England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Rolls Building Royal Courts of Justice Fetter Lane London. EC4A 1NL
		26/11/2012

Mr Justice David Richards :

1. On 21 March 2012, I handed down judgment on the claim of Groveholt Limited (Groveholt) against the first defendant, Alan Hughes, in these proceedings: see [2012] EWHC 686 (Ch).
2. One of the issues still outstanding at that stage was a counterclaim by Mr Hughes. The parties had agreed that consideration of the counterclaim should be deferred until after judgment on Groveholt's claim. I had received written and oral submissions on the counterclaim from Groveholt during and after the trial of the claim. I received further written submissions from Groveholt in May 2012 and written submissions on behalf of Mr Hughes in June 2012.
3. In order to understand the counterclaim, it is first necessary to summarise the essential relevant features of a complex series of contracts relating to a development site at Cawdor Quarry, Matlock, Derbyshire (the site). These were also central to Groveholt's claim and are dealt with fully in my earlier judgment.
4. In 1994 Mr Hughes, an experienced property developer, purchased the site. In December 1996 Mr Hughes entered into an agreement with J. Sainsbury pic, subsequently amended by an agreement made in March 1998 (together the Hughes/Sainsbury agreement). Under the terms of this agreement Mr Hughes sold that part of the site closest to the town centre for development as a supermarket. The agreement contained provisions for infrastructure works necessary to enable the supermarket site to be developed and for acquiring adjacent properties (site assembly) required for the infrastructure works. Mr Hughes agreed to indemnify Sainsbury against the costs of site assembly and infrastructure works in excess of £5 million.
5. By an agreement dated 9 April 1998 (the Hughes/Chelverton agreement), Mr Hughes sold most of the rest of the site to Chelverton Limited, a property development company. The consideration for the sale was the payment of £1.5 million on completion and the payment of further sums on the obtaining of specified planning consents. Sums totalling £3 million became payable on the grant of each of the three planning consents relating to that part of the site defined in the agreement as the Phase One Residential Land. It is common ground that all those consents had been obtained by December 2001.
6. The rest of the site was defined as the Phase Two Residential Land and the agreement envisaged that it would be the subject of later development. This was reflected in the terms of the agreement which provided a long stop date of 10 years from the date of agreement by which the relevant planning consent had to be obtained for a further payment of £2 million to become due from Chelverton to Mr Hughes. Clause 5.2 provided that if such consent were not obtained by that date:

"then the land in question will be transferred by the Purchaser back to the Vendor for a nominal consideration together with the benefit of all cross rights that are reasonably required by the parties".

7. It is common ground that such planning consent was not obtained within the 10 year period. Mr Hughes counterclaims for specific performance of the obligation to re-transfer the Phase Two Residential Land to him, seeking to enforce such obligations not against Chelverton but against Groveholt in the circumstances outlined below.
8. The Hughes/Chelverton agreement also contained provisions relating to site assembly and infrastructure works. It referred to Mr Hughes' obligation to indemnify Sainsbury to the extent that the costs exceeded £5 million, and it contained a warranty by Mr Hughes to Chelverton that the site assembly and infrastructure costs would not exceed £4.5 million. If they did exceed that amount, Mr Hughes would pay a sum equal to the excess to Chelverton. To the extent that such costs exceeded the sum of £4.5 million, they would be set-off against the sum otherwise due from Chelverton to Mr Hughes on the grant of the various planning consents. Security for the net sum, if any, due from Chelverton to Mr Hughes was provided by a first charge over the property.
9. By a novation deed made on 16 September 1998, Mr Hughes, Chelverton and Sainsbury agreed that Chelverton would replace Mr Hughes under the Hughes/S ainsbury agreement.
10. The property sold to Chelverton by Mr Hughes was registered with absolute title. Mr Hughes did not at any time register his right to a re-transfer of the Phase Two Residential Land as an estate contract under the Land Registration Act 1925.
11. On 21 December 2000, Chelverton entered into an agreement with Groveholt (the Chelverton/Groveholt agreement). Chelverton agreed to sell the entire property to Groveholt for £3.6 million. Groveholt agreed to use all reasonable endeavours to organise and effect site assembly and the infrastructure works in accordance with the Hughes/S ainsbury and Hughes/Chelverton agreements. The sale was completed on 4 July 2001. Site assembly and infrastructure works proceeded and their total costs far exceeded the sum of £4.5 million warranted by Mr Hughes in the Hughes/Chelverton agreement.
12. Groveholt's claim against Mr Hughes was essentially a redemption action, in which it sought to establish that, by reason of his warranty and the set-off provisions in the Hughes/Chelverton agreement, no sum was due to Mr Hughes and that accordingly it was entitled to a release of the first charge. A large number of issues was raised by Mr Hughes, who contended that the costs incurred were either outside the terms of the agreement, or were unreasonable in amount or had been increased as a result of breaches of obligations contained in the Hughes/Chelverton agreement. Although Groveholt was not a party to that agreement, the effect of earlier rulings, both at first instance and in the Court of Appeal, was that Mr Hughes was entitled to rely on any matters which would constitute a breach of the Hughes/Chelverton agreement in determining the amount, if any, properly secured by the charge. My judgment handed down in March 2012 was directed to these issues and I concluded that most of the costs of site assembly and infrastructure works had been properly incurred and that Mr Hughes failed to establish breaches of the agreement. Accordingly, no sum was payable to Mr Hughes.
13. Mr Hughes seeks by his counterclaim to enforce against Groveholt the obligation of Chelverton to re-transfer the Phase Two Residential Land to him, notwithstanding that he has no contractual relations with Groveholt. He submits that in the circumstances which occurred. Groveholt as transferee of the land is obliged to comply with Chelverton's obligation to re-transfer the Phase Two Residential Land to him. On the face of it, any such claim is barred by section 20 of the Land Registration Act 1925 as a result of Mr Hughes' failure to register his rights to a re-transfer. This is the case notwithstanding that, as Groveholt accepts, it had knowledge or notice of Mr Hughes' rights contained in the Hughes/Chelverton agreement. Mr Hughes seeks to overcome this obstacle principally on the basis that, by reference to the terms of the Chelverton/Groveholt agreement, Groveholt is obliged as a constructive trustee to give effect to his rights.
14. It is well established that in certain circumstances a constructive trust may be imposed on a transferee of registered land to give effect to third party rights notwithstanding their non-registration. Because this clearly cuts across the underlying premise of the land registration system that purchasers should acquire good title free of any interests which do not appear on the register, subject to statutorily defined overriding interests, the circumstances in which a constructive trust will arise have been narrowly confined. In a series of cases, courts at first instance and on appeal have considered the limited circumstances in which a constructive trust may arise in such a case: see Bannister v Bannister [1948] 2 All ER 133, Binions v Evans [1972] Ch 359, Lyus v Prowsa Developments Ltd [1982] 1 WLR 1044, Ashburn Anstalt v Arnold [1989] Ch 1, IDC Group Ltd v Clark [1992] 1 EGLR 187, Lloyd v Dugdale [2001] EWCA Civ 1754. [2002] 2 TCR 167, and Chaudhary v Yavuz [2011] EWCA Civ 1314, [2012] 3 WLR 987.
15. In Lloyd v Dugdale, the Court of Appeal formulated the relevant legal principles at [52]:

"(1) Even in a case where, on a sale of land, the vendor had stipulated that the sale shall be subject to stated possible encumbrances or prior interests, there is no general rule that the court will impose a constructive trust on a purchaser to give effect to them.

(2) The court will not impose a constructive trust in such circumstances unless it is satisfied that the conscience of the estate owner is affected so that it would be inequitable to allow him to deny the claimant an interest in the property.

(3) In deciding whether or not the conscience of the new estate owner is affected in such circumstances, the crucially important question is whether he has undertaken a new obligation, not otherwise existing, to give effect to the relevant encumbrance or prior interest. If, but only if, he has undertaken such a new obligation will a constructive trust be imposed. "

16. Mr Hughes relies in particular on the decision of Dillon J in Lyus v Prowsa Developments Ltd. Two points may be noted about that decision. First, Dillon J identified the key question as being whether the purchaser had undertaken in its contract of purchase with the vendor a positive obligation to give effect to the rights of the plaintiffs. He said at p. 961:

"The first question is, therefore, whether the bargain between the bank and the first defendant included a stipulation to the effect that on acquiring the land, the first defendant would give effect, in relation to plot 29, to the contract which had been made between the vendor company and the plaintiffs

He analysed the terms of the contract and concluded that it did contain such a positive stipulation. At p.962, he said:

"It seems to me that the fraud on the part of the defendants in the present case lies not just in relying on the legal rights conferred by an Act of Parliament, but in the first defendant reneging on a positive stipulation in favour of the plaintiffs in the bargain under which the first defendant acquired the land".

17. Secondly, in the light of the decision of the Court of Appeal in Chaudhary v Yavuz, the decision in Lyus v Prowsa Developments Ltd must be regarded as being on the outer edge of the circumstances in which a constructive trust will be found to exist. In giving the only reasoned judgment, Lloyd LJ identified at [42] three principal differences between Lyus and Chaudhary.

"First, in that case the third party rights in question were specifically identified in the contract under which the defendant agreed to buy the property. Secondly, the bank had no need to protect itself as regards enforcement of the plaintiffs' contract, because it could not be effective against the bank whose mortgage had priority. Thirdly, and correspondingly, the plaintiffs could have done nothing by way of registration or otherwise to ensure that a purchaser from the bank was affected by their rights. A caution had been registered to protect their position as against a purchaser from the original vendor company, but that was of no avail against the bank or a purchaser from it".

At [61] Lloyd LJ stated that he was not aware of any English case in which the precedent of Lyus had been successfully relied on to make binding on a purchaser an interest which could be, but was not, protected by registration. Following up on this point, Lloyd LJ said at [62]:

"Since the basis of Lyus is showing that the conscience of the purchaser is affected, it might be argued that the apparatus of registration has no relevance to the question arising. In the Lyus case itself it had none, because nothing which the plaintiffs could have done could have protected their rights against the defendants. In a directly comparable case that might again be the case. But in a case such as the present, where the rights asserted are capable of protection on the register and where they are not referred to in the contract in specific but only in general terms, then it seems to me that the registration system is relevant. That is for at least two reasons.

One is that, absent a specific reference in the contract, the purchaser may be thought to be entitled to rely on third parties protecting themselves in the manner provided for under the legislation. The other is that the contract provision will more readily be interpreted as intended to protect the vendor against a possible claim by the purchaser than as imposing a new personal obligation on the purchaser towards the third party".

At [64] Lloyd LJ said that in his judgment Lyus was "an exceptional case, and it is right that it should be". The three features which he had identified at [42] as being present in Lyus "made it justifiable to hold [in Lyus] both that the point of the reference to the third party right in the contract was that the purchaser should be bound by it, and therefore that the purchaser thereby undertook a new obligation to give effect to the plaintiff's rights".

18. In the light of the authorities, it is necessary to consider with care the provisions of the Chelverton/Groveholt agreement to ascertain whether Groveholt undertook a new obligation to give effect to Mr Hughes' rights as against Chelverton as regards the Phase Two Residential Land.
19. As with the other agreements in issue or relevant to the dispute between Mr Hughes and Groveholt, the Chelverton/Groveholt agreement is complex and must be read against the background of the other agreements relating to the site and its development entered into prior to that agreement. There are two preliminary points to be made. First, the agreement does not provide that the sale of the property by Chelverton to Groveholt is subject to Mr Hughes' rights in respect of the Phase Two Residential Land, although any such provision would not by itself be sufficient to give rise to a constructive trust. Its absence, however, is telling in this context. In fact, to contrary effect are clauses 13 and 14. The effect of clause 13 is that for the purposes of the Law of Property (Miscellaneous Provisions) Act 1994, Chelverton sold with full title guarantee free of all rights created by Chelverton, which would clearly include Mr Hughes' right to a re-transfer. Clause 14 provided that the property was sold subject to the entries on the property and charges registers and to certain other matters, none of which included Mr Hughes' rights. Secondly, there is no specific reference in the agreement to Mr Hughes' right to a re-transfer of the Phase Two Residential Land, although there are a number of references to obligations of Chelverton to which I shall refer.
20. The first recital to the Chelverton/Groveholt agreement refers to the Hughes/Chelverton agreement and states that "certain obligations were entered into therein (inter alia) by Chelverton to carry out site assembly and infrastructure works".
21. Clause 1 contains definitions of "the Chelverton Obligations" and "the Infrastructure Obligations". The Chelverton Obligations are defined as:

"All and every one of the obligations entered into or assumed by Chelverton (some of which obligations were originally obligations of Mr Hughes but which were novated to Chelverton by the Novation Deed) and which are contained in the under-mentioned documents: the Hughes/Chelverton Agreement, the Sainsbury/Hughes Agreement, the Novation Deed, the Sainsbury/Chelverton Ancillary. "

The Infrastructure Obligations are defined as:

"The effecting of the Site Assembly and the carrying out of all and every one of the Infrastructure Works (and for the avoidance of doubt including all and every one of the Chelverton Obligations). "

22. Under the terms of the agreement, Groveholt undertook obligations in respect of both the Infrastructure Obligations and the Chelverton Obligations, but in markedly different terms. Clause 5 is headed "Infrastructure Obligations" and contains detailed terms in respect of them. Clause 5.1 provides:

"The Purchaser will henceforth be responsible for and carry out the Infrastructure Obligations and for that purpose will as soon as possible hereafter use all reasonable endeavours to organise and effect the Site Assembly and then carry out and complete the Infrastructure Works in a good and proper manner and in accordance with the Hughes/Chelverton Agreement and the Sainsbury/Hughes Agreement".

Clause 5.2 records that the Infrastructure Obligations are for the benefit of Chelverton, Sainsbury and the land owned by Sainsbury.

23. Clause 6 is headed "Sainsburys' Obligations and possible release thereof', and also contains detailed provisions. Clause 6.1, which is more of a recital than a substantive term, provides:

"Chelverton still being primarily responsible after the date hereof and after the Completion Date as herein provided to Sainsbury in respect of the Chelverton Obligations without prejudice to clause 5 hereof".

Clause 6.2 provides:

" Until the completion of the Sainsbury Novation the Purchaser shall observe and perform the Chelverton Obligations as Chelverton's agents but entirely at the Purchaser's own cost and expense ".

Clause 6.3 provides for Groveholt to indemnify Chelverton in the following terms:

"The Purchaser will indemnify Chelverton against each and every claim, liability, demand or costs arising against Chelverton by reason of any failure to comply with the Chelverton Obligations and notwithstanding that Sainsbury may not accept that Chelverton can pass on the responsibility for complying with the Chelverton obligations to another party.

The aforesaid indemnity from the Purchaser shall have full force and effect even if Sainsbury does refuse to accept that the Chelverton Obligations can be complied with and undertaken by any party other than Chelverton. The indemnity shall not extend to any obligation of Chelverton which is not in the Hughes/Chelverton Agreement, the Sainsbury/Hughes Agreement, the Novation Deed or the Sainsbury/Chelverton Ancillary"

Clause 6.5 applies at the option of Chelverton if Groveholt "procures an Approved Obligor". An Approved Obligor is defined as a party or parties who have "sufficient expertise and financial resources to be able to comply with the Infrastructure Obligations and who have first been approved by Chelverton, such approval not to be unreasonably withheld". Clause 6.5.2 provides:

"The Purchaser will use all reasonable endeavours to procure that Sainsbury and the Approved Obligor enter into the Sainsbury Novation whereby the Approved Obligor (with or without the Purchaser) assume(s) the Chelverton Obligations (or those which are then outstanding and owed to Sainsbury) and Chelverton is released from its obligation to effect the Chelverton Obligations in favour of Sainsbury. "

24. Mr Hughes relies on clause 6.2 as creating a new obligation on the part of Groveholt to perform Chelverton's obligation to re-transfer the Phase Two Residential Land to him in accordance with the Hughes/Chelverton agreement. His case is that, first, clause 6.2 imposes on Groveholt an obligation to observe and perform the Chelverton Obligations and, secondly, "the Chelverton Obligations" is defined as "all and every one of the obligations entered into or assumed by Chelverton" contained in, amongst other agreements, the Hughes/Chelverton agreement.
25. There are, in my judgment, a number of reasons why Mr Hughes cannot rely on clause 6.2 as having the effect for which he contends.
26. First, clause 6.2 provides that Groveholt is to perform the Chelverton Obligations "as Chelverton's agents". This acts not only as a restriction on the capacity in which Groveholt will perform the obligations but also, necessarily, as a restriction on the obligations to which clause 6.2 refers. It was a principal purpose and effect of the Chelverton/Groveholt agreement that Chelverton sold the property to Groveholt. The transfer was duly completed in July 2001. It was therefore not possible for Groveholt to perform any obligation to re-transfer the Phase Two Residential Land to Mr Hughes "as Chelverton's agents". It could do so only as principal. A constructive trust does not impose upon a property owner an obligation to observe the rights of third parties as agent for the person who conferred such rights but as principal.
27. Secondly, that clause 6.2 is not intended to apply to the obligation in relation to the Phase Two Residential Land is made clear by the restriction in the opening words of clause 6.2 that the purchaser is to observe the Chelverton Obligations only "until the completion of the Sainsbury Novation". The Sainsbury Novation is defined as:

"A deed whereby Chelverton is released by Sainsbury from the Chelverton Obligations and the Approved Obligor obtains the rights to enforce against Sainsbury all the Sainsbury Obligations and Chelverton relinquishes those rights "

The obligation to re-transfer the Phase Two Residential Land was owed by Chelverton not to Sainsbury but to Mr Hughes. Sainsbury could not release Chelverton from that obligation. It would be incomprehensible that an obligation imposed on Groveholt to give effect to Chelverton's obligation to re-transfer the Phase Two Residential Land should last only until completion of the Sainsbury Novation.

28. Thirdly, clause 6.1 makes clear that the Chelverton Obligations do not extend to the obligation in respect of the Phase Two Residential Land. By referring to Chelverton being responsible to Sainsbury in respect of the Chelverton Obligations, it limits the scope of the obligations to which it is referring. The same is shown by the remaining provisions of clause 6, in particular clauses 6.3 and 6.5.2.
29. There are other provisions in the agreement which in my judgment make clear the restricted scope of the obligations undertaken by Groveholt to perform the Chelverton Obligations. Clause 5 deals with the Infrastructure Obligations and imposes on Groveholt an obligation to be responsible for and carry them out not as agent but as principal. There is no equivalent provision as regards the obligation to re-transfer the Phase Two Residential Land.
30. Obligations to Mr Hughes under the Hughes/Chelverton agreement, including the obligation to re-transfer the Phase Two Residential Land, are directly addressed by clause 7.1, which provides:

"The Purchaser will use reasonable endeavours to procure the Hughes Novation in a form reasonably acceptable to Chelverton and the release of the Existing Charge. The Purchaser is not required to make any payment in order to procure the Hughes Novation and the release of the Existing Charge

A "Hughes Novation" is defined to mean:

"A deed whereby Chelverton is released by Mr Hughes from any obligations to Mr Hughes within the Hughes/Chelverton Agreement or any agreement ancillary thereto and the Purchaser or the Approved Obligor assumes such responsibilities and obligations of Chelverton "

The Chelverton/Groveholt agreement contains no express provision that, prior to execution of a Hughes Novation, Groveholt assumes an obligation to perform Chelverton's obligations to Mr Hughes.

31. In conclusion, on the construction of the Chelverton/Groveholt agreement, Groveholt assumed no obligation to re-transfer the Phase Two Residential Land to Mr Hughes in accordance with the terms of the Hughes/Chelverton agreement, unless and until it entered into a Hughes Novation as defined in the Chelverton/Groveholt agreement. This is fatal to Mr Hughes' claim based on a constructive trust, even on an application of Lyus v Prowsa Developments Ltd without regard to the observations and qualifications made by the Court of Appeal in Chaudhary v Yavuz.
32. Mr Hughes relies on statements made by or with the knowledge of Groveholt to the effect, it is suggested, that Groveholt would abide by all of Chelverton's obligations to Mr Hughes. The statements relied on are contained in a letter dated 29 January 2002 from Chelverton's solicitors to Mr Hughes and in witness statements made on behalf of Groveholt in 2004. It is unnecessary to analyse these statements with a view to identifying the extent of any representation made in them, because the assumption of obligations for the purposes of giving rise to a possible constructive trust are to be found, if anywhere, in the Chelverton/Groveholt agreement. It is obligations assumed by Groveholt at or before its acquisition of the property which could arguably give rise to a constructive trust. The statements on which Mr Hughes relied were made some considerable time thereafter and in any event have no binding effect, even if they have the meaning which Mr Hughes ascribes to them. In similar vein are statements, also relied on by Mr Hughes, made by persons acting on behalf of Chelverton or Groveholt that if planning permission for the Phase One Residential Land was not obtained by the dates set out in the Hughes/Chelverton agreement, then it would revert to Mr Hughes notwithstanding its transfer to Groveholt. Again, Groveholt's obligations are not to be determined by reference to such statements of belief but by reference to the obligations which they had on proper analysis assumed.
33. Even if Groveholt had assumed a new obligation to give effect to Mr Hughes' right to a re-transfer of the Phase Two Residential Land, Groveholt relies on Mr Hughes' own breaches of the Hughes/Chelverton agreement as disentitling him to specific performance of that right. It is well established that a claimant who seeks specific performance of a contract must show, among other things, that he has performed or has been ready and willing to perform all its terms and conditions, other than trivial terms, and that he has not acted in contravention of the essential terms of the contract: see Snell's Equity (32^nd Edition) para. 17-038. An important issue in Groveholt's claim against Mr Hughes was whether Mr Hughes had been in breach of his obligation under the Hughes/Chelverton agreement to release his charge on the Phase One Residential Land pursuant to clause 6.2. I held that Mr Hughes' refusal over an extended period to release his charge was a breach of his obligations under the agreement and would on any footing have prevented completion of the site assembly and commencement of the infrastructure works before June 2004, when the charge was finally released pursuant to a consent order. This was clearly a serious breach of an important provision in the Hughes/Chelverton agreement which would in my judgment disentitle him to an order for specific performance. Although Groveholt is not a party to that agreement, the doctrine of constructive trust could not be used by Mr Hughes to put himself in a better position against Groveholt than he would have been against Chelverton. The most that a constructive trust will do is to impose on the defendant a duty to perform obligations which could have been enforced by the claimant against his contractual counterparty.
34. Groveholt relies also on the disclaimer in December 2003 by the liquidator of Chelverton of the Hughes/Chelverton agreement. In the light of my conclusions above, I prefer not to express a view on the novel and perhaps difficult question of whether a disclaimer in these circumstances brings to an end a constructive trust arising on the earlier transfer of the land to a third party. I will also not express a final view on the further submission made by Groveholt that the terms of the obligation to re-transfer the land contained in the Hughes/Chelverton agreement is too vague for enforcement, by reason of the inclusion of the words "together with the benefit of all cross-rights that are reasonably required by the parties". I am inclined to the view that this would not be a bar to specific performance, because the criterion by which any such cross-rights would fall to be judged is the objective one of reasonable requirement, and it would be within the competence of the court to resolve any dispute as to the cross-rights required.
35. Mr Hughes has advanced further arguments in support of his case that the obligation to re-transfer the Phase Two Residential Land is enforceable against Groveholt.
36. First, Mr Hughes submitted that Groveholt has itself relied on the terms of the Hughes/Chelverton agreement in its claim against him. This is to misunderstand the nature of Groveholt's claim. Groveholt's claim was to redeem Mr Hughes' charge by establishing that it did not secure any sum payable to him. In order to do so, it was necessary to apply the terms of the Hughes/Chelverton agreement. Groveholt was not seeking to enforce those terms or obtain the benefit of them but was simply seeking to establish the amount, if any, secured by Mr Hughes' charge.
37. Secondly, Mr Hughes relied on the charge created over the property pursuant to clause 6 of the Hughes/Chelverton agreement. This charge in terms secures the payments due to Mr Hughes under clause 5 of the Hughes/Chelverton agreement and is therefore irrelevant to the obligation of re-transfer on which Mr Hughes relies.
38. I conclude therefore that Groveholt is not obliged to re-transfer the Phase Two Residential Land to Mr Hughes. His counterclaim is dismissed.