The recent decision in Groveholt Ltd v (1) Alan Hughes and (2) Delbrook Properties Ltd [2005] saw an imaginative attempt by the vendor of a development site to increase his overage payments when the agreement was disclaimed by the insolvent purchaser.

Background

In his appeal, Mr Hughes attempted to overturn the decision of the court in a previous summary judgment application. The action arose out of a scheme for the development of a brownfield site owned originally by Mr Hughes and known as Cawdor Quarry in Matlock, Cheshire.

In order for the site to be developed, it required major infrastructure works to provide access, including the diversion of a trunk road and the construction of a new road bridge. In addition, certain parcels of land not forming part of the site itself needed to be acquired from third parties to facilitate the development.

The sequence of contracts by which Mr Hughes sold the site was complex, but the main sale agreement was between him and Chelverton Properties Ltd. Under this sale agreement (the agreement), a certain sum was payable by Chelverton to Mr Hughes immediately on exchange of contracts. Further sums fell due once planning permission had been obtained in respect of various parts of the site (the overage payments).

However, the agreement also provided for the cost of putting in the infrastructure and effecting the site assembly (the preparatory costs). If these costs exceeded £5m, they were to be deducted from the overage payments. The overage payments were secured by a charge in favour of Mr Hughes. Planning permission was subsequently obtained in respect of three parts of the development.

Before making any payment to Mr Hughes, Chelverton sold the site to Groveholt Ltd. The Chelverton group then went into liquidation, and the liquidator disclaimed the agreement.

At the date of disclaimer (and indeed at the date of the appeal), the total amount of the preparatory costs had not yet been finally ascertained. However, Mr Hughes accepted for the purposes of his summary judgment application and appeal that the projected preparatory costs would extinguish his overage payments altogether.

Therefore, his payment prospects rested upon demonstrating that, as a result of the disclaimer, Groveholt could not deduct the preparatory costs and would need to pay his overage payments in full in order to secure release of Mr Hughes’s charge over the site.

When did payment fall due?

In his appeal from the dismissal of his summary judgment application, Mr Hughes argued that as at the date of Chelverton’s disclaimer, the sums to which he was entitled under the agreement were accrued debts.

He claimed that upon planning permission being obtained for the various parcels of land at the site, these sums had fallen due, albeit that they were not yet ‘payable’ because of the set-off provisions.

Although Mr Hughes’s argument relied on construction of the wording of the agreement, the principle could be applied to many common overage arrangements.

The agreement was drafted in terms that provided for fixed sums to be paid to Mr Hughes within 14 days of relevant planning consents being obtained. A later clause then deferred payment of these sums to Mr Hughes until the preparatory costs were known and provided for the deduction of the sums in excess of £5m from these payments. Mr Hughes’s contention was that the agreement merely deferred payment of sums that had become due to Mr Hughes as soon as the relevant planning consents had been obtained.

He relied on G&T Earle Ltd v Hemsworth RDC [1928] as authority for his proposition that a debt is no less a debt because payment is postponed and may be subject to a set off.

In G&T Earle a building owner paid a retained sum of 10% under a building contract to the contractor’s receiver. However, the contractor had previously assigned its right to the retention to the plaintiff, a third-party supplier to the contractor. The building owner argued that the assignment of the retention was no more than an equitable assignment of a future debt, which would only become a legal assignment when a final certificate was issued under the building contract. In the judge’s view, the retention moneys were actually earned by the contractor by the date of the final certificate. They were not merely a future debt, and were only ‘future’ in the sense that they were not payable until a future date. This was notwithstanding that they were held as security, could be subject to reduction and were not payable until final settlement.

The effect of Chelverton’s disclaimer

Mr Hughes argued that because under s178(4)(a) of the Insolvency Act 1986 a disclaimer ‘operates so as to determine, as from the date of disclaimer, the rights, interests and liabilities of the company in or in respect of the property disclaimed’, the effect of Chelverton’s disclaimer was to discharge both parties to the agreement from any liabilities that had not accrued as at the date of the disclaimer. Because the trial amount of the preparatory costs had not been ascertained at the disclaimer date, Mr Hughes’s liability to defray these excess costs had not arisen, and was discharged by the disclaimer. However, because the payments due to him had accrued, he remained entitled to full payment.

In support of what on the face of it would have been a rather unfair result for Groveholt, Mr Hughes sought to draw an analogy between a disclaimer and a repudiation of contract.

The general position where a contract is repudiated is that an innocent party cannot sue in debt for payments that have not fallen due prior to repudiation; they are entitled only to sue for specific performance or for damages for loss of bargain. Mr Hughes submitted that the situation differs where payments are due under a contract for the sale of land that has been transferred prior to repudiation and is not liable to be retransferred. Mr Hughes relied on a judgment in a New Zealand case, Ruddenklau v Charlesworth [1925], which held that where a contract had been completed by the execution and acceptance of a conveyance, unpaid purchase money could become a debt and could be recovered accordingly.

Further, he argued that in circumstances where a contract is repudiated, both parties are discharged from further performance of the contract, but rights that have been unconditionally acquired are not divested or discharged.

Mr Hughes argued that, as at the disclaimer date, he had unconditionally acquired rights to be paid overage under the agreement that were unaffected by s178(4)(a) of the 1986 Act. By contrast, Chelverton’s rights – ie to set off the preparatory costs – came to an end because under s178(4)(a) the disclaimer determined these from the disclaimer date. Chelverton could therefore no longer exercise its ‘right’ to impose a deduction on Mr Hughes’s overage payments because this right had not yet arisen. However, s178(4)(a) did not affect Mr Hughes’s rights that had been acquired unconditionally by the date of the disclaimer.

Third parties

In considering Groveholt’s position, Mr Hughes relied upon s178(4)(b) of the 1986 Act. He was entitled to enforce his charge against Groveholt as a third party because the disclaimer:

... does not, except so far as is necessary for the purpose of relieving the company from any liability, affect the rights or liabilities of any other person.

In support of this latter point, Mr Hughes relied upon the well-known case of Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997], in which the House of Lords underlined the fact that a disclaimed property is deemed to continue in existence as regards third parties, who are affected by the disclaimer only to the extent necessary to achieve the object of securing the release of the company from all liability.

The decision

In rejecting Mr Hughes’s appeal, the Court of Appeal was keen to interpret the Agreement pursuant to the principles of ‘business common sense’.

The reality was that the payments due to Mr Hughes were not merely deferred payments of the purchase price, but overage payments that would only be ascertained after a ‘netting off’ exercise had been undertaken that took account of the cost of the preparatory works. Accordingly, in contrast to G&T Earle, it could not sensibly be said that Mr Hughes’s overage payments were ‘actually earned’ when planning permission was obtained.

All that had been ‘earned’ was whatever net sum was payable once the amount of preparatory costs had been finally ascertained and deducted from those sums due to Mr Hughes.

As far as the position between Mr Hughes and Groveholt was concerned, the disclaimer had no effect since, pursuant to s178(4)(b) and the principle in Hindcastle, the agreement was deemed to continue in existence. Accordingly, the disclaimer did not affect Mr Hughes’s charge, which continued to secure the net sums due to him.

Ultimately, the decision was made on the construction of the wording in the agreement. The case demonstrates the willingness of the courts to interpret the wording of a contract and statute in a manner that reflects commercial common sense, and this is to be applauded. However, the arguments put to the Court of Appeal highlight that where third parties are liable to pay overage or similar payments, they cannot necessarily assume that they will be able to use the mechanism of a disclaimed agreement to calculate these.

To ensure certainty, those drafting agreements providing for overage payments to be made at a future stage should give close attention to the concept of when payments fall due, and when sums are actually payable. If appropriate, parties should make it clear in the agreement that payment is due only after relevant deductions have been made.

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