repayments of capital of the original purchase price of £130,000 would in effect be restored to Garmite under the terms of the Second Option. The effect of the provision for set off is that the more that Garmite pays by way of capital, the more it receives from Warnborough.
151. As to the second feature, it cannot be said in the present case that Garmite was to be punished for any default by being bound to retransfer the Property at a fixed price which was bound to be less, and could be very much less, than Garmite had paid. The price fixed for the repurchase in the present case was the same as the original purchase price. Leaving to one side payments of interest, on exercise of the Option Garmite would get back the price it had paid.
152. Kerr LJ (who dissented on the appropriate relief to be granted but not on the issue of penalty) dealt with the penalty issue as follows (at 1047A – C):

It is common ground that cl 6(b) is penal in its nature.  The reason is of course not that the value of the shares might rise substantially above the agreed price before the end of the period during which the instalments fall to be paid, although in my view, as explained below, this may be relevant to the appropriate order which should now be considered in the unusual circumstances of this case.  The reason why cl 6(b) is penal in its nature, as explained by Dillon LJ, is that it subjects the defendant to the same liability irrespective of the gravity and consequences of the breach relied on by the plaintiff in seeking to enforce the clause: see Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 at 87, [1914--15] All ER Rep 739 at 742 per Lord Dunedin.  This is a question which falls to be decided on the true construction of the clause independently of subsequent events (see [1915] AC 79 at 86--87, [1914--15] All ER Rep 739 at 741--742).

153. Dillon LJ referred to Dunlop Pneumatic Tyre (at p1033 B - C) as authority for the proposition that the question of whether a clause is in the nature of a penalty "is a question of construction to be decided on the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract, not as at the time of the breach".
154. These passages reinforce my conclusion that the provisions in question in the present case are not in the nature of a penalty. The only basis upon which Garmite was able to point to the provisions being a penalty was the increase in the value of the Property – in other words circumstances at the time of the breach and not at the time of the contract. To construe the provisions in reliance on this fact would fly in the face of the correct approach in the passages I have cited.
155. Accordingly, I consider that Garmite derives no assistance from the judgments of Dillon LJ and Kerr LJ in Jobson v Johnson. In my view the provisions in question in the present case are not in the nature of a penalty.
156. Garmite also relied on the judgment of Nicholls LJ in Jobson v Johnson in the passage starting at p 1043 (headed "A forfeiture clause"). Nicholls LJ had held (at p 1042 H) that paragraph 6(b) of the side letter possessed all the essential characteristics of a penalty clause. He went on to say that Paragraph 6(b) was "something of a hybrid". "In substance paragraph 6(b) is equivalent to a right to re-take the property being sold in default of payment of the full price". Having analysed the contractual terms and other arrangements entered into between the parties, Nicholls LJ concluded that the purpose of paragraph 6(b) was "to provide a form of security for payment in that the purchaser was obliged to restore to the vendors their former stake in the company if default occurred in payment…. So construed, paragraph 6(b) falls squarely" within the first head formulated by Lord Wilberforce in Shiloh Spinners v Harding enabling the court to grant relief.
157. In considering the application of this passage in the judgment of Nicholls LJ to the present case, I think it important to bear in mind that he characterised Paragraph 6(b) as a penalty clause – which he had earlier described (at p 1039H) as "an obligation to make a money payment stipulated in terrorem". This is a feature which is lacking in the present case. Furthermore, the arrangements entered into between the parties in Jobson v Johnson described by Nicholls LJ at p 1043B – G were very different from those in the present case. In particular, he drew attention to the "unusual" terms of the agreement between the parties in that the vendors had no lien or charge over the shares sold. In the present case Warnborough was granted the Original and Supplemental Charge over the Property as security. Accordingly, I do not consider that the analysis of Nicholls LJ affects the conclusions I have already expressed as to the applicability in the present case of Lord Wilberforce's first head.
158. For these reasons, I conclude that the provisions sought to be challenged in the present case are neither a penalty nor of the type in respect of which the court has jurisdiction to grant relief from forfeiture.

Discretion

159. In the light of this conclusion, it is not strictly necessary for me to consider whether, had I found that the court had jurisdiction, I should as a matter of discretion grant relief from the enforcement of the Second Option on terms. The approach which I would usually follow in such a situation, where evidence has been given at trial, would be to consider the exercise of discretion on the footing that my conclusion as to jurisdiction was wrong (as might be so held on appeal). In the light of the unusual course of events which I shall now explain, I do not consider it appropriate to follow my normal approach.
160. There was no dispute between the parties that, if relief from the enforcement of the Second Option were to be granted, it would be on terms that the whole of the amount outstanding under the Original and Supplemental Charge be paid to Garmite, together with the cost of this action.
161. The evidence adduced by Mr Nye in support of his/ Garmite's ability to pay these amounts was somewhat exiguous (see para 479 of his first witness statement and paras 46 – 48 of his second witness statement). He referred to approaches he has made to three prospective lenders and an offer in principle from Lloyds TSB (his bankers) to lend £250,000. He produced a letter dated 31 August 2005 from Lloyds TSB. In that letter, the bank referred to a remortgage package to "uplift" the existing mortgage facilities for the Property and facilitate the clearance in full of Mr Nye's sole trader liabilities. The letter continued:

"Before I can move to a formal lending offer I will need to address the following lending requirements:-

1. I would need to have a full professional valuation confirming that we advance no more than 50% of the open Market Value and that the property in question will provide us with appropriate security……

3. Repayment capability will be need to be clearly evidenced going forward…."

162. Mr Nye was cross examined on these matters. He said that he carried on business as a sole trader but it was not doing well – it was hardly functioning and had a turnover of hundreds, not thousands, of pounds. He said that he was getting very little income and was receiving income support (for which his income had to be less than £8,000 per year). Garmite has for some time ceased to function. Mr Nye has personal debts of about £50,000. Mr Nye said that he was looking to obtain a loan of £250,000 from Lloyds TSB but that nothing had changed since the letter of 31 August 2005 and there had been no subsequent discussions taking the matter further. His approaches to other prospective lenders had come to nothing. When asked whether he would be able to find funding for Warnborough's costs of these proceedings of, say £120,000, he said he would be in severe difficulty and it would take a long time – perhaps more than six months. He explained that if he were able to obtain £250,000 from Lloyds TSB he had been proposing to discharge the debt to Warnborough (£120,000 - £130,000), a couple of loans "to get this far" (£30,000-£35,000), his personal debts (£50,000 although he considered that he might be able to leave some outstanding) and costs. When pressed on the amount he had allowed for Warnborough's costs, Mr Nye referred to about £40,000 - £42,000. (A draft bill produced by Warnborough indicated that its costs were over £100,000).
163. In re-examination, Mr Nye was asked about the prospects of reaching agreement with a developer (RBL Developments with whom he had been in discussion in late 2001) which would involve a sale of the Property. Mr Nye said that this was not an option which he wished to take. He was asked whether, if offered the opportunity by the court, this would be a route he would be prepared to follow. After a long pause, and with some reluctance, Mr Nye said that if no other option were open, he supposed he would as a last resort be prepared to follow this route but this would involve him losing his business which was not something he would want to happen.
164. I heard submissions in closing as to whether, if I found I had jurisdiction, I should as a matter of discretion grant relief. One of Mr Gadd's submissions was that the remote possibility that Mr Nye might be prepared to sell the Property to a developer was an insufficient basis to apply for relief. At the end of the hearing on 1 December 2005 I reserved my judgment.
165. By a letter dated 8 December 2005 and delivered to me that day, Mr Galway-Cooper applied on behalf of Garmite to reopen the trial. A witness statement from a Mr Peter Harding, a property developer, was enclosed in which he said that had entered into an agreement with Garmite (which was not exhibited) to purchase the Property from Garmite and was ready, willing and able to pay the sum of up to £250,000 of the purchase price into court, or as the court might direct, at short notice. Mr Harding was proferred for cross-examination. There was also enclosed a further witness statement from Mr Nye attaching a schedule calculating the total amount of capital and interest that would be due to Warnborough on 12 December 2005 after accounting for tax as £122,490.63.
166. By a fax to me dated 9 December 2005, Mr Gadd, on behalf of Warnborough, opposed Garmite's application to reopen the trial. He pointed out that the application assumed that, contrary to the submissions he had made at trial, the court had jurisdiction to grant relief. It was submitted that the further evidence could and should have been adduced at trial. No admissions were made as to any of the facts in the new evidence, including the calculations of the amounts outstanding. Mr. Gadd asked for the opportunity to make submissions before a decision to reopen the trial was made.
167. In the light of my conclusions as to the court's jurisdiction to grant relief, and the developments since the trial I have decided that the most appropriate course is to express no view, one way or the other, on the question of discretion. From Garmite and Mr Nye's perspective, to hear further submissions and evidence as is sought risks the incurring of additional and, in the light of my conclusion on jurisdiction, unnecessary costs. Wansborough for its own part has made clear its position that it resists that the matter be reopened. In these circumstances, having decided that it is not necessary or appropriate for me to address the question of discretion, it is unnecessary for me to rule on Garmite's application to reopen the matter which is only relevant to this question.

Conclusion

168. For the reasons which I have given, Warnborough's claim succeeds. I shall hear Counsel as to the appropriate form of order.