Article contributed by Ian Quayle

Ian Quayle discusses an interesting case dealing with a number of issues including the interpretation of a joint venture agreement, the use of a unilateral notice to protect an equitable charge and the application of S42(1)(a) of the LRA 2002.

Case name, reference and Bailii link  

Yarnold and others v Ziga and others [2023] UKUT 284 (LC) [2023] PLSCS 199.

BAILII link

Summary  

The case concerned a joint venture agreement involving the Respondents investing in a property development. The investment was to be protected by a legal charge secured on the development.

The respondents contended that there was an implied term in the joint venture agreement that the land over which the investment was to be secured was not to be sold before the legal charge was registered.

In an effort to create some protection pending the registration of the charge the Respondents applied to enter a restriction on the registered title. The appellants objected to that application. 

Facts

The respondents invested in a property development on the understanding that their investment would be protected by the security of a legal charge over two parcels of land at Platt Bridge in Wigan. Before the charge was registered, the owner of the land contracted with the appellants for them to purchase parts of it. The appellants were parties to contracts to purchase leasehold interests in houses on the parcels of land which were to be subject to the charge.

When they realised their investment was not protected, the respondents applied to enter a restriction to prevent the disposition of the property under section 42(1)(a) of the Land Registration Act 2002, on the basis that it was necessary or desirable to prevent unlawfulness in relation to the disposition of the registered estates.

The First-tier Tribunal overruled the appellants’ objections and directed the Chief Land Registrar to give effect to the respondents’ application to enter a restriction on the registered titles of the land.

The appellants appealed.

Issues

• Was it appropriate for a term to be implied into the joint venture agreement and if so, what could be implied?
• Was the use of a restriction to prevent the disposition of the property compliant with S42(1)(a) LRA 2002?

Decision

Held: The appeal was dismissed.

1. The process of implying a term into the contract was not to become the rewriting of the contract in a way which the court believed to be reasonable, or which the court preferred to the agreement which the parties had negotiated. A term would be implied into a contract where it was necessary to do so to give effect to the intention of the parties in the light of the express terms of the contract, commercial common sense and the facts known to the parties when entering into the contract: Marks & Spencer plc v BNP Paribas Securities Trust Co ( Jersey) Ltd [2016] EGLR 8 applied. The four-part test for determining whether a term could be implied into an ordinary business contract was: (i) the term had to be necessary to give business efficacy to the contract; (ii) it had to be so obvious that it went without saying; (iii) it had to be capable of clear expression; and (iv) it was not to contradict an express term: Hallman Holding Ltd v Webster [2016] UKPC 3 applied. 
2. The concept of necessity was not to be watered down. Necessity was not established by showing that the contract would be improved by the addition. The fairness of a suggested implied term was an essential but not a sufficient precondition for inclusion: Ali v Petroleum Company of Trinidad and Tobago [2017] UKPC 2 considered. The equity of a suggested implied term was an essential but not sufficient precondition for inclusion. A term should not be implied into a detailed commercial contract merely because it appeared fair or because the court considered the parties would have agreed if it had been suggested to them. The stringent test was one of necessity, not reasonableness: Yoo Design Services Ltd v Iliv Realty Pte Ltd [2021] EWCA Civ 560 considered. In the present case, there was a contractual obligation on the landowner to grant a charge, and once the money was handed over by the respondents, that obligation gave rise to an equitable charge which the respondents could have protected by the entry of a unilateral notice. They did not need any additional protection.
3. There was no doubt that the registration of the legal charge would come before any possibility of a sale. Thus, the investment would be “securitised” by the charge until the property has been sold; the charge would protect the respondents’ interest and stop the property being sold without their consent. It would lack business efficacy if the landowner could deprive the respondents of their security by selling parts of the land before a charge was registered. Viewed objectively, the parties could not be taken to have intended that the property would be sold before the legal charge was in place to provide the protection which featured in their agreement. Nor could it have been intended that the investor would simply rely on the landowner’s voluntary restraint in not selling the property before the charge had been registered. It would make no sense for the respondents’ capital to be at risk for as long as it took to register a charge, and secure only after that. The parties must therefore have intended that the borrower would not be entitled to sell until the promised security was in place. A contractual fetter preventing the property from being sold before the security was in place was essential. Without it the lender’s investment would be at risk, and the promised security would be illusory.
4. Hindsight could not determine what, objectively, the parties must be taken to have intended by their agreement. The question was how the parties intended the agreement to operate, and what obligations they were assuming to each other, not what remedies they would have anticipated if the agreement did not operate as they intended because NVC sold without waiting for the charge to be registered. The parties intended that the agreement would be secure and there would be no question of a sale before the legal charge was in place to provide that security.

The parties agreed on the form which the security was to take; there was nothing in the documents to suggest that the respondents might have to be content with the security of an equitable charge. A contractual term that the land would not be disposed of before the charge was registered was therefore necessary to give effect to the agreement that the respondents would be secured by a legal charge.

The grant of leases to the appellants were dispositions in breach of those terms. The registration of a restriction was justified to prevent that unlawfulness and permissible under section 42(1)(a) of the 2002 Act.