Blackpool Football Club (Properties) Ltd v JSC Baltic International Bank & Anor [2018] EWCA Civ 732

Case No A3/2017/0717/QBCMF[2018] EWCA Civ 732
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN’S BENCH DIVISION
Venue MANCHESTER MERCANTILE COURT (HHJ MOULDER), Royal Courts of Justice, Strand, London, WC2A 2LLDate 12/04/2018
Before
LORD JUSTICE LONGMORELORD JUSTICE NEWEYLADY JUSTICE ASPLIN
Between
BLACKPOOL FOOTBALL CLUB (PROPERTIES) LIMITED (FORMERLY SEGESTA LIMITED)AppellantJSC BALTIC INTERNATIONAL BANKRespondentsVB FOOTBALL ASSETSRespondent
Matthew Collings QC (instructed by Haworth Holt Bell Limited) for AppellantAndrew Green QC and Fraser Campbell (instructed by Clifford Chance LLP) for RespondentsHearing Hearing date: 14 th March 2018
Judgment
[1]This appeal is concerned with the proper construction of an agreement dated 21 July 2008 which was made between the Appellant, Blackpool Football Club (Properties) Limited which in 2008 was known as Segesta Limited (“Segesta”), and the Second Respondent, VB Football Assets (“VBFA”), as the “Parties” and Blackpool Football Club Limited (“BFC”), VBFA and Mr Owen Oyston who are together referred to as “the Initial Parties” (the “Investment Agreement”).[2]VBFA is a Latvian company beneficially owned jointly by Mr Valeri Belokon and his brother. VBFA’s rights under the Investment Agreement were assigned to the First Respondent, JSC Baltic International Bank (“BIB”), and an order substituting BIB as the claimant was made on 16 November 2016. Segesta is the holding company of BFC. BFC owns the football related business of Blackpool Football Club. The Club’s ground, however, is owned by Segesta, of which the principal shareholders are Mr Owen Oyston and other family members. Pursuant to an agreement dated 5 June 2006 made between Segesta and the Initial Parties, VBFA became the holder of 20% of the issued shares in BFC, approximately 76% being held by Segesta and the remainder by private individuals.[3]Pursuant to the Investment Agreement, the parties agreed to fund the development of the South Stand and the South West Corner Stand of the Club’s ground on the terms set out in the Investment Agreement and on the preliminary assumptions set out in Recital (C), “subject to the quality of the specification which would have to be upgraded for a Casino or high quality hotel.” It was also agreed that the net income from the South Stand and the South West Corner would be divided annually and equally between Segesta and VBFA: clause 6(A). The precise detail of clause 6(A) and its proper construction is at the heart of this appeal and I will return to it in more detail.[4]It was recorded at Recital (C)(i) to the Investment Agreement that it was envisaged that the whole development would cost £9 – 9.5 million. The First Phase comprised building the South Stand and the South West Corner Stand and building the skeleton structure of the rest of the development, the cost of which was anticipated to be £3.5 million: Recital (C)(ii). The Second Phase was the fitting out of the South West Corner to meet the requirements of “PHCT”, a primary health care trust which was a proposed tenant of part of the premises. It was anticipated that this would cost £2.25 million: Recital (C)(iii). The dispute has arisen in relation to the Third Phase which was expected to cost £3.25 – 3.75 million.[5]Pursuant to clause 1 of the Investment Agreement VBFA agreed to loan Segesta £4.75 million for the construction and fitting out of the South Stand and the South West Corner Stand (the “South Stand Loan”) and, pursuant to clause 2, Segesta committed £1 million for the same purpose (the “Commitment”). These sums equated to the anticipated cost of the First and Second Phases of the development. The building works in relation to those Phases, at the South Stand and South West Corner Stand, were completed and they have been in operation since March 2009.[6]In May 2010, the Club was unexpectedly promoted to the Premier League. Thereafter, Segesta borrowed monies from BFC which was in funds as a result of the Club’s promotion. The monies were advanced to Segesta and work started on the Third Phase in October 2010. In fact, a hotel rather than a casino was constructed. However, in order to comply with fire regulations, amongst other things, it was necessary to construct a separate entrance to the hotel with a lift shaft, stairs, reception area and restaurant situated in the South East Corner Stand. The South East Corner Stand was immediately adjacent to the South Stand, on land wholly owned by Segesta which was outside the scope of the Investment Agreement. The hotel is operated by a separate company, Blackpool Football Club Hotel Limited (“BFCH”), which is wholly owned by Segesta.[7]On 14 November 2011, Segesta paid £181,832 to BIB in respect of its share of “Income” under clause 6(A) of the Investment Agreement. At trial, BIB contended that other than payments made for the financial years 2009/2010 and 2010/2011, it had received no income pursuant to the Investment Agreement and would have done so but for the deductions which ought not to have been made by Segesta from the gross income derived from the development.

Grounds of Appeal

[8]First Segesta contends that HHJ Moulder (as she then was) sitting as a High Court Judge was wrong to decide that clause 6(A)(i) does not permit the deduction from Income of sums expended by Segesta with the aid of money borrowed from BFC, by way of capital expenditure in completing the Third Phase and ought to have held that the words in parenthesis in that clause permitted the deduction of all expenditure by the defendant of a capital nature in completing the Third Phase of the development irrespective of whether it had been funded by borrowing and irrespective of the identity of the lender (the “Capital Expenditure Issue”). Secondly, Segesta contends that the Judge was wrong to decide that clause 6(A)(i) does not permit the deduction from Income of losses said to have arisen in connection with the hotel constructed as part of the development (the “Hotel Losses Issue”) and thirdly, it contends that the Judge was wrong to conclude that sums in respect of a notional rent to take account of the fact that the hotel occupied part of the South East Corner Stand, which is owned solely by Segesta and is outside the scope of the Investment Agreement, could not be deducted (the “Notional Rent Issue”). Declarations were made in relation to those three issues in paragraphs 2, 3 and 4 respectively of the Judge’s Order dated 23 February 2017 (the “Order”). Permission to appeal was granted as to the true construction and scope of clause 6(A) of the Investment Agreement in relation to those three matters. Permission to appeal was refused in relation to arguments on waiver and estoppel and there was no appeal in relation to the Judge’s rejection of Segesta’s factual case that it was entitled to make the deductions as a result of an oral agreement reached in or around 2010.[9]By a Respondent’s Notice, BIB contends that paragraph 2 of the Order, which relates to the Capital Expenditure Issue, should be upheld on the additional ground, rejected by the Judge, that account should have been taken of the previous agreement dated 1 July 2008 between Ms Vlada Belokon, Segesta, BFC, VBFA and Mr Owen Oyston (“the Vlada Agreement”). By clause 12 of the Vlada Agreement, amongst other things, in the event that further funds over and above the South Stand Loan and the £1 million Commitment were necessary to complete the “construction and/or fitting out, future maintenance, repairs and refurbishment of the South Stand or the South West Corner or either of them” the investing parties were required to “make equal contributions themselves” to any “additional funds” in the event that such funds could not be “obtained from external sources.”

The Investment Agreement in more detail

[10]As I have already mentioned, the nature of the proposed phases of the development of the South and the South West Corner Stands were set out at Recital (C) of the Investment Agreement.

(C) (iv) was concerned with the Third Phase and was as follows:

“the cost of the intended Third Phase, which will be borrowed from a third party on terms acceptable to the Parties (both VBFA and Segesta), will be (subject as mentioned in this clause) approximately £3,250,000 to £3,750,000.”
The Vlada Agreement is referred to in Recital (D) and it is stated that the modifications to that agreement were contained in the Investment Agreement. The purpose of the Vlada Agreement was described as:
“(i) to enable the urgent commencement of the construction of the South Stand and the South West Corner … to exploit at least part of the forthcoming football season and (ii) to release the press statement which Valeri Belokon and Mr Oyston had previously signed.”
Further, at Recital (E) it is stated that the parties to the Investment Agreement were aware that it would supersede the Vlada Agreement. There was also an express provision to this effect at clause 23 of the Investment Agreement which went on to provide that in the case of any conflict between the Investment Agreement and any other agreement between the parties, the Investment Agreement would prevail “save that insofar as the previous agreements between the Parties have not been varied or modified by this agreement, then the previous agreements shall remain in full force and effect.”[11]Clause 6(A), the construction of which is central to this appeal, is as follows:
“(6)(A)The Parties together agree that after the deduction of (i) all items of revenue expenditure (and any expenditure of a capital nature in excess of the amounts provided by the parties pursuant to this agreement) in relation to the South Stand and the South West Corner and (ii) all such monies as are required to repay monies to any Mortgagee on the terms of a mortgage advance made to Segesta in connection with the South Stand and the South West Corner or either of them and (iii) any corporation or other taxes that may fall due, from all income of the South Stand and the South West Corner (including income from football revenue, commercial revenue and all other revenue sources)…that the remaining income (“the Income”) shall be divided annually equally between the parties on a 50/50 basis for a term of 1000 (one thousand) years from the date of this Agreement . . . The share of such net income that would otherwise be an entitlement of VBFA shall first be treated as a repayment of the Original Loan until satisfaction, and shall then be treated as repayment of the South Stand Loan until satisfaction and then the remainder shall be treated as income of VBFA.”
Clause 9 applies if the Parties agree to sell either the South Stand and/or the South West Corner. It provides that in such circumstances, they will share the net proceeds of sale “after payment of all Corporation Tax and any other outstanding taxes and all other loans, mortgages and borrowings as set out in Clauses 6 and 19 of this agreement, also on a 50/50 basis.” Clause 19 is in the following form:
“(19) When further funds over and above the South Stand Loan and the Commitment are required to complete the construction, rebuilding and/or fitting out, future maintenance, repair and refurbishment of the South Stand and the South West Corner or either of them, then Segesta will endeavour to obtain such funds at the most competitive rates from external financial institutions or sources who will be offered the South Stand and/or the South West Corner as security for such additional funds. For the avoidance of doubt, Segesta shall require in advance VBFA’s written consent for any such additional funds over and above the South Stand Loan and the Commitment and shall agree with VBFA the conditions (the sum, repayment order and other conditions) of such additional funds, as well as the security related to such additional funds. VBFA shall not unreasonably withhold or delay such consent. Still, for the avoidance of doubt, VBFA will have joint responsibility with Segesta for the repayment of such additional funds only if VBFA has given its consent for such additional funds.”
TheCapital Expenditure Issue The Judgment

TheCapital Expenditure Issue

[12]The Judge concluded at paragraph [41] of her judgment that as the natural and ordinary meaning of “any expenditure of a capital nature in excess of the amounts provided” in clause 6(A)(i) allowed for two possibilities, it was necessary to consider other relevant provisions of the Investment Agreement in order to construe it. She went on to consider clause 19 and to conclude that its opening words made its purpose clear. It applied:
“ . . . “When further funds over and above the South Stand Loan and the Commitment are required to complete the construction, rebuilding and/or fitting out, future maintenance, repair and refurbishment of the South Stand and the South West Corner or either of them,…”
If further funds were required the Investment Agreement provides that the mechanism in clause 19 had to be followed. As things turned out, the unexpected happened and as a result of promotion to the Premier League, BFC was in a position to lend the funds needed to the defendant. As acknowledged by Mr Malnacs in his evidence, the loan by BFC made economic sense in circumstances where it was interest-free and unsecured. However clause 19 was triggered in my view, by the need for further funds but the mechanism set out in clause 19 of obtaining VBFA’s approval was not. 42. Clause 6 (A)(ii) expressly provides for a deduction of amounts repayable to a mortgagee. Although I accept that there is no express cross reference in clause 6(A)(ii), this is a clear reference, in my view, to clause 19 which expressly deals with the situation where further funds are required to complete the Third Phase, in which event clause 19 contemplates such funds being obtained by the defendant from external financial institutions or sources on a secured basis. It seems to me that therefore clause 6 (A) (ii) and clause 19 do dovetail and are interrelated even without an express cross reference. Clause 19 was not limited to funds obtained from financial institutions but extended to other sources. Had the parties obtained “external” third-party funding then clause 19 would apply and the monies would fall to be deducted under subparagraph (ii). 43. The court also has to consider the facts and circumstances known to the parties at the time the document was executed. Counsel for the defendant submitted that the defendant was and remains the owner of the stands and was the developer so it was plainly envisaged that any expenditure of a capital nature would be by the defendant. He suggested in closing submissions, that it was a possibility that the defendant could have had money and might have wanted to fund the capital expenditure itself rather than being obliged to borrow from a bank. However it is clear in my view from recital C (iv) that the assumption of the parties at the time they entered into the agreement was that the cost of the third phase would be borrowed from a third party: Recital C (iv) stated:
“the cost of the intended Third Phase which will be borrowed from a third party on terms acceptable to the Parties (both VBFA and Segesta) will be (subject as mentioned in this clause) approximately £3,250,000 to £3,750,000”. [emphasis added] Whilst I accept that this is stated to be a “preliminary assumption” so was not fixed in stone, it is clear evidence of the facts and circumstances known to the parties at the time. I reject the submission that this is to control the operative part of an instrument by recitals; rather it provides evidence of the facts and circumstances at the time the Investment Agreement was entered into. 44. . . . the court has to identify what a reasonable person having all the background knowledge available to the parties would have understood the parties to be using the language in the contract to mean. In addition to the recital referred to above, the evidence before me from both parties’ witnesses is that it was never contemplated that BFC would be in a position to advance funds for the development of the Third Phase. (Day 3 p75-Owen Oyston) It was put to Karl Oyston in cross examination and he said “prior to the agreement we had envisaged that it would be an external funder”
. Asked “you never anticipated that it would be from Blackpool football club” he replied “no I don’t think anyone anticipated Blackpool hitting the Premier league…” (Day 2/Page 225). . . . 46. It is clear from the authorities that “commercial common sense” is only relevant to how matters would have been perceived by the parties at the time. It is not to be invoked retrospectively. Although counsel for the defendant sought to suggest that it was absurd not to construe the clause to allow the defendant to put money in from its own funds, there was no suggestion in the evidence before me that the parties contemplated that the defendant itself would put in money. As at the date the contract was made it is clear that the parties did not intend the deduction for excess capital expenditure in clause 6(A) (i) to be used by the defendant to fund excess capital expenditure using either its own resources or funds borrowed from a third party. At the time the contract was entered into the evidence is overwhelmingly clear that the parties did not intend clause 6(A) (i) to be used by the defendant to incur capital expenditure using funds borrowed from BFC.”[13]The Judge went on to hold at [47] that where the parties intended borrowings to be dealt with through the mechanism of clause 19 and given the express reference in clause 6(A)(ii) to monies required to pay mortgage advances, there was no need to invoke commercial common sense to allow for borrowings to be deducted through the language of clause 6(A)(i). There was already a mechanism in relation to third party funding and an appropriate amendment to clause 6(A)(ii) could have been agreed to cover the fact that the borrowing was an unsecured basis. She concluded:
“To interpret clause 6(A)(i) as including deductions for monies borrowed by the defendant would potentially create an unnecessary and confusing overlap with deductions for borrowings under clause 6(A)(ii) and this supports the conclusion that this is not what the parties intended. Having regard to the circumstances known to the parties at the time the document was executed, the construction of clause 6(A)(i) as excluding capital expenditure funded by the defendant using monies borrowed from a third party is not a bizarre result or commercially nonsensical.”

Submissions in outline

[14]First, Mr Collings QC on behalf of Segesta submits that the recitals to the Investment Agreement should be treated as just that. They were not contractual requirements and should be characterised as mere expectations or aspirations. He points out that the costs of the First and Second Phases and the proposed development as a whole, set out at Recital (C) (i), (ii) and (iii) can only have been expectations in relatively broad terms.[15]In relation to the Capital Expenditure Issue itself, Mr Collings submits that the words in relation to expenditure of a capital nature in parenthesis in clause 6(A)(i) are very wide. He points in particular to the use of “any” and says that, as the developer, Segesta could decide to spend whatever sum it chose on the South Stand and the South West Corner Stand and that the monies did not have to be borrowed. He says that the reference to borrowing in Recital (C)(iv) was a mere aspiration and not a straitjacket. He points out that clause 6(A)(i) ends with the word “and” which indicates that it should be contrasted with sub-clause (ii) which is expressly concerned with monies owed to a mortgagee under the terms of a mortgage advance. He says that it is only borrowing of this much more formal kind which dovetails with the provisions in clause 19 in relation to which VBFA’s written consent was necessary. Mr Collings submits, therefore, that clause 6(A)(i) is broad enough to cover “any” expenditure of a capital nature, whether or not the monies were borrowed and irrespective of from whom they were borrowed, other than a loan secured by a mortgage and the mortgage repayments and the interest element on them which would fall under sub-clause (ii). He pointed out that in this case, the monies were borrowed from BFCH but on the most favourable terms, namely at an interest rate of nil and, therefore, the capital expenditure fell naturally within sub-clause (i). He also made clear that the amounts which Segesta seeks to deduct or has deducted were actual sums of capital expenditure incurred on the Third Phase of the development and not, as the Judge found at paragraph [39] of her judgment, loan repayments in relation to the amount advanced to Segesta by BFCH.[16]Further, in response to questions from the Court, Mr Collings submitted that clause 9, which is concerned with the entitlement to the net proceeds of sale of either the South Stand or the South West Corner, is consistent with his construction. The net proceeds of sale to be shared equally are arrived at after “payment of . . . all other loans, mortgages and borrowings set out in clause (6) and (19) . . .” Mr Collings says that, logically, this includes commercial borrowings under clause 19 and clause 6(A)(ii) and any other capital expenditure under clause 6(A)(i).[17]Furthermore, he says that if these amounts do not fall within sub-clause (i), the entirety of the bargain between the parties would be different and a bizarre result would be achieved in that VBFA would be able to take the benefit of the extra capital expenditure funded by Segesta but receive 50% of the net income from the development nevertheless. He emphasises that the essence of the bargain was that Segesta would provide the land which it owned being the South Stand and the South West Corner Stand plus the £1 million Commitment and VBFA would provide the South Stand Loan in the sum of £4.75million which was to be repaid out of income and in doing so they effectively bought 50% each of the net income stream from the development.[18]Mr Green QC submits that it is clear from both Recital (C)(iv) and clause 19 that as at the date of the Investment Agreement it was contemplated that the Third Phase would be externally funded and that the relevant mechanism in relation to that funding was contained in clause 19. He pointed to the Judge’s findings in this regard at paragraph [46] of her judgment that “there was no suggestion in the evidence . . . that the parties contemplated that the defendant itself would put in money” and “at the time the contract was entered into the evidence is overwhelmingly clear that the parties did not intend clause 6(A)(i) to be used by the defendant to incur capital expenditure using funds borrowed from BFC.” He submitted therefore, that if Segesta wished to take a different course, it should have sought VBFA’s specific agreement and that, in fact, before the Judge it contended that such an agreement (to treat its borrowing from BFC as borrowing under clause 19) had been reached.[19]He also pointed to the different provisions contained in clause 12 of the Vlada Agreement which was executed just a few weeks before the Investment Agreement. Clause 12 of the Vlada Agreement provided as follows:
“(12) In the event of further funds over and above the South Stand Loan and the Commitments being required to complete the construction and/or fitting out, future maintenance, repairs and refurbishment of the South Stand and South West Corner or either of them, then Segesta will endeavour to obtain such funds at the most competitive rates from external financial institutions or sources who will be offered the South Stand and/or the South West Corner as security for such additional funds. For the avoidance of doubt, any such additional funds over and above the South Stand Loan and the Commitment which are obtained and used for the construction and/or fitting out of either of the South Stand and or the South West Corner and any payments due to any Mortgagee, are the joint responsibility for repayment by the Parties. To the extent that such additional funds as are required cannot be obtained from external sources (and there is insufficient surplus income under clause 5) the Parties shall make equal contributions themselves to such funds.”
Mr Green pointed to the fact that the final sentence of clause 12 was not replicated in the Investment Agreement which he says is consistent with the parties no longer contemplating that they would themselves contribute to the Third Phase.[20]Secondly, Mr Green submits that if Segesta’s construction in relation to the words in parenthesis in clause 6(A)(i) were correct, the protection contained in clauses 6(A)(ii) and 19 would be overridden. He says that it was clear from Recital (C)(iv) that it was intended that the Third Phase be funded externally and from the Investment Agreement as a whole that clause 19 was to apply. It refers expressly to “further funds over and above the South Stand Loan and the Commitment . . . required to complete the construction, rebuilding and/or fitting out, . . . of the South Stand and the South West Corner … ” (the parties’ initial contributions) and provides for the need for VBFA’s written consent in advance to such additional funds, including to “the sum, repayment order and other conditions . . . as well as the security related to such additional funds.” He says that although Segesta could have funded capital expenditure annually from gross annual income, to whatever building standard it thought fit, it could not unilaterally decide to borrow monies for that purpose without complying with clause 19 and if it did so, the last sentence of clause 19 would apply, namely that joint responsibility for the repayment of such additional funds would only arise if VBFA’s consent had been obtained. Clause 19 was intended to prevent unilateral decisions by Segesta, which was the developer, of the very kind which have occurred in this case. He submits, therefore, that as the expenditure is neither within clause 6(A)(i) nor within (ii) having been approved by VBFA under clause 19, it is irrecoverable.[21]Thirdly, Mr Green submits that in any event, the sums to which the wording in parenthesis in clause 6A(i) are directed are capital sums actually expended in any year to which the income to be distributed relates. In this regard he refers to the use of “remaining income” after deductions in clause 6(A)(i). He says, therefore, that the entirety of a loan cannot be deducted in the first year, or, for that matter, brought forward into future accounting years and that this is what Segesta is seeking to do. It wants to treat the entirety of the loan made to it by BFC as capital expenditure on day one, whether or not it has been spent. In this regard, Mr Green referred to the way in which Segesta put the matter at paragraph 9 of the Rejoinder which makes clear that Segesta considered it “proper to account for the whole sum of money borrowed and allocated for the third phase at the time of borrowing … rather than when it is actually spent …” Mr Green says that such a construction is inconsistent with clause 6(A)(ii) under which only the mortgage repayments in the year in question would be deducted from income and not the entirety of the loan at the outset. In fact, Mr Green says that the words in parenthesis in clause 6(A)(i) were intended to catch something entirely different: namely capital expenditure such as redecoration or the cost of minor repairs to the Stands. He says that any greater capital expenditure would fall, inevitably, under clause 6(A)(ii).[22]Lastly, Mr Green says that Segesta’s construction creates an absurdity because if the terms of clause 19 were complied with it would enable a deduction to take place both under Clause 6(A)(i) in respect of capital expenditure and (ii) in respect of repayments of a loan, which Mr Collings has yet to explain.

Conclusion

[23]There is no longer any dispute that clause 6(A)(i) allows for deductions to be made from gross income in respect of capital expenditure over and above the amounts committed by the parties where the expenditure is incurred in the year in question and has been funded from excess income. In other words, Segesta would have been entitled to use excess income to fund further capital expenditure on developing the South Stand and the South West Stand where the income and expenditure arose in the same year and could have done so without VBFA’s prior consent. However, the question of whether clause 6(A)(i) also allows for the deduction of capital expenditure in completing the Third Phase funded by Segesta itself by means of borrowing, irrespective of the identity of the lender, remains.[24]I agree with the Judge’s conclusion at paragraph [51] of her judgment that clause 6(A)(i) does not allow for such deductions. It seems to me that the natural and ordinary meaning of clause 6(A)(i) viewed objectively and when read in the light of the clause and the Investment Agreement as a whole against the background of the relevant factual matrix and attributing to the relevant words the meaning which reasonable persons in the position of the parties would have understood them to mean, would not permit the deduction from income of sums expended by Segesta on the Third Phase with the aid of monies borrowed from BFC.[25]First, it seems to me that if clause 6(A)(i) is read together with clause 6(A)(ii), the remainder of clause 6(A) and clause 19, it is clear that it does not allow for the deduction of capital expenditure arising from funds borrowed by Segesta from BFC. As Mr Green points out, clause 19 applies expressly when “further funds over and above the South Stand Loan and the Commitment … are required to complete the construction, rebuilding and/or fitting out, … of the South Stand and the South West Corner … ”. In such circumstances, it contains the mechanism by which the parties were to proceed. Furthermore, I agree with the Judge that clauses 19 and 6(A)(ii) dovetail despite the lack of a cross reference. Reference is made in clause 19 to the South Stand and/or the South West Corner being offered as “security” for any loan and clause 6(A)(ii) allows for deductions in respect of monies required to repay monies to any Mortgagee.[26]It is obviously also necessary to take into account the relevant factual circumstances known to the parties at the date on which the Investment Agreement was executed. I agree with the Judge that Recital (C)(iv) although only a recital, provides evidence of the relevant factual matrix. It makes clear that the costs of the Third Phase would “be borrowed from a third party on terms acceptable to the Parties”. This is also consistent with the Judge’s findings of fact at paragraphs [44] and [46] of her judgment that at the time, the parties did not contemplate that Segesta itself would put in monies over and above the Commitment to fund the Third Phase or that BFC would be in a position to advance funds for that purpose. Promotion to the Premier League and the consequent increase in revenue came as a surprise to all of the parties.[27]Furthermore, as Mr Green points out, and as the Judge found at paragraph [46] of her judgment, if Segesta’s construction of the words in parenthesis in clause 6(A)(i) were correct, the protection contained in clauses 6(A)(ii) and 19 would be overridden. Segesta would be able to borrow funds on whatever terms it thought fit without the consent of VBFA and deduct the capital expenditure in any year under clause 6(A)(i).[28]Under clause 19 VBFA’s written consent is required in advance in relation to additional funds and the conditions attaching to them including “the sum, repayment order and other conditions . . . as well the security related to such additional funds.” It seems to me that it is clear that clause 19 was intended to provide VBFA with a level of protection by preventing Segesta, which was the owner of the football ground itself and was the developer of the South Stand and South West Corner Stand, from deciding unilaterally to borrow monies for the development. Under the clause, VBFA was given the opportunity to agree not only to the amount of any new loan but also its repayment terms and other conditions. Segesta was protected because VBFA’s consent could not be unreasonably withheld or delayed. It was expressly stated that joint responsibility for the repayment of such additional funds would only arise if VBFA’s consent had been given.[29]Although I place little weight upon it, it also seems to me that despite Mr Collings’ submission to the contrary, the Judge’s construction of clause 6(A)(i) is also consistent with clause 9 of the Investment Agreement. That clause is concerned with sharing the net proceeds of sale of the South Stand and/or the South West Corner in circumstances in which the Parties have agreed the sale. It provides that “all other loans, mortgages and borrowings as set out in Clauses 6 and 19” are to be paid off before one arrives at the net proceeds of sale. It seems to me that the natural and ordinary meaning of that phrase in the context of clause 9 and the Investment Agreement as a whole does not naturally include items of capital expenditure under clause 6(A)(i) and, therefore, if Mr Collings were correct, and the borrowing from BFC falls within that clause having been characterized as capital expenditure, he would not be able to deduct that borrowing from gross proceeds of sale. In order to reach a contrary conclusion, it would be necessary to give an extended meaning to “loans, mortgages and borrowings” and to place less emphasis upon the reference to clause 19 than to that of clause 6.[30]In my judgment, therefore, it cannot be the natural and ordinary meaning of the words in parenthesis in clause 6(A)(i), read in the context of the Investment Agreement as a whole, that sums borrowed by Segesta unilaterally can be deducted from income. I come to this conclusion without any reliance upon clause 12 of the Vlada Agreement. I agree with the Judge that little can be gleaned from it. It amounts to little more than pre-contractual negotiations in that the parties’ intentions may have changed before the Investment Agreement was executed: see paragraph [50] of the judgment. Furthermore, it is recorded at Recital (D) that the Investment Agreement set out the modifications to the Vlada Agreement, at Recital (E) that the Parties were aware that the Investment Agreement would supersede it and at Clause 23 that it had been superseded.[31]To the extent that it is relevant, I also agree with Mr Green that the natural and ordinary meaning of clause 6(A)(i) is that capital expenditure can be deducted if it is expended in the year in which the income in question arises. This is consistent with clause 6(A) as a whole in which reference is made to “remaining income” after deductions being divided “annually”. Such a construction is also consistent with clause 6(A)(ii) which makes sense if construed to refer to mortgage repayments which fall due in the year in which the income from which they are to be deducted arises and not to the entirety of any loan. It would seem to me, therefore, that the procedure outlined in the Rejoinder would not fall within the natural and ordinary meaning of clause 6(A)(i), even if one assumes that capital expenditure as a result of borrowings did fall within the clause.[32]Lastly, it seems to me that far from being a bizarre outcome, it is clear from the way in which clause 6(A) dovetails with clause 19 and the express terms of clause 19 itself, that the natural and ordinary meaning of the Investment Agreement as a whole was that VBFA was entitled to the protection to which I have referred. If Mr Collings were correct, the protection in clause 19 would be worthless. Furthermore, there would be considerable if not complete overlap between clause 6(A)(i) and (ii). In my judgment, the further funding does not fall within clause 6(A)(i) and Segesta having failed to activate the mechanism in clause 19 or otherwise agree the terms upon which it provided further funds for the purposes of the Third Phase, the expenditure is irrecoverable. That was the nature of the bargain. Hotel Losses Issue and Notional Rent Issue The Judgment

Hotel Losses Issue and Notional Rent Issue

[33]As I have already mentioned, the hotel business is operated by BFCH which is wholly owned by Segesta. The Judge decided that the losses of that business could not be deducted from income under clause 6(A)(i). She dealt with this matter at [134] of her judgment in the following way:
“However clause 6 (A) provides that the income which is to be divided is “all income of the South Stand and the South-West Corner”
. It does not say for example all income “derived from operations in” the South Stand and the South-West Corner. The hotel business is arguably in part “income of the South Stand” although part is constructed in the South East corner and it could be said that an appropriate proportion of the income should be included within clause 6 (A). The more significant difficulty in my view, arises when one looks at the deduction to be made from that income. The term “revenue expenditure” is not defined but I accept the submission that the natural reading of “revenue expenditure” is that it refers to the running costs of the stands such as maintenance and cleaning and it does not fit well with the concept of losses incurred by a separate company. The difficulty, it seems to me, with interpreting clause 6 (A) in relation to a separate company arises not in relation to whether the company was run “in-house” rather than let out to a third party hotel operator or whether the purpose of setting up a limited company was merely to establish a billing centre. The problem of interpretation lies in that, by interposing a separate legal entity, it arguably separates the income and expenditure of the hotel business, with the result that the “income of the South Stand” is the dividends declared by the hotel company to the defendant rather than the underlying income of the hotel business. A further difficulty is that the deduction is only for “revenue expenditure” which would suggest that were one to look through the separate company and include the underlying income from the hotel business, any deduction would only be for “revenue expenditure” and not expenditure of a capital nature. Counsel for the defendant submitted that the losses are the “product of the revenue expenditure” and under clause 6 (A) all revenue expenditure is deductible from the Income. However it seems to me that this submission is not substantiated and as a matter of common sense it would appear to be unlikely, although not impossible, that the hotel losses arose only from revenue expenditure. It would appear to be illogical and contrary to commercial common sense to deduct from the hotel income only items of revenue expenditure and not items which would be classed as capital expenditure.” She dealt with the Notional Rent Issue at [138] of her judgment and stated that there was no basis for concluding as a matter of construction of clause 6(A) that the parties intended that a notional rent should be paid for the part of the hotel which is located on land in the South East Corner and so outside the contemplation of the Investment Agreement.

Submissions in outline

[34]In relation to the Hotel Losses Issue Mr Collings submitted this is an obvious case of the principle of benefit and burden. The income from the hotel would be represented by dividends declared and received by Segesta and would be income generated by the South Stand and accordingly, that losses should be deducted. He says that interposing BFCH should make no difference therefore and one should not take a strict view. However, in response to a question from the Court, Mr Collings appeared to accept that in light of the fact that all losses would be taken into account before any dividend was declared, everything was caught by BFCH’s separate legal personality.[35]In relation to the Notional Rent Issue, Mr Collings accepted that upon a proper construction, clause 6(A) is concerned with reality and not with a notional position and that the Judge had found at paragraph [141] of her judgment that it was not established on the evidence that there had been any subsequent agreement that a notional rent should be paid for the part of the hotel which is located on the South East Corner. He accepted therefore, that the claim to deduct such a notional rent from income was bound to fail.[36]Once again Mr Green submits that at the time the Investment Agreement was executed it was neither envisaged that the hotel would be run by a company associated with Segesta, nor that the hotel would be built in part on land outside the South Stand and the South West Corner. Furthermore, he submits that the benefit and burden argument to which Mr Collings referred does not arise because Segesta has misinterpreted paragraph [134] of the judgment. He says that the Judge did not find that any dividends paid to Segesta would have to be treated as income and shared with VBFA and that that would not be the case. Furthermore, he says that the income and expenditure of the hotel is that of the separate legal entity, BFCH, and therefore, is distinct from income and expenditure of the South Stand and the South West Corner.

Conclusion

[37]It seems to me that the Hotel Losses Issue and the Notional Rent Issue can be dealt with very shortly. I agree with the Judge that the real difficulty in relation to the Hotel Losses Issue arises as a result of BFCH having been interposed. It is a separate legal entity. The income and losses of the hotel business are those of BFCH. The income of BFCH from its hotel business is not the “income of the South Stand” and the losses of the hotel business cannot fall within the phrase “revenue expenditure … in relation to the South Stand and the South West Corner”. They are losses in relation to BFCH’s business. Any dividends which are eventually declared in favour of Segesta will already have had losses taken into account in their calculation. As the Judge found, it is a proportion of such dividends declared by BFCH, if any, which may well be “income of the South Stand” within clause 6(A).[38]Lastly, I agree with the Judge’s conclusion in relation to the notional rent at paragraph 138 of her judgment. As Mr Collings quite properly conceded, clause 6(A)(i) is not concerned with the notional and this ground of appeal cannot succeed. Clause 6(A)(i) is concerned with the actual state of affairs. Despite the fact that the hotel is built in part on land which is not within the contemplation of the Investment Agreement, there is no room for the deduction of a notional rent. If the parties had wanted a notional rent to be payable they should have made a separate agreement in this regard.[39]For all of the reasons set out above, I would dismiss the appeal.[40]I agree. I also agree.