Investec Bank (Channel Islands) Ltd. v The Retail Group Plc [2009] EWHC 476 (Ch)

[2009] EWHC 476 (Ch)Case No HC07C03495
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 13/03/2009
Before
THE HONOURABLE MR JUSTICE SALES
Between
Investec Bank (Channel Islands) LimitedClaimantThe Retail Group plcDefendant
Charles Hollander QC (instructed by Eversheds) for ClaimantNeil Mendoza (instructed by Altermans) for DefendantHearing Hearing dates: 17/02/09 – 24/02/09
Judgment
[1]The Claimant (“Investec”) is a bank. The Defendant (“TRG”) is a property development company. TRG’s sole shareholder and one of its two directors is David Murphy. This is a claim by Investec for a payment which it says is due from TRG in respect of what has been termed an “exit fee”. This is a fee which Investec says is due to it under a profit-sharing arrangement in the form of an Exit Fee Agreement dated 22 October 2004 made between Investec and TRG (“the EFA”) in respect of the development of a shopping precinct at Palmerston Road in Southsea.[2]The shopping precinct was comprised of shops and other retail outlets on the east and west sides of Palmerston Road. I will refer to the properties owned by TRG on the east side of Palmerston Road as “the East Block”. I will refer to the properties which TRG purchased from Portsmouth City Council (“Portsmouth CC”) in October 2004, located on the west side of Palmerston Road, as “the West Block”.[3]From 2003 TRG had been acquiring properties in the East Block piecemeal in order to build up a property portfolio which could be developed as a coherent unit. The plan was to try to improve the overall quality of the shops and outlets so as to achieve better rental income over time and improved capital values, and also to obtain planning permission to build residential flats above the retail outlets, which could then be let or sold. Mr Murphy also entered into negotiations on behalf of TRG with Portsmouth CC to acquire the West Block, so as to achieve a larger portfolio capable of development as a still larger unified project. I will refer to the East Block and West Block together as “the portfolio”, and to the development of the portfolio as “the development” or “the project”.[4]By letter of 15 June 2004 Portsmouth CC offered to sell the West Block to TRG for £9,750,000, subject to contract. This was an important opportunity for TRG. TRG had to raise the finance necessary to acquire the West Block and also to refinance the East Block at the same time. Mr Murphy therefore entered negotiations with a range of possible lenders.[5]By July 2004 it appears that Mr Murphy had found possible senior loan providers for TRG (i.e. lenders who would take a first charge over the portfolio and lend TRG funds equal to some 70-75% of its value), but he still needed to find a provider of higher risk lending (referred to as “mezzanine lending”), secured by a second charge over the portfolio ranking behind the first charge in favour of the senior loan provider, in order to fund the balance of the purchase price for the West Block and the refinancing of the East Block. Investec was a well-known provider of such mezzanine lending for property development transactions.[6]TRG’s then solicitors were Messrs Glinert Davis. Mr Murphy had a particular connection with that firm, because his sister Ms Hibberd (now Ms Biagi, by which name I shall refer to her throughout this judgment) was a solicitor there. Daniel Glinert of Glinert Davis had contacts with Investec, so Mr Murphy arranged for Mr Glinert to approach Investec to see whether it would be interested in providing mezzanine lending of £2.5m for the development. Mr Glinert wrote a letter dated 21 July 2004 to Marc Weinberg at Investec setting out summary details of a proposal that Investec provide mezzanine lending of £2.5m for a term of 30 months to be discharged at the end of that term by a payment of £4m. The disparity between the sum lent and the sum repaid reflected the risk inherent in mezzanine lending in relation to a property development of the kind in question.[7]Investec was interested. Mr Weinberg and Michael Donovan of Investec met Mr Murphy and a surveyor representing TRG, Tim Clark. They also visited the site of the development. TRG supplied Investec with detailed information about the project.[8]On 5 August 2004 Mr Weinberg sent Mr Murphy an e-mail asking for, amongst other things, simplified cash flows to be provided and a breakdown of the £8m profits which TRG had suggested could be made from the development. Mr Clark responded on 9 August 2004 on TRG’s behalf. He attached some new cash flows to his reply, as requested. He wrote:
“The breakdown of profits is as follows - £3.75m residential gains, £5.75m commercial gains. As at completion none of the commercial gains are included in the projected figures.”
The cash flows included an exit return analysis which showed a projected property valuation for the portfolio as at December 2007 of about £20.2m. The cash flows showed senior debt of £12.25m, mezzanine debt from Investec of £2.5m and further subordinated lending (including what was described as “equity” from Mr Murphy) of about £1.2m. In addition, an investment return was expected on the residential element within the development. This was projected to be in the order of about £3.75m.[9]By a letter dated 10 August 2004, Investec Bank (UK) Limited made an indicative offer to provide mezzanine funding to TRG subject to approval by its credit committee. (In due course the relevant loans were made by another company in the Investec group, namely the Claimant; in this judgment it is not necessary to distinguish between these companies and for convenience I refer to them both as Investec). The indicative offer proposed mezzanine lending of £2.5m by Investec for a term of three years to assist with the acquisition of the portfolio for a consideration of £16.35m (i.e. covering both the East and West Blocks). There was to be an arrangement fee of 1% of the value of the loan. The letter also stated that there should be:
“A profit share of 35% of the net profit after all costs with a minimum fee of £500,000 at expiry of the Loan.”
Investec was to be protected by a second legal mortgage over the portfolio, ranking behind the first mortgage in favour of the provider of the senior loan.[10]On 11 August 2004 Mr Murphy sent Mr Weinberg some additional information by e-mail. This included an exit analysis showing the anticipated valuation of the portfolio as about £19.6m in December 2007 which (after deduction of combined senior and mezzanine lending of £14.5m) gave an equity or profit value of about £5.1m, excluding any return on the residential elements in the project. The information Mr Murphy provided also showed expected rents of the order of about £1.1m a year against interest payable on the senior and mezzanine lending of about £920,000 a year. A degree of coverage of interest by anticipated income of the order of about 20% would be normal in a transaction of this kind, to give the lenders comfort that the interest payments would indeed be met.[11]In the course of July and August 2004 TRG negotiated with various potential providers of senior lending. In the event, however, it was Investec which was chosen as the provider of the senior loan as well as a mezzanine loan. On 26 August 2004 Mr Weinberg and others presented an application to Investec’s credit committee for a loan in the total sum of £14.75m, made up of a senior loan of £12.25m and a mezzanine loan of £2.5m. This lending was proposed in order to refinance the East Block for £3.8m and to fund the purchase of the West Block for £10.45m. The terms proposed involved payments of interest, an upfront fee and a profit share in these terms:
“35% of the net profit after all costs with a minimum fee of £500,000 at expiry of the Loan.”
The application contemplated an exit at the end of three years. The value of the East Block was estimated at £6.15m. The application referred to the scope for improving the commercial rental values within the development and improving its capital value. It also referred to the residential planning gains which it was hoped would arise from a substantial residential development as part of the East Block. The application referred to planning permission dated 9 June 2004 for the development of part of the East Block and to further applications for planning permission. There was also a reference to a potential further phase of the development to expand holdings close to the West Block. This was referred to as “phase 4”, but it was stated not to form part of the application. The financial analysis set out in the application referred to purchase costs for the portfolio of about £16.3m, proceeds of sale of the commercial development of about £20.4m and net proceeds from residential sales of about £3.6m. On these projected figures, and making allowance for interest charges and rental receipts, the analysis showed a profit share for Investec of about £2.7m at the end of the three year term and for TRG of about £5m at the end of that term, reflecting the 35% / 65% division between them. These figures reflected information provided by TRG and were broadly in line with the predicted profits previously indicated by TRG.[12]On 26 August 2004 Investec’s credit committee approved the transaction in principle. One of the conditions set out in the approval was, “the client is to receive no coupon [i.e. interest] on his equity in the profit share calculation.” The reference to “equity” related to the finance which it was expected TRG would provide (from its own resources or borrowings from third parties) in relation to the purchase of the West Block and the refinancing of the East Block.[13]Investec indicated to TRG that it would issue a letter of offer. By letter dated 15 September 2004 from Glinert Davis to Investec it was indicated that Mr Murphy was proposing to exchange contracts with Portsmouth CC on the strength of the letter of offer from Investec. The same day Investec sent TRG a facility letter (“the Facility Letter”) referring to senior lending (“loan 1”) of £12.25m and mezzanine lending (“loan 2”) of £2.5m to assist with refinancing the East Block and purchasing the West Block. Both loans were to be available for a period of three years. The letter provided that prepayments of the whole or part of the loans could be made at any time. It provided that a non-refundable management fee of 1% (£147,500) would be payable. Under clause 8, the Facility Letter provided for an exit fee in these terms:
“[Investec] is to receive an Exit Fee of 35% of the profit with a minimum of £500,000 on re-sale or refinancing of the properties [in the portfolio] in accordance with the agreed business plan. The profit is defined in [Investec’s] Exit Fee agreement.”
Although reference was made there to Investec’s Exit Fee Agreement, no such document was provided at this stage. It was negotiated subsequently. The Facility Letter provided for TRG to give Investec a first legal mortgage over all the properties in the portfolio as security for the loans.[14]On 23 September 2004 Mr Murphy countersigned the Facility Letter for TRG and paid the first part of the management fee which became due. The remaining part of the management fee was paid upon initial drawdown.[15]By letter dated 24 September 2004 from Glinert Davis to Investec, Mr Glinert referred to an earlier telephone conversation he had had with Mr Weinberg and recorded:
“With regard to the exit fee, you have kindly confirmed that you will let me have a copy of the draft profit share/exit fee agreement. We discussed and agreed the basic principle is that where a unit is sold off or a long lease granted at a premium and [Investec] has attributed a collateral security value to that property, the appropriate sum needs to be repaid to [Investec] on completion of that sale. Any profit over and above the security value is to be available for distribution as to 35% to [Investec] and 65% to [TRG].”
It appears from that letter that the discussion at this stage contemplated that there might be sale of individual units within the portfolio rather than a sale of the whole, and that part of the overall exit fee would become payable on such part sales.[16]On 27 September 2004 Mr Clark for TRG sent Mr Donovan a copy of TRG’s business plan for “Southsea Village”. This addressed in some detail the proposed steps in the development of the West and East Blocks from 31 October 2004 until 30 September 2007 (i.e. over the anticipated three year period of the loan facility). The business plan was discussed at a meeting between Mr Clark and Mr Donovan on 29 September 2004.[17]On about 27 September 2004 Mr Weinberg sent to Investec’s solicitors, Messrs Eversheds, a draft of the proposed EFA. However, this was based on an old precedent which had been superseded, so Ms Joanne Canning, the associate solicitor at Eversheds responsible for the banking aspects of the transaction at Eversheds, produced a revised draft based on the most up-to-date precedent. Ms Canning checked this draft with Investec and on 29 September she sent it to Ms Biagi for TRG. That draft contained a definition of “Exit Fee” as:
“the amount by which the aggregate of Net Sale Proceeds or the Estimated Net Sale Proceeds (as the case may be) and the Net Rental Income exceed the aggregate of the Completion Costs, (Planning Costs), (Management Costs), Development Costs and Interest.”
This was the relevant definition of the profit which was to be shared between Investec and TRG under the terms of the proposed EFA. Clause 8 of the draft (which provided for distribution of net sale proceeds upon a sale) stipulated that the net sale proceeds or estimated net sale proceeds should be distributed, first, by repayment to Investec of the debt due to it and, second, by distribution of the exit fee as follows:
“8.2 The Exit Fee shall then be distributed as follows: 8.2.1 If the Profit is between zero and £500,000, [Investec] shall receive all of the Exit Fee; 8.2.2 If the Profit is £500,000 or above, [Investec] shall receive £500,000 and 35% of any excess amount over £500,000” 8.2.1 If the Profit is between zero and £500,000, [Investec] shall receive all of the Exit Fee; 8.2.2 If the Profit is £500,000 or above, [Investec] shall receive £500,000 and 35% of any excess amount over £500,000”
[18]Mr Murphy informed Investec in early October that the 10% deposit payable to Portsmouth CC in respect of the West Block in the sum of £975,000 would be funded by a loan from Tristmire Limited (“Tristmire”), which would require a second charge over the portfolio in respect of its loan. Investec indicated to Glinert Davis for TRG that Tristmire’s legal charge would have to rank behind Investec’s charge and that Investec should have unlimited priority. Eversheds for Investec asked for details of the proposed second chargee and their solicitors, as Eversheds would need to prepare a deed of priority. Ms Biagi provided these details, identifying Tristmire and their solicitors by letter of 6 October 2004.[19]By report dated 7 October 2004 the surveying firm C B Richard Ellis provided Investec with a valuation of the portfolio in the sum of £16,695,000.[20]Also on 7 October Ms Biagi wrote to Investec indicating that exchange of contracts with Portsmouth CC in relation to the West Block was proposed to take place the next day, and seeking comfort that there were no outstanding points from Investec which might provide any impediment to the eventual provision by Investec of the loan funds necessary to complete the transaction. The same day, Eversheds confirmed that Investec would consent to the creation of a second legal charge in favour of Tristmire subject to Investec having unlimited priority and Tristmire entering into an appropriate deed of priority.[21]In the event, exchange of contracts with Portsmouth CC was postponed until 11 October 2004. The same day, TRG entered into a loan agreement with Tristmire (“the Tristmire loan agreement”). The Tristmire loan agreement provided for a loan of £975,000 by Tristmire to TRG for a period of three years. The purpose of the loan was stated to be to assist TRG in the purchase of the West Block. The agreement provided for the loan to be discharged at the end of the three year term by a payment of £3m (“the Redemption Payment”), which was stated to be “inclusive of the Loan and all and any interest on the Loan”. Clause 5 of the Tristmire loan agreement was in these terms:
“5.1 [TRG] may repay part of the Redemption Payment during the third year of the three year period following the date of advancement of the Loan up to the Loan Repayment Date by, inter alia, the payment by [TRG] to [Tristmire] of Sixty Five per centum (65%) of the net sale proceeds of any of the [portfolio] or parts thereof that are sold during that period and in this context “net sale proceeds” means the sums remaining after payment to/of:- (i) the first mortgagee of the relevant property of the amount required by the first mortgagee to secure the release of the relevant property and (ii) all legal and professional fees wholly and exclusively incurred in relation to the sale and release of the relevant property and (iii) the profit element (if any) payable to the first mortgagee under the first mortgage from time to time of any property sold or released and (iv) any payments made to tenants to secure surrenders or lease variations in relation to any such property and (v) any construction, demolition or fitting out costs reasonably incurred in connection with the sale and/or release of the relevant property. 5.2 [Tristmire] acknowledges that [TRG] is entitled to sell or lease the [properties in the portfolio] or parts thereof from time to time and [Tristmire] shall on the occasion of each such lease or sale immediately do all things necessary to release the relevant property or part thereof from its legal charge … and for the avoidance of doubt [Tristmire’s] consent is not required for any such sale or lease provided that [TRG] utilises the net sale proceeds of such sales and/or leases towards the acquisition of further property interests arising out of the [portfolio] or other properties in Palmerston Road, Southsea aforesaid or the net sale proceeds of such sales and/or leases are applied in reduction of the first mortgage on the [portfolio] from time to time.”
[22]TRG also eventually entered into a legal charge dated 22 October 2004 in favour of Tristmire (“the Tristmire charge”) in relation to the Tristmire loan and the Redemption Payment. It provided for Tristmire to have the benefit of a second charge over the portfolio behind the first charge in favour of Investec. Clause 5.9 of the Tristmire charge provided as follows:
“[TRG] must not sell or dispose of the premises or any part thereof without effecting payment of the Redemption Payment in accordance with the [Tristmire loan agreement].”
[23]Completion of the purchase agreement with Portsmouth CC was set for 22 October 2004.[24]On 12 October 2004 Ms Canning sent Ms Biagi and Tristmire’s solicitors a draft of the proposed deed of subordination asking that their respective clients should sign it. She also wrote to Ms Biagi to inquire whether the draft EFA was agreed.[25]At this stage, Ms Biagi was dealing with a considerable quantity of documentation in relation to the transactions involving TRG in relation to the development and it is not surprising that the proposed EFA came some way down the list in terms of priority in dealing with it. By e-mail on 15 October Ms Canning chased for Ms Biagi’s comments as soon as possible during the course of the day, as Mr Weinberg was due to go on holiday and wanted to get the EFA sorted out before he left.[26]Also on about 15 October, Ms Biagi spoke to Mr Murphy about the terms of the draft EFA which Ms Canning had sent. There were two points of particular significance for Ms Biagi, on which she advised Mr Murphy and which were reflected in the marked up version she sent to Ms Canning later on 15 October. First, in the definition of “Exit Fee” (para. [17] above) Ms Biagi deleted the words, “and the Net Rental Income”, as a plus item in the profit calculation. Her manuscript comment against this deletion was in these terms:
“The rents will be used to pay the mortgage interest and are not part of the equation”
. Secondly, in relation to clause 8.2 (para. [17] above) she was concerned that the draft EFA appeared to provide for a payment of £500,000 (or any profit realised below that figure) in respect of each part sale of the portfolio which might be effected before the end of the term. That was not in accordance with her or Mr Murphy’s understanding of the commercial arrangement between TRG and Investec. Against clause 8.2, therefore, she had included the written note, “The principle is agreed as to the final position your client will be in, but we understood that on every sale throughout the term Investec would be entitled to 35% of net profit. Obviously this clause cannot apply on each and every sale during the term because [TRG] would have to pay £500,000 every time. Can you please consider?”[27]Ms Biagi advised Mr Murphy to take up these points directly with Mr Weinberg. Mr Murphy telephoned Mr Weinberg on about 15 October to discuss them. Mr Murphy told Mr Weinberg that he could not agree a document which required TRG to pay Investec £500,000 every time it sold one of the properties in the portfolio or which inflated the profit figure under the agreement. Mr Weinberg said that he would speak to Eversheds about these points. A day or two later he called Mr Murphy to say that Investec would agree to TRG having a “cushion” of £928,571 of the whole profit after £500,000 had been paid to Investec. Although this was not spelled out in their conversation, it is clear that the logic of this was that Investec would receive the first £500,000 of profit which was realised, that TRG would receive the next £928,571 of profit which was realised (thus producing the 35% / 65% split in profits which was the foundation of their agreement), and that further profits realised beyond this would be split in accordance with that ratio. Mr Murphy was content with that proposal.[28]In this further conversation, Mr Murphy and Mr Weinberg did not discuss the question of the inclusion of “Net Rental Income” in the calculation of the profit under the proposed EFA. However, Mr Weinberg did make a comment along the lines that Ms Biagi had made a mistake. Mr Murphy did not understand the significance of this at the time. It seems likely to have been intended by Mr Weinberg to indicate disagreement about the position adopted by Ms Biagi in deleting reference to this element in the calculation of the profit in the marked up version of the draft EFA which she had sent Ms Canning on 15 October. Certainly, Investec did not accept the logic of Ms Biagi’s position on this point. The expectation of TRG and Investec was that rental income would largely be used to meet interest payments in respect of the senior and mezzanine lending. Therefore, since “Interest” on that lending was included as a minus item in the calculation of profit, Investec (and Eversheds) considered that the commercial logic was clearly that “Net Rental Income” should be brought into account as a plus item in that calculation – otherwise, the calculation of profit would be unacceptably diminished and skewed in favour of TRG. There was considerable force in Investec’s position on this, and it was not a point which it regarded as open to negotiation.[29]Meanwhile, Ms Canning worked through the marked up version of the draft EFA which Ms Biagi had faxed to her. She noted the proposed amendments which she could agree and marked for her own reference those which needed to be discussed with Ms Biagi. She marked that the deletion of “Net Rental Income” from the “Exit Fee” calculation had to be queried. So far as the difficulty identified by Ms Biagi with clause 8.2 was concerned, it was not Ms Canning’s understanding that it was intended that £500,000 should be payable on each part sale from the portfolio. Therefore, she was willing to accommodate Ms Biagi’s concern in that regard in the drafting. She did not, however, work out a new text for clause 8 before she spoke to Ms Biagi about the marked up version of the draft EFA, which she did by telephone on 18 October.[30]Neither Ms Canning nor Ms Biagi made notes of this conversation. In their evidence, both of them were doing their best to remember what had been said in a relatively short conversation several years ago. In these circumstances, in assessing the probable course of events, I place considerable weight on what seems to me to be the inherent commercial probability in relation to what was said.[31]Ms Canning’s recollection was that she raised with Ms Biagi the deletion of “Net Rental Income” in the definition of “Exit Fee” and the proper approach to when the exit fee would be payable; that after explaining to Ms Biagi Investec’s view on the “Net Rental Income” point Ms Biagi seemed to be content for that term to remain as a plus item in the calculation of the “Exit Fee”; that it was agreed that wording would be inserted to make it clear that £500,000 would not be payable by TRG every time a property in the portfolio was sold; and that Ms Biagi proposed that the words “Bank Debt amendment” referred to in para. [33] below should be included in the definition of “Exit Fee” to address that same point. Ms Biagi’s recollection was that on both issues Ms Canning simply said she would take instructions. Ms Biagi denied that she had put forward the Bank Debt amendment in the course of their conversation.[32]In my judgment, the true position lies between these competing recollections. I find that Ms Canning did put Investec’s position on the “Net Rental Agreement” point to Ms Biagi. I think it likely she did this because she knew Investec’s view on the point, the commercial logic of its position was strong, she was responding to a textual deletion made by Ms Biagi, Ms Canning had checked her instructions before the call and she was the person who made the call to respond to the points Ms Biagi had made (Ms Biagi had been chasing her to do so). It is very unlikely Ms Canning would have called and then simply have said that she would take instructions on a matter like this. I find that Ms Biagi did not respond to the arguments which Ms Canning put forward on this point, which left the impression that she did not disagree with them (although I think Ms Biagi was silent because she intended to discuss this further with Mr Murphy, rather than commit herself one way or the other in the conversation).[33]In relation to the timing for payment of the exit fee, I find that Ms Canning indicated in general terms that Investec accepted the general principle that TRG should not have to pay £500,000 each time a property in the portfolio was sold. She had checked Investec’s position on this before the call, and there was no reason why she would have failed to give this indication during the call. However, I do not accept Ms Canning’s evidence that Ms Biagi proposed that words should be inserted in the definition of “Exit Fee”, after the reference to the “Net Sale Proceeds” and “Estimated Net Sale Proceeds”, as follows:
“(after repayment in full of the Bank Debt)”
. The interpretation of these words as included in the final version of the EFA is the main point in issue between the parties. I refer to this insertion as “the Bank Debt amendment”.[34]Contrary to Ms Canning’s evidence, I think it is likely that she simply indicated that she would provide a further draft of the EFA which would accommodate TRG’s concerns on the issue regarding sale of properties in the portfolio on a piecemeal basis, and that Ms Biagi was happy with that. There is no evidence that either of them went into the conversation with any specific proposed text to deal with this issue, and it is unlikely that either of them would have attempted to draft amendments to a complicated agreement like the EFA in the course of their short conversation. It is much more likely that Ms Canning would have indicated that she would produce a further draft to deal with the issue: the draft EFA was an Eversheds draft of an Investec document, Ms Biagi had raised the point of principle in general terms and the ball was in Eversheds’ court to respond to it with detailed drafting proposals. Moreover, there is a copy of the marked up version of the draft EFA supplied by Ms Biagi to Ms Canning which bears some additional jotted notes by Ms Canning and ideas for textual changes. These reflect a concern to deal with the issue of piecemeal disposal of properties in the portfolio. It is likely they were made shortly after her conversation with Ms Biagi. They do not include any reference to the Bank Debt amendment.[35]After this conversation, Ms Canning turned her attention to producing a further draft of the EFA. By this time she had become aware that work had been carried out by Eversheds and Investec further amending the precedent EFA which Investec used in its banking business. In the light of this, she was unsure whether she should continue using the existing draft EFA, which had been the subject of discussion between her and Ms Biagi, or should translate the agreement into the terms of the new precedent used by Investec. She consulted her managing partner, who advised that he thought it would be better to translate the proposed EFA using the terms of the new precedent. Accordingly, that is what Ms Canning did.[36]The changes to the draft document that this entailed were so extensive that Ms Canning opted to provide a new clean draft of the revised terms of the EFA to Ms Biagi on 20 October. This undoubtedly created problems for Ms Biagi, who was confronted at short notice and without warning with a draft agreement in rather different terms from the draft that she had been working on. Nonetheless, she worked through the documents comparing them to satisfy herself that the new draft was acceptable.[37]The new draft EFA was in the terms of the final EFA which was eventually executed on 22 October 2004. The calculation of profit which had previously been contained in the definition of “Exit Fee” was now contained in the definition of a new term, “Surplus”, as follows:
“Surplus” means the amount by which the aggregate of Net Sale Proceeds or the Estimated Net Sale proceeds (as the case may be) (after repayment in full of the Bank Debt) and the net Rental Income exceeds the aggregate of the Completion Costs, Planning Costs, Management Costs, Development Costs and Interest.”
Thus, Ms Canning had re-inserted “Net Rental Income” as a plus item in the calculation. She had also inserted the text of the Bank Debt amendment. “Bank Debt” was defined to mean “all monies and liabilities (whether in respect of principal, interest or otherwise) due, owing or incurred by [TRG] to [Investec] under the Facility Letter”. I find that this was the first time that the Bank Debt amendment was raised between the parties.[38]Ms Biagi’s evidence was that she understood that the Bank Debt amendment meant that the “Bank Debt” was to be treated as a full deduction from the calculation of the “Surplus” and that she thought that this was being offered as a quid pro quo by Investec in return for re-inserting “Net Rental Income” as a plus item in the calculation. This was her subjective understanding of the language that had been used: she did not discuss it with Investec or Eversheds, although she did discuss it with Mr Murphy. Neither Ms Biagi nor Mr Murphy worked through the existing projected figures in respect of the development in relation to the calculation in order to see how it might work in practice.[39]Ms Canning, on the other hand, believed that the Bank Debt amendment simply provided comfort to TRG that there would be no exit fee payable if parts of the portfolio were sold off piecemeal by TRG. I find that this was her intention in including that amendment in the EFA. She also sought to accommodate TRG’s concerns in that regard by including clauses 6 and 7 of the new EFA, as follows: “6. When Exit Fee is Payable6.1 [Investec] shall be entitled to receive the Exit Fee in the following circumstances:-6.1.1 Immediately upon a sale of the whole of the Property; or6.1.2 Within 28 days of the Bank serving a Crystallisation Notice on the Borrower.6.2 Upon the Bank serving a Crystallisation Notice on [TRG], [TRG] shall within 2 days instruct the Valuer to carry out a Valuation to determine the Estimated Net Sale Proceeds. If any part or parts of the [portfolio – referred to in the EFA as “the Property”] have been previously sold the Net Sale Proceeds of such part(s) shall be added to the Estimated Net Sale proceeds for the purposes of calculating the Exit Fee.6.3 [Investec] shall not be entitled to serve a Crystallisation Notice prior to the Termination Date except in the event that the Bank Debt is repaid prior to the Termination Date.6.4 [Investec] shall be entitled to serve a Crystallisation Notice on [TRG] upon a repayment of the Bank Debt prior to the Termination Date PROVIDED ALWAYS that if [Investec] elects not to serve a Crystallisation Notice at the time of repayment of the Bank Debt this Agreement shall continue in full force and effect regardless of the fact that the Bank Debt may have been repaid and [Investec] shall continue to be entitled to receive the Exit Fee either upon a sale of the Property or upon [Investec] serving a Crystallisation Notice.6.5 In the event that a Crystallisation Notice is served and the Valuer calculates the Exit Fee based upon the Estimated Net Sale Proceeds, the Exit Fee shall be paid by [TRG] to [Investec] within 10 days of the Valuer calculating the Exit Fee. 7. Payment of Exit Fee [Investec] shall be entitled to receive the Exit Fee as follows:-7.1 The first £500,000 of any Surplus shall be paid to [Investec] by way of Exit Fee.7.2 Any Surplus in excess of £500,000 but less than £1,428,571 shall be retained by [TRG].7.3 35 per cent of the balance of any Surplus in excess £1,428,571 shall be paid to [Investec] by way of an Exit Fee.”

[Investec] shall be entitled to receive the Exit Fee as follows:-

[40]The executed EFA, dated 22 October 2004, was sent by Ms Biagi to Ms Canning under cover of a letter of 21 October 2004, together with other documents (presumably the executed version bore the later date that was the date on which it was to come into effect on completion of the purchase of the West Block from Portsmouth CC).[41]On about 22 October the executed deed of subordination between TRG, Investec and Tristmire was provided to Eversheds. That deed referred to the Tristmire charge, and it is likely that Eversheds saw a copy of that charge in the course of finalising the transaction. The Tristmire charge referred to the Redemption Payment of £3m payable by TRG in respect of the Tristmire loan.[42]TRG completed its purchase of the West Block from Portsmouth CC on 22 October.[43]There was then an interlude in which the loan relationship between Investec and TRG appears to have run smoothly. In May 2006 TRG switched its bank accounts from HSBC Bank to Clydesdale Bank. In relation to this, Clydesdale Bank wanted TRG to give a third charge over the portfolio in its favour, in the amount of £300,000, to cover any overdraft. Investec agreed to this in about late July 2006 on the basis that such a charge would be subordinate to its first charge over the portfolio.[44]However, the change in TRG’s banking arrangements caused problems to arise in relation to the smooth payment of interest in respect of the loans from Investec. On 25 August 2006 Mr Donovan e-mailed Mr Murphy to point out that TRG was now seriously in arrears in relation to its payment of interest in respect of the Investec loans. By a fax sent at about the end of August 2006 by Mr Murphy to Mr Donovan, Mr Murphy sought to explain how the situation had arisen. He stated that “the equity in the property has been building steadily for some time now”, and claimed that “at least £8m of equity” had accrued. Mr Donovan asked C B Richard Ellis for a desktop valuation of the portfolio, which they valued at £20.5m. That lent support to TRG’s claim.[45]On 30 August 2006 Mr Donovan, through his assistant Mr Irvine, put a further proposal to Investec’s credit committee to increase the mezzanine facility by £330,000 to cover TRG’s additional need for funds. This was put forward on the basis of what appeared to be the improved value of the portfolio (which had improved the value of Investec’s security) and the improved rental income in relation to the portfolio, which was then at a level of £1.126m p.a.. This proposal represented a helpful increase by Investec in its mezzanine loan facility at a time when TRG was experiencing cash flow difficulties. It was made without taking any additional security or increasing the amount of the exit fee which would be payable, to compensate Investec for the additional risk which it would assume. The proposed increase in the mezzanine loan facility was approved and was notified to TRG by a further facility letter dated 13 September 2006.[46]In about October 2006 TRG received an offer from Schroder Emerging Retail Property Trust (“Schroders”) for the West Block in the sum of £14.7m. On about 13 October Mr Clark for TRG informed Mr Donovan of this offer. Both TRG and Investec regarded this as a very good offer for the West Block and both were keen to proceed with it.[47]On 13 October Mr Donovan e-mailed Mr Murphy to schedule a meeting on Monday, 23 October with Mr Murphy and Mr Clark. He said:
“You need to come with a proposal in respect of apportioning the debt and part payment of the Exit Fee. Perhaps your accountants can help you with the calculation of the potential profit to date.”
[48]At this stage neither Mr Donovan nor Mr Irvine had gone back to the EFA to check its terms. They made the assumption going into the meeting that the EFA included provision for part payment of the exit fee when part of the portfolio was sold. In fact, however, this was not allowed for under clauses 6 and 7 of the EFA and by reason of the terms of the Bank Debt amendment. Mr Murphy was aware of this, and checked his understanding with Ms Biagi before attending the meeting.[49]At the meeting on 23 October Mr Murphy asked to be allowed to withdraw money (about £1m) from the sale proceeds to be received from Schroders in order to recoup costs that TRG and he had been incurring in relation to development of the portfolio. Since Investec held the first charge over the West Block, Mr Murphy understood that he needed Investec’s agreement to do this. I accept his evidence that he raised the fact that the EFA did not allow for early part payment of the exit fee at the meeting. I think it is likely he did so, since it was a powerful commercial negotiating point for him in trying to persuade Investec to allow him to withdraw the money he requested to emphasise that he too would be making a major concession in return by agreeing to make an early part payment of the exit fee. In that regard, I find that Mr Murphy proposed that his accountants should prepare figures to calculate an early part payment in respect of the exit fee payment. He said the figures should be ready by about mid-December. Mr Donovan and Mr Irvine, for their part, indicated that Investec would in principle be prepared to agree to release from the sale proceeds of some monies for TRG.[50]The parties also discussed how the Schroders sale proceeds should be apportioned as between the senior and mezzanine lending by Investec, and pending payment of the early part payment of the exit fee which Mr Murphy proposed to make in about December 2006. Mr Murphy pressed for the whole of the balance of the sale proceeds (after withdrawal of the monies which TRG requested) to be used to pay down as much of the outstanding senior and mezzanine lending as possible, to reduce the continuing interest payments which TRG had to meet. He and Mr Clark emphasised that the debt due to Investec would thereby be reduced to about £1.3m, secured against the value of the East Block of about £8m. Against this, Mr Donovan and Mr Irvine pressed for a significant part of the balance of the sale proceeds to be paid into an escrow account as a fund out of which the early part payment of the exit fee could be made, rather than being used to reduce TRG’s debt (and interest payments) to Investec. Contrary to a later claim in correspondence by Mr Clark and evidence from Mr Murphy that at the meeting Mr Donovan and Mr Irvine agreed with TRG’s proposal, I find that no agreement was reached on this point. There are a number of reasons for reaching this conclusion, which I set out below.[51]On 24 October Mr Irvine put a further proposal to Investec’s credit committee. This reflected the approach taken by Mr Donovan and him at the meeting on 23 October. It is very unlikely that Mr Irvine would have done this if there had in fact been agreement on TRG’s proposal at the meeting. The proposal which Mr Irvine put forward to the credit committee was that the sale proceeds should be used to reduce the senior and mezzanine loans from Investec by 63%, in line with the proportion of the original lending which related to the funds used to purchase the West Block (as against 37% attributable to the refinancing of the East Block). The proposal also recommended that the remainder of the net sale proceeds should be held in a blocked deposit account (i.e. in escrow) pending finalisation of the profit sharing calculations in relation to the West Block, estimated to give rise to an early exit fee payment of about £1.4m (i.e. about 35% of £5m of net sale proceeds in respect of the West Block). It was also proposed that the EFA should be redrafted to protect Investec’s position, allowing for a further 35% profit share relating to the East Block which would be due on the expiry of the loan term. It was noted that these proposals would leave residual debt in relation to the East Block of about £5.58m against a valuation of the security represented by the East Block of about £8m, which gave a healthy loan to valuation ratio of about 70%.[52]The credit committee approved Mr Irvine’s proposal, so on 25 October he e-mailed Mr Murphy to put the proposal to him on behalf of Investec. That e-mail did not lead to any protest by Mr Murphy that Mr Irvine had gone back on anything that had been agreed at the meeting on 23 October.[53]By e-mail of 27 October from Mr Murphy to Mr Donovan, Mr Murphy set out the detail of the sums which he and TRG wished to withdraw from the sale proceeds of the West Block as follows:
“£162,000 (approx) Schroders rental payment – assuming completion 31.10.06 £130,000 Barlow Lyde & Gilbert £282,000 Garner Wood & MSBL £100,000 Dental surgery works £320,000 Clydesdale £50,000 D. Murphy”
The £320,000 for “Clydesdale” was to provide for repayment of TRG’s overdraft with Clydesdale Bank and discharge of its third charge over the property. The £50,000 for Mr Murphy was explained by him shortly afterwards to be required to pay off an overdraft of £40,000 with NatWest Bank and general expenses, all in relation to the development of the portfolio. Mr Donovan responded to agree that these sums could be retained by TRG out of the sale proceeds and that TRG should account to Investec for the balance remaining. Mr Murphy’s proposal left a balance of some £13.67m of the sale proceeds. £50,000 D. Murphy”[54]The same day, Mr Clark e-mailed Mr Donovan in these terms:
“To confirm the payment arrangements to Investec that we agreed when we met. On completion The Retail Group Plc will pay Investec £13,750,000, which is to be used to pay off completely the Senior Debt of £12,250,000 and £1,500,000 of the Mezzanine Debt. This will leave an outstanding sum of £1,323,000 which is to be retained on a first charge basis over the eastern block of property, which I estimate to be worth £8,000,000. The £1,323,000 will continue to attract the Mezzanine Debt rate of interest. As agreed David Murphy will prepare all accounts for The Retail Group Plc and we will meet in early December to discuss the profit share.”
Mr Donovan replied shortly afterwards to say, “This is still under discussion with David [Murphy]” (i.e. he disputed that these arrangements had been agreed at the meeting).[55]Also on 27 October, Mr Murphy e-mailed Mr Donovan to compare the financial implications for TRG of the proposal in Mr Irvine’s e-mail of 25 October and “our proposal” (i.e. the TRG proposal made at the meeting on 23 October). Again, it is relevant to note Mr Murphy’s e-mail contained no assertion that an agreement had been reached at that meeting regarding the allocation of the proceeds of sale. On TRG’s proposal the balance of £13.67m would be used to pay off the whole of the outstanding senior loan of £12.25m and £1.42m of the mezzanine loan. That would leave £1.403m of the mezzanine loan outstanding. Use of the balance in this way would reduce the interest payable by TRG as far as possible. On the other hand, on Investec’s proposal, TRG would suffer a detrimental interest charge because of the difference in the interest that TRG would earn from monies in the escrow account as compared with the greater interest it would have to pay to Investec on the balance of the Investec loans which would be left outstanding. Mr Murphy pointed out that Investec would suffer part of this loss in relation to their share of profits under the EFA. He continued:
“I do not mind if a time limit of three months is used to hurry up all sides to come to an agreement for the profit share. Also I am very wary of interest rate rises that are on the way and would not like to be at any more risk than I have to by having continuing large mortgage… It is imperative we resolve this issue quickly as any delay could mean I could lose this deal with Schroders…especially with interest rate rises and the insistence from Schroders that this deal is completed quickly.”
[56]Later on 27 October Mr Donovan replied to this e-mail to suggest that the difference in interest costs was not as great as Mr Murphy suggested and inviting him to reconsider Investec’s proposal “as we already have credit approval [for] the proposal”.[57]On 30 October 2006 Mr Murphy replied to Mr Donovan in these terms:
“…Thanks for your latest figures on your proposal… I would like to propose another option which may be acceptable to you. This option would be more suitable for me as I am minded to sell the eastern block once we have completed the transaction for the western side. On advice from Tim, it is best to sell this asset as shortly as possible before the department stores vacate and there is a downward move in rents. The air rights, if developed, would not compensate the difference in the drop in investment value if rental values dropped £10 or £15 per sq ft (please speak to Tim about this if required).. Apart from investing a further £2 or 3 million it seems to be too much risk… I would propose that we go along with what we originally agreed at our meeting to pay off the senior debt and the difference off the mezz debt…To make this deal more acceptable to you, I could make a £500k payment to Investec towards the total profit share now and then sort out the up to date figures for remaining profit share within 3 months.. I do not want to have money left on a escrow account, especially when rates and values can go up or down, also it will cost me an extra £16k per quarter to do it this way.. This proposal means that I will have approx £1.91m left on mezz debt with you having first charge on a £8m asset.. It is important that we sort this out asap as Schroders insist on completing tomorrow.. Any delay and I will lose this deal…”
[58]This proposal, involving immediate payment of £500,000 out of the sale proceeds on account of the exit fee, was acceptable to Investec and was agreed.[59]Eversheds were instructed to draft a new exit fee agreement to cover the position. A draft was prepared by Ms Beth Evans at Eversheds. This was forwarded by Investec to Mr Murphy on 2 November 2006. He forwarded the draft agreement to Ms Biagi, and she responded to it by e-mail dated 2 November to Ms Evans. Ms Biagi pointed out that the Facility Letter allowed for prepayments of the loans under it and did not provide for allocation by Investec to other accounts. She also pointed out that the exit fee under the EFA did not have to be paid until the whole of the portfolio was sold or following service of a Crystallisation Notice after the three year term had expired. She maintained that TRG was not obliged to pay Investec the net sale proceeds but wished to do so to redeem the loans (save for a relatively small balance). She emphasised the importance of a speedy resolution in view of the urgent timetable imposed by Schroders and a requirement for an executed DS1 (i.e. the necessary certificate for the Land Registry notifying it of Investec’s consent to removal of notice of its first charge over the West Block) to be available on completion. She said:
“Notwithstanding the fact that the Exit Fee is not payable for at least another 12 months, and in order to secure a quick “turn round” by your client, (as apart from anything else, speed is the purchaser’s overriding requirement), my client then agreed with yours that on completion of the sale of the western block he would pay £500,000 on account of the Exit Fee, which is money that he would otherwise use to reduce the lending with your client. This is therefore costing him interest, which he should not have to pay. There is no need to re-cast either the facility letter or the exit fee agreement. All that is needed is a side letter to record the prepayments that are being made and the basis upon which they are being made and I prepared such a letter this afternoon, as you will see below.”
She complained at the delay which had been caused by the demand for the documents which might result in the sale being lost. She concluded by emphasising the extreme urgency of the matter. She enclosed a draft side letter dated 2 November 2006.[60]After some negotiation the side letter was put into an agreed form by about 3 November. It was first signed by the parties on 6 November 2006, but Schroders then dropped the price that it was prepared to pay for the West Block by £200,000 so a revised form of side letter reflecting this was signed on 17 November 2006. That letter was addressed to Investec and set out that TRG had agreed to forward to Investec on completion the sum of £12,957,000 from the net sale proceeds by way of prepayment of loans 1 and 2 referred to in the Facility Letter to redeem loan 2 (the mezzanine loan) in its entirety and the balance to be assigned to loan 1. The letter continued in these terms:
“5. Notwithstanding the terms of the [EFA], we [i.e. TRG] have agreed to make a further prepayment to you of £500,000 on account of the final calculation of the Exit Fee, being the sum referred to in paragraph 7.1 of the Exit Fee Agreement. 6. Save as varied herein, the Facility Letter and the [EFA] continue as before, mutatis mutandis, and in particular, as provided by clause 6.1 of the [EFA], the remainder of the Exit Fee is not payable until the sale of the whole property, i.e. the entirety of both the Western Block and the Eastern Block or following the service of a crystallisation notice after 21st October 2007.”
[61]After receipt of that letter Investec supplied TRG with the executed form DS1 which enabled TRG to conclude the sale of the West Block to Schroders under a sale contract dated 28 November 2006 and completed the same day.[62]On 30 November 2006, Investec received £13,457,000 from the sale proceeds which was used to discharge the mezzanine loan (with interest), to repay about £10m of the senior loan and as payment of £500,000 in respect of the exit fee.[63]In December 2006 Ms Biagi carried out detailed work to draw together the figures to calculate the part payment of the exit fee in relation to the West Block, as had been proposed by Mr Murphy at the meeting on 23 October 2006. It was while doing that work that she came to appreciate that on her interpretation of the definition of “Surplus” in the EFA no exit fee would be due. This was because she interpreted the definition of “Surplus” (and in particular the Bank Debt amendment) to mean that one added together “Net Sale Proceeds” in respect of the West Block and “Estimated Net Sale Proceeds” in respect of the East Block, then deducted the full amount of the “Bank Debt” (i.e. the principal, interest and other charges due from TRG to Investec under the Facility Letter), then added the “Net Rental Income”, then deducted the “Completion Costs”, “Planning Costs”, “Management Costs”, “Development Costs” and “Interest”. Ms Biagi (who had moved to a new firm of solicitors, Barlow, Lyde & Gilbert, which was now acting for TRG) wrote to Investec on 23 January 2007 to say that TRG wished to refinance the remainder of its portfolio and so intended to redeem the remainder of loan 1 (the senior lending) by 31 January 2007. Relying on her interpretation of the definition of “Surplus”, she stated that no exit fee was due, set out a calculation to demonstrate that and provided five lever arch files of calculations and accounting information to support that calculation. On the basis that no exit fee was payable, she stated that the sum of £500,000 which TRG had paid to Investec on account of the exit fee should be repaid.[64]Meanwhile, TRG also entered into negotiations with Tristmire with a view to discharging the Tristmire loan and the Redemption Payment in respect of it.[65]Investec did not agree with Ms Biagi’s claim that no exit fee was payable. Correspondence ensued between solicitors, culminating in a detailed letter from Eversheds for Investec dated 14 February 2007. This stated that the EFA contained “an error in [its] drafting” and that it did not reflect the common intention of the parties. The letter maintained that the EFA should be rectified so as to remove the Bank Debt amendment from the definition of “Surplus”. Barlow, Lyde & Gilbert wrote on 20 April 2007 to maintain that TRG’s case was that the wording of the EFA was clear and unambiguous and that there was no good case for rectification. The letter also sought to set out that there were other extensive deductions to be made in the calculation of the “Surplus”, including large figures in relation to interest and costs associated with the Tristmire loan and capital gains tax (“CGT”). These items and others have remained in dispute between the parties since then.[66]TRG eventually refinanced the East Block in June 2007 and discharged Investec’s loan on 5 June 2007, whereupon Investec’s charge over the balance of the portfolio comprising the East Block was cancelled.[67]By letter dated 6 June 2007 from Investec to TRG, Investec gave a Crystallisation Notice for the purposes of the EFA, requiring the exit fee due under that agreement to be calculated and paid. The letter referred to the requirement that a valuer be appointed to determine the “Estimated Net Sale Proceeds” in respect of the East Block. In due course, King Sturge LLP was appointed as valuer for these purposes and produced a valuation report valuing the East Block as at 25 June 2007. This valuation was accepted by both sides as the basis for calculation of the “Estimated Net Sale Proceeds” of the East Block.[68]One matter in particular in the valuation report calls for attention. At paragraph 3.2.7, King Sturge recorded:
“3.2.7 The site for the Medical Centre has already been sold on a 999 year lease at a peppercorn rent and therefore does not form a valuable asset to the remaining property. You should however ensure that no existing occupiers have their rights infringed which could affect the stability of the income from the remaining units.”
[69]It emerged from evidence at the trial that the proposed site for the medical centre was a car park area located at the rear of the East Block. TRG entered into a contract with a medical practitioner to design and build a medical centre on that site for him in return for an advance payment (which by agreement between them took the form of the transfer to TRG of another property owned by him at 67 Albert Road, Southsea, which Mr Murphy valued at about £300,000) together with a further obligation to make a payment of £129,000 when the works were complete. According to Mr Murphy’s evidence, the cost of designing and building the surgery would be roughly equivalent to the value of 67 Albert Road and the further payment of £129,105, so that in broad terms the development of the medical centre would be financially neutral so far as the overall value of the development of the East Block was concerned.

Interpretation of the EFA

[70]I turn now to address a number of issues which have arisen between the parties concerning the proper interpretation of the calculation of the “Surplus” which is set out in the EFA. Unsurprisingly, TRG contends for a wide interpretation to be given to the various elements in the calculation which are minus items, while Investec argues for a narrow interpretation of such elements. The most important point in dispute is whether the Bank Debt amendment, in the definition of “Surplus”, sets out a minus item at all, such as to require the deduction of the full amount of the “Bank Debt” in the calculation, as well as the deduction of “Completion Costs” and so on.[71]The parties were in agreement as to the proper approach to the construction of the EFA as a matter of law. On familiar principles, an objective approach is to be applied. A useful summary of the law is given by Lawrence Collins LJ in Chartbrook Ltd v Persimmon Homes Ltd [2008] EWCA Civ 183 at [85]-[86], as follows:
“85. The starting point is not controversial. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. Subject (a) to the requirement that the background should have been reasonably available to the parties, and (b) the exclusion of previous negotiations of the parties and their declarations of subjective intent, it includes anything which a reasonable man would regard as relevant and which would have affected the way in which the language of the document would have been understood by a reasonable man: Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; BCCI v Ali [2002] 1 AC 251, 269; and also Mannai Investment Co Ltd v Eagle Star Life Assurance Ltd [1997] AC 749, 779. 86. If a semantic analysis of words in a commercial contract leads to a conclusion which flouts business common sense, it must be made to yield to business common sense: Antaios Cia Naviera v Salen Rederierna AB [1985] AC 191, 201, per Lord Diplock. This does not mean, however, that the language can be rewritten in order to make the language conform to business common sense: Co-operative Wholesale Society Ltd v National Westminster Bank plc [1995] 1 EGLR 97.”
[72]The particular significance of the application of an objective approach to construction of the EFA in the present context is that the subjective understandings of Ms Biagi and Mr Murphy, on the one side, and of Eversheds and Investec on the other, regarding the interpretation of the definition of “Surplus” in the EFA are not relevant to the proper interpretation of the EFA to be arrived at by the Court. I have found that Ms Biagi considered the effect of the insertion of the Bank Debt amendment to be to create a further minus item in the calculation of “Surplus”, and that she discussed that with Mr Murphy. However, that remained their subjective understanding, which was not communicated at the time to Investec, and does not control the proper interpretation to be given to the definition of “Surplus” in the EFA. Similarly, Eversheds’ letter of 14 February 2007 (para. [65] above) was written on the basis of the subjective understanding of the writer, a solicitor in Eversheds’ litigation department, formed well after the making of the EFA, that the true meaning of the Bank Debt amendment in the definition of “Surplus” was to create a minus item in the calculation. But, again, that does not control the proper interpretation of the EFA.[73]I have found that Ms Canning’s understanding of that amendment, which she inserted into the definition of “Surplus”, was that it did not create a further minus item but only provided clarification and comfort for TRG that the exit fee would not be payable until after the whole development was sold or re-financed and the entirety of the sums due to Investec under the Facility Letter were repaid. But Ms Canning did not communicate that understanding to Ms Biagi, so again it is not something which controls the proper interpretation of the EFA.[74]In construing the EFA, I have to have regard to the words used by the parties in the EFA, and give them the objective meaning which would be given them by a reasonable person located in the factual context in which the parties were positioned at the time of making their agreement.[75]The parties also agreed that another part of Lawrence Collins LJ’s judgment in Chartbrook Ltd v Persimmon Homes, at [129]-[130], correctly states a further principle relevant to the construction of a contract: “129. The other most directly relevant decision at first instance is Jones v Bright Capital Ltd [2006] EWHC 3151 (Ch). The issue was as to the meaning of a paragraph in a defence in a claim about pension rights, which had been incorporated as a term of the settlement of those proceedings. Sir Andrew Morritt C referred to the argument for the claimant that correspondence was admissible to show that the parties had used words in a special sense or to show the commercial business genesis or object of the agreement. He cited Prenn v Simmonds, Investors Compensation Scheme Ltd v West Bromwich Building Society, and The Karen Oltmann, and went on (at [24]): ‘In my view each of the letters in questions is admissible on the issue of construction. They show the genesis and subject matter of paragraph 38(3) of the defence which became a term of the Compromise. They show the connection between the actuary’s calculations and that paragraph and explain the figures and other terms which appear in it. None of them is relied on as indications of subjective intention and on the face of them they are not objectionable on that account. The mere fact that they were written in the course of inter-solicitor correspondence seeking to agree a redundancy package is not, in my judgment, a sufficient objection.’ 130. He then went on to say that none of the letters added a great deal on the issue of construction (at [25]), but (at [41]) used them to determine what he described as “the subject matter of discussion” to show that what the parties were negotiating about was extra scheme pension (attracting pension increases) rather than a flat rate annual payment. A literal reading of the document would not have led to that result. This was not a “private dictionary” case. The use of the correspondence was justified on the basis that it showed the genesis and object of the provision and provided a ground for treating the parties as having negotiated on an agreed basis.” ‘In my view each of the letters in questions is admissible on the issue of construction. They show the genesis and subject matter of paragraph 38(3) of the defence which became a term of the Compromise. They show the connection between the actuary’s calculations and that paragraph and explain the figures and other terms which appear in it. None of them is relied on as indications of subjective intention and on the face of them they are not objectionable on that account. The mere fact that they were written in the course of inter-solicitor correspondence seeking to agree a redundancy package is not, in my judgment, a sufficient objection.’[76]Accordingly, in interpreting a contract, regard may be had to the content of the parties’ negotiations to establish “the genesis and object” of a provision. This seems to me to be a relevant part of the factual matrix, since if the parties in the course of their negotiations are agreed on a general objective which is to be achieved by inclusion of a provision in their contract, that objective would naturally inform the way in which a reasonable person in the position of the parties would approach the task of interpreting the provision in question. I return to consider the relevance of this further principle at paragraphs [82]ff below.[77]Certain of the difficulties in interpreting the EFA stem from the fact that it was adapted from a standard form agreement suitable for a simpler development situation, in which one property would be acquired for development using funds provided by Investec and Investec would share in the profits from that development. In such a case, working out the profit on the transaction in which Investec should share would be a comparatively straightforward task. But in the present case the situation was more complicated, and the standard form agreement had been modified in an effort to deal with this.[78]TRG had acquired the properties in the East Block piecemeal over a period of about a year and a half before the transaction with Investec, using monies borrowed from other sources. The immediate reason TRG required funding in July 2004 was to take advantage of an opportunity to buy the West Block from Portsmouth CC. At the same time, TRG wished to re-finance its investment in the East Block. Its commercial objective was to treat the West and East Blocks as a potential unified development. But it was also contemplated by both parties from the outset that, if good opportunities arose to sell off individual properties within that development, TRG might do so.[79]There were, therefore, differences from a more usual, simple development transaction to which the standard form of EFA would apply. Two were of particular significance. First, part of the development to which the agreement was to apply had been acquired some time before Investec participated in the investment, but the profit sharing arrangement was to apply to the whole of the development. That required some method for working out the profit element in which Investec would share in relation to the previously acquired properties. Secondly, the parties had to consider what should happen if TRG sold off part of the overall development, rather than treating it as a single whole. These features of the present case are reflected in a somewhat uneasy tension in the EFA which was entered into by Investec and TRG.

The interpretation of the Bank Debt amendment

[80]The most significant matter in dispute between the parties concerns the effect of the Bank Debt amendment in the definition of “Surplus” in the EFA. TRG submits that the amendment creates a further minus item to be taken into account in the calculation of the “Surplus”. Investec submits that, on proper construction, the amendment does not create a further minus item, but merely stipulates that no “Surplus” can arise for sharing by way of an exit fee until the Bank Debt has been repaid.[81]In my judgment, Investec’s submission is correct. It is convenient to deal with indicators in the factual matrix which support this conclusion before turning to the detail of the provisions of the EFA.[82]As regards the factual matrix, the principle identified in paras. [75]-[76] above is significant, for two reasons. First, in documents passing between the parties from an early stage the general object of the provision for an exit fee in respect of the mezzanine loan to be provided by Investec was stated to be to provide Investec with “A profit share of 35% of the net profit after all costs …” (see the indicative offer of 10 August 2004: para. [9] above) and “35% of the profit” (see the facility letter of 15 September 2004, signed by TRG on 23 September 2004: para. [13] above). The profit sharing nature of the proposed exit fee arrangement was confirmed in the letter from Glinert Davis to Investec of 24 September 2004 (para. [15] above).[83]In the context of a property development transaction, the profit which it is hoped will be made is given in broad terms by deducting the price at which the developer acquired the property (which will very often be paid out of monies borrowed by the developer) and the costs of work carried out in developing it (which will also often be paid out of monies borrowed by the developer) from the final price at which the developer sells the property. One does not deduct from the final sale price the price for which the developer acquired the property and then also deduct the amount of the borrowing which enabled it to pay that price. That would involve an impermissible element of double-counting on the minus side of the profit calculation. Similarly, one does not deduct from the final sale price the developer’s costs of development works and then also deduct the amount of the borrowing which enabled it to meet those costs. That again would involve an impermissible element of double-counting on the minus side of the profit calculation. There was nothing said or done in the negotiations up to the making of the EFA which indicated any departure from this common objective to create an agreement which provided for a 35% profit share for Investec out of the three year loan transaction. This is an important part of the factual background against which the EFA falls to be construed.[84]The commercial logic of this focus on the intended profit sharing nature of the EFA is brought out by consideration of the figures in the contemplation of the parties in July to October 2004 in relation to this particular transaction. TRG indicated to Investec that it contemplated a profit of the order of about £8m or £9m, based on an acquisition price of about £16.4m, rental income of about £1.1m p.a., interest payments in respect of the senior and mezzanine loans of about £900,000, and an anticipated value of the portfolio by the end of the three year term of the loans of about £24m: see paras. [8]-[11] above. The original borrowing from Investec would be £14.75m. On those figures there would be no “Surplus” at all to be shared under the EFA, if both the acquisition price of about £16.4m and the borrowing of £14.75m fell to be deducted from the final value of the portfolio of £24m.[85]In the light of all this, one would require very clear language in the EFA to indicate that the parties intended to depart from the natural approach to be adopted to working out the profit in relation to a property development to be shared with Investec, and to deprive the profit sharing arrangement of what the parties contemplated in their negotiations up to the making of the EFA should be its practical effect. The Bank Debt amendment is not expressed in language which gives any clear indication that the parties did intend such a departure.[86]Secondly (as a matter of lesser weight), in relation to the detail of what passed between Ms Biagi and Ms Canning between 15 and 22 October 2004, by Ms Biagi’s markings on the draft of the EFA supplied to Ms Canning on 15 October 2004 (para. [26] above), Ms Biagi identified two principal concerns which she had in relation to the drafting of the EFA, namely that she did not consider that “Net Rental Income” should be brought into the calculation of the exit fee and that provision needed to be included to ensure that the principle as to the final position Investec would be in was recognised without TRG being liable to pay £500,000 on each part sale from the portfolio. I have found that Ms Canning explained in their conversation (paras. [30]-[34] above) that “Net Rental Income” was an appropriate plus item, in light of the fact that “Interest” was included as a minus item. Ms Canning also accepted in that conversation that it was not the intention that TRG should pay £500,000 on account of the exit fee each time part of the portfolio was sold and that the draft EFA should be amended to remove that possibility. Ms Biagi did not suggest in either her manuscript proposals on the draft EFA or in that conversation that the definition of “Exit Fee” in the draft EFA (which became the definition of “Surplus” in the final version of the EFA) required to be amended to bring in “Bank Debt” as a further minus item. In this context, it is my view that a reasonable person in the position of the parties would have understood that the general object to be served by inserting the Bank Debt amendment was to emphasise for the benefit of TRG that no exit fee would be payable until the whole Bank Debt was repaid, and thereby to provide comfort that there would be no obligation on TRG to pay £500,000 in relation to each part sale of the portfolio before that time.[87]I turn to the terms of the EFA itself. There are, in my view, three indications that in the definition of “Surplus” the Bank Debt amendment was not intended to create a further minus item in the calculation there set out.[88]First, absent the Bank Debt amendment, the definition of “Surplus” already provides for deduction of the “Completion Costs” as a minus item. “Completion Costs” are defined as follows:
“the purchase price, stamp duty, Land Registry fees, valuation fees, legal fees and disbursements and agent’s fees reasonably and properly incurred by the Borrower in connection with the acquisition of the Property”
[89]In relation to the development of the portfolio, the “Completion Costs” to be deducted comprised the purchase price and other related costs of acquisition of the portfolio, the great bulk of which were funded – as regards the West Block - directly by Investec and – as regards the East Block – indirectly by Investec, since its loans covered the refinancing of the borrowing which TRG had incurred to acquire the East Block properties. If, by virtue of the Bank Debt amendment, the Bank Debt fell to be treated as a further minus item, that would involve a double counting of the borrowing from Investec as a deduction, which in my view would be commercially absurd and could not on any reasonable view have been intended: see para. [83] above.[90]Secondly, absent the Bank Debt amendment, the definition of “Surplus” already provides for “Interest” (i.e. interest paid by TRG to Investec under the Facility Letter) to be treated as a minus item. Therefore, if, by virtue of the Bank Debt amendment, the “Bank Debt” (i.e. the total sums payable to Investec under the Facility Letter) also fell to be treated as a further minus item, that would involve a double counting of the interest due to Investec under the Facility Letter as a deduction. That would again be wholly illogical, and the parties cannot reasonably be thought to have intended such a result.[91]Thirdly, the Bank Debt amendment is included in the text of the definition of “Surplus” in parenthesis and between “Net Sale Proceeds”/“Estimated Net Sale Proceeds” and “Net Rental Income”, which are all plus items which fall to be aggregated before the list of specified minus items (commencing with “Completion Costs”) begins. The fact that the amendment is in parenthesis suggests that it has a status different from the main plus and minus items in the calculation, which goes some way to indicate that it is not itself intended to be a minus item. The fact that it is included between two plus items, and apart from the list of minus items, again tends to indicate that it is not itself intended to be a minus item.[92]Against all this, if the language used in the Bank Debt amendment made it very clear that it was intended that the Bank Debt should be regarded as a further minus item, I would have treated that language as the decisive indicator of the parties’ intentions. But it does not. The drafting is clumsy and its positioning in the definition of “Surplus” is confusing, but as a matter of ordinary language, the Bank Debt amendment is capable of being read as bearing the temporal meaning for which Investec contends. Since that is a possible, natural interpretation of the words used, it is appropriate to have regard to all the reasons given above to conclude on an objective basis that this was the proper meaning which the parties intended the Bank Debt amendment to have.[93]I should add that in reaching that conclusion I have also taken account of the fact that (quite apart from the Bank Debt amendment) the effect of clauses 6.1 and 6.3 of the EFA was to provide that no exit fee would be due under the EFA until the whole of the portfolio was sold (which would naturally be expected to involve the repayment of the Bank Debt, since Investec held the first charge over the portfolio in respect of its lending) or until after service of a Crystallisation Notice (which could only take place after the end of the three year term, when the Bank Debt would fall to be repaid, or in the event that the Bank Debt was repaid before then). In the light of these provisions, it might be said that in any context in which a profit would arise (and hence where there might be a question of an exit fee having to be paid), it would be otiose for the Bank Debt amendment to provide that the “Surplus” could only be calculated after (in a temporal sense) the repayment in full of the Bank Debt. Therefore, it might be said, some different meaning should be given to the Bank Debt amendment, in line with TRG’s submissions. The difficulty with this, in my view, is that the other indicators as to the true meaning of the Bank Debt amendment to which I have referred above are so powerful that they plainly outweigh this rather tangential argument in favour of a different construction for that amendment. The interpretation of the other elements in the calculation of “Surplus” “Net Rental Income” and “Interest”

The interpretation of the other elements in the calculation of “Surplus”

[94]“Interest”, as defined, is only that interest payable to Investec under the Facility Letter. Accordingly, it is a minus item which applies only from October 2004.[95]It is common ground that “Net Rental Income” relates to the rental income from the properties in the West and East Blocks (a plus item) only after funding was provided by Investec in October 2004, and that accordingly only those costs and expenses reasonably incurred in connection with collecting such rents (a minus item) from October 2004 fall to be taken into account. Such costs and expenses incurred in connection with collecting rents in relation to the East Block before October 2004 are not to be taken into account. The treatment of rental income in this way corresponds with the treatment of “Interest” (a minus item). Since interest was intended to be paid out of rent, the commercial logic was that if it was only interest payable from October 2004 which was to be taken into account as a minus item, then it should only be rental income receivable from October 2004 (calculated net of costs associated with collecting it) which should be taken into account as a plus item. “Net Sale Proceeds” and “Estimated Net Sale Proceeds”[96]The definition of “Net Sale Proceeds” in the EFA is as follows:
“the proceeds of sale of Property or any part thereof less the costs and expenses reasonably and properly incurred by [TRG] in connection with the sale.”
[97]“Estimated Net Sale Proceeds” are defined as:
“the estimated proceeds of sale of the Property or any part thereof based on the Valuation [prepared by a Valuer after a Crystallisation Notice is served] and less the costs, fees, charges and expenses reasonably and properly expected to be incurred by [TRG] and as estimated by the Valuer assuming for the purposes of estimating such costs on arms length sale of the Property on the open market and to include legal fees and disbursements and agent’s fees incurred in connection with the marketing and sale of the Property.”
[98]The “Net Sale Proceeds” thus comprise the actual net proceeds of sale if the portfolio or any part of it is sold. Where the portfolio or some part of it has not been sold, and a Crystallisation Notice is served, the “Estimated Net Sale Proceeds” comprise the hypothetical net proceeds of sale in relation to the unsold properties, calculated on the basis of a valuation by a valuer (in this case, King Sturge was eventually appointed to undertake this role). As is clear from the definition of “Surplus”, there may be a sale of part only of the portfolio and retention of the balance of the portfolio, which then falls to be valued by a valuer. That is in fact what happened in the present case. In my view, by reason of the similarity of the expressions used, the fact that they have the same basic commercial purpose and the fact that it is contemplated that they may fall to be applied alongside each other, it is plain that “Net Sale Proceeds” and “Estimated Net Sale Proceeds” are intended to be interpreted in line with each other and as having similar effect (subject only to differences inherent in the fact that the former addresses a position in which property has actually been sold and the latter a position in which it has not, so that a hypothetical sale has to be postulated). It is therefore appropriate to have regard to the rather fuller indication in the definition of “Estimated Net Sale Proceeds” of the costs and other minus items which are to be taken into account in calculating that element in the definition of “Surplus” when seeking to determine what are to be regarded, in the case of an actual sale, as “the costs and expenses reasonably and properly incurred by [TRG] in connection with the sale” (minus items) for the purposes of calculating the “Net Sale Proceeds”.[99]There were four main areas of dispute between the parties regarding the application of the definition of “Net Sale Proceeds” in respect of the sale of the West Block: i) TRG submitted that the cost of repaying the Tristmire loan (insofar as it has been repaid: there is still a balance outstanding in respect of it), and thereby securing release of the Tristmire charge over the West Block to allow the sale to Schroders to take effect, should count as a cost or expense reasonably incurred by TRG in connection with the sale. I do not accept this. This cost to TRG was not “incurred in connection with the sale”; rather, it was incurred in connection with obligations assumed by TRG long before the sale, when it took the loan from Tristmire and gave the charge to Tristmire as security. It is a cost of a kind which is far more remote from the sale itself than the specific types of cost referred to in the definition of “Estimated Net Sale Proceeds”, which suggests that it does not fall to be treated as a minus item in the calculation of “Net Sale Proceeds” and “Surplus”. To the extent that repayment of the Tristmire loan involved repayment of capital, to count it as a minus item would involve double-counting, since this is already in practice included as a minus item within “Completion Costs” (see para. [89] above). To the extent that repayment of the Tristmire loan involved repayment of interest, it would fall outside the express definition of the “Interest” minus item in the calculation of “Surplus”, which indicates that the parties did not intend that it should be taken into account. Since the parties defined the element of “Interest” to be brought into account in the calculation of the “Surplus” in a special and restricted way, the inference is that if an element of interest in respect of borrowing cannot be brought into account as relevant interest by the front door (as being within the definition of “Interest”) it may not be brought into account indirectly by the back door, under the other heads of minus items which make no reference to interest payments. Also, it would be most peculiar for the interest on the Tristmire loan to be brought into account as a minus item when the capital amount of that loan is not. The fact that a charge was given by TRG over the portfolio in favour of Tristmire in respect of the capital and interest on the loan, which had to be removed before the sale to Schroders could take place, cannot improve TRG’s claim that the discharge of the loan qualifies as a cost or expense incurred by TRG in connection with the sale. The charge is in respect of the underlying obligations arising under the loan, and since they do not qualify as minus items in the calculation of “Net Sale Proceeds” the fact that a charge was given in relation to them does not change the nature of the payments to discharge those obligations as qualifying minus items or not. This point is underlined by considering the capricious way in which the EFA calculation would operate were the position changed by the fact of a charge having been given: in that case, whether the capital of and interest on the loan counted as minus items would depend on the essentially adventitious position whether any parts of them were outstanding at the time of a sale, so that they had to be discharged in order to secure release of the charge. I do not think that on an objective view the parties intended the “Surplus” calculation to operate in this capricious manner. (I also observe, though it is not critical to my reasoning on this point, that it appears that TRG had a contractual right as against Tristmire under clause 5.2 of the Tristmire loan, overriding clause 5.9 of the Tristmire charge, to secure part release of the charge in order to effect the sale to Schroders, provided TRG used the proceeds of sale to discharge the borrowing from Investec – it would have been very odd if the effect of Investec agreeing as it did to allow Mr Murphy to use some of the proceeds of sale for other purposes had the effect of transforming the payments to Tristmire from being irrelevant to the calculation of the “Surplus” to being minus items in that calculation; again, this serves to emphasise that the operation of Tristmire’s security rights under its arrangements with TRG would be completely capricious, if those rights were to be taken into account, and hence to indicate that it was not intended that they should be). ii) TRG submitted that the cost of repaying Clydesdale Bank some £320,000 which TRG owed it, in order to secure release of its third charge over the West and East Blocks and hence allow for the transfer of the West Block to Schroders free of encumbrances, should also count as a cost or expense reasonably incurred by TRG, and hence should qualify as a minus item in the calculation of the “Surplus”. This raises issues closely similar to those arising in relation to the Tristmire loan, and I again reject the submission. The only difference as between the analysis applicable in respect of the Tristmire loan and that applicable in respect of the lending by Clydesdale Bank is that the latter was not used as part of the original sale price, but was applied as part of the costs of carrying out the development. However, the same double-counting issue would arise if TRG were right, since those costs are already taken into account in the calculation of “Surplus”, either under the head of “Management Costs” or under the head of “Development Costs” (or, possibly, under “Planning Costs” – the court had very little information how the borrowing from Clydesdale Bank was in fact used). Therefore, in substance, the same reasoning applies in relation to the lending by Clydesdale Bank as in relation to the Tristmire loan; iii) TRG submitted that the cost of repaying unsecured loans from various sources (including an individual called “Leo” and finance companies such as ANA Financial Planning Ltd) (together with interest thereon), which had been taken out to provide finance to fund various costs associated with carrying out the development, should also be brought into account as minus items. I reject this submission. The position in relation to these loans is essentially the same as in relation to the lending by Clydesdale Bank (save that there was no security given in respect of them), and for the same reasons they do not qualify as further minus items for the calculation of “Surplus”; iv) TRG submitted that CGT for which it will be liable in respect of the sale of the West Block, and notional CGT for which it assesses it will be liable in relation to notional sales of properties in the East Block at the values estimated for the purpose of calculating the “Estimated Net Sale Proceeds”, should also be brought into account as minus items, as a cost or expense reasonably and properly incurred by TRG in connection with the sale or notional sales. I reject this submission as well. I do not think that CGT arising in respect of the sale of property is aptly or naturally described as a cost or expense incurred by the seller in connection with the sale. The incidence of CGT, and the amount payable, depends on all the gains and losses arising in the relevant period for the taxpayer, and is not an item which is necessarily determined by what happens in relation to the sale of any particular property; and it is implausible to suppose that the parties intended that the calculation of the “Surplus” should turn on such adventitious matters as the overall tax position of TRG. In support of this view is the fact that, as was common ground, if an exit fee is payable to Investec under the EFA (as, on my interpretation of the EFA, it will be), TRG would be entitled to deduct that fee in calculating the amount of any capital gain for the purposes of payment of CGT. This indicates that calculation of the exit fee was intended to take place prior to, and independently of, any calculation of CGT payable by TRG, since otherwise a highly complicated degree of circularity in calculating the exit fee would be introduced. There is no indication in the EFA that such a complex calculation was intended by the parties. Moreover, as observed above, the calculation of “Net Sale Proceeds” is intended to reflect and operate in parallel with the calculation of “Estimated Net Sale Proceeds”. In calculating the latter element, if CGT were to be taken into account it would be necessary for the valuer to base a calculation of CGT on an entirely speculative assessment of TRG’s overall notional tax position at a given point in time, without knowledge of TRG’s total capital gains or losses throughout the relevant tax period. There is nothing in the definition of “Estimated Net Sale Proceeds” to indicate that this exercise is required. On the contrary, the definition specifies a set of assumptions which the valuer is to make, which implies that other (and highly speculative) assumptions are not included in the exercise. Finally, if CGT is not taken into account in the calculation of the exit fee, a sensible and natural tax position is arrived at: TRG will have to include its share in the profits from the development when accounting for CGT and Investec will have to pay corporation tax on the exit fee it receives as its share of those profits. In my view, clear language would be required in the EFA to displace the natural expectation that each party should bear (at its own cost) the appropriate tax in respect of its share of the profit from the development; there is no clear provision in the EFA to that effect. “Completion Costs”[100]“Completion Costs” are defined in the EFA to mean:
“the purchase price, stamp duty, Land Registry fees, valuation fees, legal fees and disbursements and agent’s fees reasonably and properly incurred by [TRG] in connection with the acquisition of the Property.”
[101]There was no dispute about the amount of the “Completion Costs” relevant to be treated as minus items in the calculation of “Surplus”. What is significant about the definition of “Completion Costs” is that they clearly include the costs to TRG of acquiring all the properties in the portfolio, i.e. including the properties in the East Block which TRG acquired before Investec provided funding in October 2004. This shows that there was no comprehensive or governing principle in the EFA that any and all items arising before October 2004 were to be left out of account for the purposes of calculating the “Surplus”, and hence is relevant to the construction of “Management Costs” and “Development Costs”, below. “Planning Costs”[102]“Planning Costs” are defined in the EFA to mean:
“the costs, charges and expenses reasonably and properly incurred by [TRG] in obtaining the Planning Permission.” “Planning Permission” is defined to mean: “any planning permission relating to the Property from the relevant authority.” “any planning permission relating to the Property from the relevant authority.”
[103]In my judgment, the word “any” plainly bears its natural meaning and the language used in these definitions indicates clearly that costs of TRG in connection with obtaining any planning permission relating to any of the properties in the East and West Blocks were to be taken into account as a minus item in the calculation of “Surplus”, even if incurred before October 2004. This makes commercial sense, since planning permission would be essential for the development of the project to realise the capital growth which it was hoped would be achieved and with the sharing of which the EFA was directly concerned. When Investec made its loans in October 2004 it knew that TRG had already obtained planning permission for part of the project (see para. [11] above), and the use of the word “any” against that background appears to have been deliberate. The cost of getting the project into a position in which it would have planning permission overall to achieve the profit which was hoped for would naturally be a cost to be taken into account in calculating the profit from the project as a whole. I therefore reject the submission of Investec that “Planning Costs” were limited to costs incurred after October 2004. The fact that planning costs arising before October 2004 are to be taken into account in calculating the “Surplus” is a further matter relevant to the construction of “Management Costs” and “Development Costs”, below. “Management Costs”[104]“Management Costs” are defined in the EFA to mean:
“the costs, expenses and charges properly and reasonably incurred in managing the Property (in so far as not included or deducted in Net Rental Income) which are not recoverable from the Tenant including without limitation: (1) any irrecoverable taxes, rates, charges, outgoings of whatever nature imposed in respect of the Property or any Planning Permissions; and (2) the cost of obtaining consent to any proposed works to implement the Planning Permissions or the release of any restrictive covenants affecting the Property which may affect or hinder the obtaining of Planning Permissions; and (3) marketing, sales and promotional expenditure in connection with financing and letting of the property any part thereof [sic]; and (4) the payment of incentives to tenants or the cost of works carried out to enable or facilitate letting of the Property or any part thereof including refurbishment and redecoration; and (5) payments made to tenants or licensees to obtain vacant possession of any part of the Property; and (6) the upgrading of title to title absolute or acquisition of the freehold or leasehold title to the Property if in the opinion of [Investec] the value of the Property shall increase, such costs not to exceed £10,000 without the prior written consent of [Investec].”
[105]Investec submitted that the minus items which come within “Management Costs” are limited to items arising after October 2004. In support of that submission it pointed to the cross-reference to “Net Rental Income” in the introductory part of the definition (making the point that, as is common ground, “Net Rental Income” is limited to matters arising after October 2004) and to the fact that parts of the detailed sub-paragraphs in the definition (in particular, sub-paragraphs (3) and (4)) appear to be concerned primarily with getting in good rents for the properties in the development, which again was said to demonstrate a linkage with “Net Rental Income” and events occurring after October 2004.[106]I reject this submission. In my judgment, “Management Costs” cover all management costs, as defined, in relation to the West and East Blocks, including those in respect of the East Block which were incurred before October 2004. My reasons for coming to this view are as follows: i) Since “the Property”, as defined in the EFA, means both the West and the East Blocks, on the natural language of the provision management costs in relation to the East Block are included within it, and the provision makes no stipulation limiting the time according to which those costs were incurred; ii) The definition, at sub-paragraphs (1) and (2), expressly cross-refers to costs incurred in relation to implementing “any Planning Permissions” and “the Planning Permissions”, and as already observed above the definitions of “Planning Costs” and “Planning Permission” are not limited in time. Since costs of implementing a permission obtained before October 2004 might well have been incurred before October 2004, and since the parties intended that the costs before October 2004 of obtaining such a permission should be brought into account, it seems natural to conclude that they also intended that any costs of implementing such a planning permission before October 2004 should also be brought into account under the definition of “Management Costs”. There is no suggestion in that definition that the parties intended one rule to apply for some of the costs falling within it, and another rule in relation to other costs. Rather, it appears that a single temporal rule was intended to operate, so the indication from sub-paragraphs (1) and (2) that costs prior to October 2004 were to be included is a powerful indicator as to the proper interpretation of that definition generally; iii) The definition, at sub-paragraphs (5) and (6), refers to matters affecting the property holdings of TRG within the development, rather than the getting in of rents. Those matters are closely akin to the costs of acquiring properties within the development portfolio (which are comprised within “Completion Costs”, and include costs incurred before October 2004). So, again, the natural inference is that the parties intended a similar timing principle to govern the application of the definition of “Management Costs”. This is a further powerful indication that, in that definition, the parties did not intend to exclude costs incurred before October 2004; iv) Contrary to the suggestion made by Investec, so far as concerns sub-paragraphs (3) and (4) of the definition, there is not a rigid divide between matters affecting rental income and the growth in the capital value of the development portfolio. Growth in capital value will in large part be a function of the rental income stream which the properties in the portfolio can sustain. An increase in rental income would normally imply an increase in the capital value of the development. Therefore, it is not surprising that sub-paragraphs (3) and (4) should make reference to matters capable of affecting rental income, but be subject to the same general rule as to the timing of costs to be brought into account as sub-paragraphs (1), (2), (5) and (6), which relate clearly to matters affecting the capital value of the development portfolio. It is also significant that sub-paragraph (3) is not limited to matters affecting the letting of the property, but also covers matters in connection with financing it (i.e. a matter likely to involve consideration of the capital value of the portfolio); and sub-paragraph (4) makes reference to refurbishment and redecoration (which would affect the value of the properties in the portfolio, as well as rents).[107]This construction of the definition of “Management Costs” is not inconsistent with the cross-reference in it to matters included or deducted in “Net Rental Income” (which are limited to matters arising after October 2004). This is because “Management Costs” cover both matters arising before the making of the Investec loan in October 2004 and after it, so it makes sense to exclude items already covered by the definition of “Net Rental Income” in respect of the latter period. However, the construction does give rise to a question regarding the interaction between “Management Costs” and “Net Rental Income”: if items arising before October 2004 within “Management Costs” would have been comprised within the calculation of “Net Rental Income” (if the definition of that element had had application to matters occurring before October 2004), are they to be treated as minus items in the calculation of “Surplus” or are they to be regarded as impliedly excluded from that calculation because of the intention that the definition of “Net Rental Income” should be restricted to matters after October 2004?[108]In my judgment, on the natural interpretation of the definition of “Management Costs”, such pre-October 2004 items would qualify as minus items in the calculation of “Surplus”. The inclusion of the cross-reference to “Net Rental Income” in that definition is simply intended to remove any element of double-counting of the same items; it is not intended to prevent the definition of “Management Costs” applying in accordance with its ordinary construction to any items falling within it before October 2004, where no difficulty of double-counting arises.[109]TRG submitted that, if it failed in its contention that CGT qualified as a minus item by virtue of the definitions of “Net Sale Proceeds” and “Estimated Net Sale Proceeds”, it qualified as a minus item as a “tax” falling within sub-paragraph (1) of the definition of “Management Costs”. I reject that submission. In my judgment, it is clear that CGT which may be payable by TRG is not a cost “incurred in managing the Property”, and is not a tax “imposed in respect of the Property”. TRG has not had to pay CGT in order to manage the portfolio. If CGT arises, it will do so only when TRG sells property from the portfolio and hence only when it ceases to manage such property. Moreover, in so far as TRG may have to pay CGT which takes account of the sale proceeds from properties in the portfolio, that is tax imposed in respect of capital gains made by TRG in a relevant period (and taking account of its overall position, not necessarily just what happens to the portfolio), not tax imposed “in respect of the Property” itself. Taxes imposed in respect of the Property falling within the definition of “Management Costs” are limited, in my view, to taxes such as business rates or equivalent imposed directly on the properties in the Portfolio, which TRG might need to pay while it retains the properties and hence is still in the course of managing them. “Development Costs”[110]“Development Costs” are defined in the EFA to mean:
“the costs reasonably and properly incurred by [TRG] in carrying out the Development of the Property.” “Development” is defined to mean: “development of the Property in accordance with the Business Plan.”
The “Business Plan” is the business plan appended as Schedule One to the EFA, which is the document provided by TRG to Investec referred to at para. [16] above. “development of the Property in accordance with the Business Plan.” The “Business Plan” is the business plan appended as Schedule One to the EFA, which is the document provided by TRG to Investec referred to at para. [16] above.[111]Investec submitted that the minus items comprised within “Development Costs” are limited to items arising after Investec’s funding of the development in October 2004. In support of this submission, it pointed out that the definition of “Development” is by reference to development of the portfolio “in accordance with the Business Plan”. The “Business Plan” is a document which sets out TRG’s plans going forward from October 2004. Therefore (it was said) the “Development Costs” must be limited to the costs contemplated in that plan, and only included items arising after October 2004.[112]I found the interpretation of “Development Costs” less straightforward than the interpretation of the other elements in the calculation of “Surplus” to which I have referred above, but I have come to the clear view that Investec’s submission on this point fails. In my judgment, the definition of “Development Costs” includes items arising before October 2004, for the following reasons: i) The broad commercial object which the EFA was directed to achieving was to provide for the sharing of the profits of the overall development of both the West and the East Blocks, even though the East Block had been acquired before Investec made its loans in October 2004. In the light of that objective, it is natural to suppose that the intention was that all the costs of developing the portfolio, including those incurred before October 2004, should be brought into account in calculating the profit from the development which was to be shared. Since Investec was to share in, inter alia, the profits represented by the increase in value of the East Block since its acquisition by TRG in 2003, the commercial logic of a profit sharing arrangement in respect of that part of the portfolio was that the costs of developing it from 2003 onwards should all be brought into account; ii) The language used in the definitions of “Development Costs” and “Development” does not clearly and distinctly show that the parties had any different intention from that which their agreed commercial objective would suggest. It was in the nature of the “Business Plan” that it should be forward looking. It was provided by TRG not to give Investec an historic account of the development down to October 2004, but an indication of how the development project was to be carried forward. The intention which was given effect by the EFA was that Investec should share in the profits arising from the whole development, including the historic aspects of it down to October 2004 and the forward looking aspects of it from October 2004. In my view, in that context, it involves no distortion of the language of the definition of “Development” to construe it as referring to the overall development of the portfolio, of which the historic development was already known (and so required no further special reference to explain what was meant) and the future development was unknown and hence fell to be specified as being “in accordance with the Business Plan”. In the context of the EFA, I do not consider that the intention of the parties in including this latter phrase in the definition of “Development” was to exclude what had happened down to October 2004 from what the parties meant by the “Development” and by the “Development Costs”; iii) The fact that each of the other minus items in the calculation of “Surplus”, save for “Interest”, includes reference to matters arising prior to October 2004 is a strong indication that the parties intended the same principle to apply in relation to “Development Costs”. There is no commercially rational reason for treating those costs differently from “Completion Costs”, “Planning Costs” and “Management Costs”. (By contrast, the reason “Interest” does not include interest prior to October 2004 is because it is expressly limited to interest payable to Investec; and the reason “Net Rental Income” is, as the parties agree, limited to matters from October 2004 is because that reflects the treatment of “Interest” and the fact that interest and rental income were understood to be related commercially).

Other issues

(a) Rectification

[113]In relation to the main issue of construction between the parties (whether the “Bank Debt” falls to be treated as a minus item in the definition of “Surplus” by reason of the Bank Debt amendment), Investec submitted that if its preferred construction of the EFA was not accepted, then the EFA should be rectified. Since I have ruled in favour of Investec on that issue of construction, the question of rectification does not arise. However, I should set out my findings in case there is an appeal.[114]Investec pleaded its alternative case for rectification both on the basis of common mistake and on the basis of unilateral mistake by Investec (allegedly known to Ms Biagi and TRG and exploited by them). Having heard the evidence, Mr Hollander QC for Investec abandoned any case of unilateral mistake. He was right to do so. Before executing the EFA, Ms Biagi and Mr Murphy were conscious of the addition of the Bank Debt amendment and believed it had the effect for which TRG contended at the hearing before me (so that “Bank Debt” should be treated as a further minus item in the calculation of “Surplus”). But because of delay by Eversheds in getting the final draft of the EFA to them and the presentation of it to them in completely revised form shortly before completion of the purchase of the West Block was due to take place, they had very little time to assimilate its contents and they did not work through the definition of “Surplus” with detailed figures. The commercial oddity of the result which would arise if TRG’s interpretation were correct did not strike them (it may be said that it does not leap off the page when one first reads the definition of “Surplus”), and they did not think that Investec and its advisers had made any mistake in putting forward the final draft of the EFA in that form. They simply thought that this was Investec’s latest proposal, and upon a fairly speedy review it appeared acceptable to them.[115]If the claim of rectification based on common mistake had fallen to be resolved by me, I would have rejected it on the facts. There is a convenient summary of the law in relation to rectification for common mistake in the judgment of Lawrence Collins LJ in Chartbrook Ltd v Persimmon Homes Ltd, at [134]-[136], as follows:
“134. The court will rectify a contract if the evidence is clear and unambiguous that a mistake has been made in the recording of the parties’ intention, what that intention was, and that the alleged intention continued in both parties’ minds down to the time of the execution of the agreement: Swainland Builders Ltd Freehold Properties Ltd [2002] 2 EGLR 71 at 74, [33]. 135. The burden is particularly onerous where there have been prolonged negotiations between the parties eventually assuming the shape of a formal instrument on which they have been advised by skilled lawyers: Crane v Hegeman-Harris Co Inc [1939] 1 All ER 662 at 664-5; and also Snamprogetti Ltd v Phillips Petroleum Ltd [2001] EWCA 889 at [36]. 136. In cases where common mistake is alleged, it is necessary to establish not merely a continuing common intention, but also some outward expression of that prior accord: Joscelyne v Nissen [1970] 2 QB 86 at 97-98. The requirement of an outward manifestation of accord has been said to be an evidential factor rather than a strict legal requirement: Beasley v Munt [2006] EWCA Civ 370 at [36], per Mummery LJ. The claimant does not have to meet more than the civil standard of balance of probabilities, but convincing proof is required to counteract the cogent evidence of the parties’ intention displayed by the instrument: Thomas Bates and Sons v Wyndham’s Ltd. [1981] 1 WLR 505, 521 (CA).”
[116]There is one qualification to this passage which Mr Hollander submitted was appropriate to be borne in mind. The words in para. [134], “in both parties’ minds”, might be taken to suggest that it is relevant to focus on the parties’ subjective intentions, whereas what is in fact required for a claim for rectification based on common mistake is an objectively assessed and outwardly manifested common intention. It is well established that the parties’ subjective intentions do not govern the interpretation of their agreement for the purposes of the law of contract, so I think that Mr Hollander’s point is a fair one (and see the judgment of Christopher Clarke J in PT Berlian Laju Tanker TBK v Nuse Shipping Ltd [2008] EWHC 1330 (Comm), at [38]-[39], where the requirement that an objective approach be adopted in relation to a claim for rectification on grounds of common mistake is set out clearly). I do not consider that Lawrence Collins LJ was intending to suggest that any different approach than this does apply.[117]On the facts as I find them, Ms Canning did not discuss the terms of the Bank Debt amendment on the telephone with Ms Biagi on 18 October 2004, let alone agree those terms and agree that they should have the effect for which Investec has contended in these proceedings. In my view, in their conversation Ms Canning merely indicated that Investec accepted the principle to which Ms Biagi had earlier referred in her manuscript note on the previous draft, that TRG should not have to make a payment of up to £500,000 on each part sale from the portfolio, and indicated that she would produce a further draft of the EFA which she would adapt to ensure that no such obligation was included: see paras. [30]-[34] above. The first time Ms Biagi was informed of the terms of the Bank Debt amendment was when she received the revised draft EFA on 20 October. She did not discuss what was meant by the Bank Debt amendment with Ms Canning. It was the execution by TRG of the EFA in that form which constituted the manifestation of agreement on the terms of the Bank Debt amendment. There was no other discussion or agreement about what the Bank Debt amendment was intended to mean. I should add that the fact that the Facility Letter referred to sharing of profits did not create any relevant common intention for the purposes of the claim of rectification, since it was not precise or clear on this point and the letter itself referred to the need for a further document (the EFA) to be drawn up to define the parties’ rights and obligations. Therefore, the form of the EFA including the Bank Debt amendment is the only relevant evidence regarding the common intention of the parties and the terms on which the parties were agreed. Accordingly, Investec’s case either stands or falls on the construction of the EFA itself, and it would have no good claim to rectification should that issue of construction be resolved against it. (b). Claim by TRG for repayment of the £500,000 paid in November 2006[118]TRG paid Investec £500,000 on 30 November 2006 on account of the exit fee: see para. [62] above. Under the terms of the EFA, TRG was not obliged to make such an early payment on account of the exit fee. According to clause 6 of the EFA, an exit fee would only be payable (if at all) some time later. TRG claimed the repayment of that £500,000 sum on the footing that (according to its submissions regarding the interpretation of the EFA, and in particular the Bank Debt amendment) it had transpired that no exit fee was in fact due. As Mr Mendoza for TRG put this part of TRG’s case, if TRG were correct on its interpretation of the Bank Debt amendment in the EFA then the £500,000 should be repaid; but if Investec were correct on its submissions regarding the interpretation of the Bank Debt amendment, and an exit fee in excess of £500,000 had eventually been shown to be due, TRG would not be entitled to recover the £500,000. The claim to repayment of the £500,000, as explained by Mr Mendoza, does not depend in any way on the plea of economic duress which was included in the Amended Defence and Counterclaim. Subject to the issue about the true interpretation of the EFA, the claim for repayment turns solely on interpretation of the agreement under which the £500,000 was paid to Investec.[119]TRG also claimed that it had paid that sum under circumstances amounting to economic duress. The sole significance of this plea, as Mr Mendoza made clear, was to found (as he submitted) a claim for consequential damages in respect of loss arising from TRG being deprived of that sum.[120]In relation to the claim for repayment of the £500,000, Investec submitted that on proper construction of the agreement under which it had been paid, the parties intended it to be an outright payment, so that even if TRG succeeded in its submissions as to the true meaning of the Bank Debt amendment, Investec would still have no obligation to repay the £500,000. So far as concerned the claim for consequential damages based on alleged economic duress, Investec submitted that TRG’s pleading of economic duress disclosed no cause of action in damages, and that in any event TRG had not been subjected to illegitimate economic duress in October and November 2006.[121]Since I have held that Investec is correct on its submissions as to the true interpretation of the Bank Debt amendment, and it is clear that at least £500,000 became due to Investec under the EFA, I dismiss TRG’s claim for repayment of the £500,000 paid on 30 November 2006. Had it been necessary for me to rule upon the interpretation of the agreement under which that sum was paid to TRG, I would have had no hesitation in accepting TRG’s submission that the payment was not made as an outright payment. At all stages it was referred to by the parties as a payment on account of the exit fee (see paras. [57]-[60] above), so if it had transpired that in fact no exit fee was payable the clear and natural inference would have been that their intention was that it should be repaid.[122]As to the plea of economic duress, I accept both the submissions made by Investec. Mr Mendoza submitted that economic duress may found a claim for damages, and in support of that submission he referred me to Chitty on Contracts, 30th ed., para. 7-055. However, he accepted that the pleading of economic duress (by other counsel) in the Amended Defence and Counterclaim did not include a pleading of all the elements which would be required to plead a cause of action in the tort of intimidation (see Rookes v Barnard [1964] AC 1129). That would have required a plea (not made) that unlawful means were deliberately used to exert pressure on TRG. The passage in Chitty suggests that “it would seem that the doctrines of duress and intimidation are based on similar principles”. No doubt that is correct, but it remains the case that the primary object of a plea of economic duress in relation to a contract is to avoid the contract, which is a legal consequence significantly different from establishing a cause of action in damages. So far as a cause of action in damages is to be made out, I can see no proper basis in principle why it should be on any basis other than a pleading of facts and matters sufficient to establish a cause of action for the tort of intimidation. It is not sufficient to plead economic duress, without pleading all the matters which would provide a basis for concluding that a cause of action in the tort of intimidation is established, and then to say that on the basis of that lesser pleading damages are claimed. Since TRG did not plead matters amounting to the tort of intimidation, and did not seek to establish that such a tort was made out on the evidence, it is not entitled to claim damages on the lesser case of economic duress which it did put forward. I do not read the passage in Chitty referred to as supporting any different conclusion.[123]In any event, I reject TRG’s claim of economic duress on the facts: see paras. [46]-[61] above. It is true that in October 2006 Investec asked for a part-payment of the exit fee though no exit fee was yet due under the EFA. However, Mr Murphy’s proposal at the meeting on 23 October 2006 was that TRG and he should be allowed by Investec to take significant sums out of the proceeds of sale, to which Investec was strictly entitled by virtue of its first charge over the West Block which was to be sold to Schroders. Mr Mendoza submitted that Investec would not have been entitled to refuse its consent for the sale to Schroders (and the discharge of its security in relation to the West Block), since if it did so a court would have treated its refusal as amounting to a clog on the equity of redemption and would have granted TRG relief. I think that is right, and Mr Hollander did not dispute it. However, it does not follow from this that Investec was obliged to agree to the payments from the proceeds of sale which Mr Murphy requested. On the contrary, since Investec held a first charge over the whole portfolio and since the payment of the purchase price for the West Block by Schroders would not result in TRG’s debt to Investec being discharged in full, even if a court had required Investec to give a release of its security over the West Block in order to allow the sale to Schroders to proceed, it would have done so only on condition that the full proceeds of sale were paid into an account to satisfy Investec’s security interest. TRG would not have been permitted to make withdrawals from the proceeds of sale for its own purposes, since that would have undermined the security which the parties had agreed Investec should have.[124]The net effect of this analysis is that TRG required the consent of Investec if it was to be allowed to draw off part of the proceeds of sale for itself or Mr Murphy. Therefore, although the negotiation between the parties in October 2006 about what should happen to the proceeds of sale of the West Block commenced on the basis of the request by Investec of 13 October 2006 that TRG should put forward proposals for an early part-payment of the exit fee, it proceeded at the meeting on 23 October 2006 as a normal commercial negotiation with each party pressing the other for concessions. It was in particular because it was an important matter for TRG to obtain Investec’s consent to the release of significant funds to TRG that Mr Murphy did not refuse outright to make any payment on account of the exit fee, although he knew that the EFA did not provide for an exit fee to be paid at that stage. He treated the terms of the EFA as a bargaining counter in his discussions with Investec, in order to emphasise that he was making a commercial concession to Investec so as to try to encourage it to make reciprocal concessions in TRG’s favour. In this context, it is my clear view that Investec did not exert nor seek to exert any illegitimate pressure to persuade TRG to make a payment on account of the exit fee.[125]There are a number of striking factors additional to those I have already mentioned which support that conclusion. Mr Murphy had received correct legal advice from Ms Biagi before the meeting on 23 October 2006 as to the effect of the EFA as regards the timing of any payment of the exit fee. Nonetheless, he chose to offer Investec at the meeting that TRG and its accountants would put together the figures and a proposal for part-payment of the exit fee in respect of the sale of the West Block by about mid-December. There was therefore no real or practical sense in which Investec was seeking to insist upon such a payment being made, overriding Mr Murphy’s own will and judgment in that regard. In fact, Investec adopted a position generous to TRG at that meeting and thereafter, by agreeing to TRG withdrawing the significant sums it asked for from the sale proceeds although Investec had no obligation to do so. It had also been generous to TRG in the period leading up to this negotiation, by agreeing to increase TRG’s mezzanine loan when it fell into arrears in August 2006 (para. [45] above) without any renegotiation of the commercial terms applicable to reflect the additional risk to which Investec was exposed. When TRG, through Ms Biagi, objected to the new form of EFA which Eversheds proposed and asked instead for a side letter, Investec agreed to that request. These aspects of Investec’s relationship with TRG in 2006 are difficult to reconcile with TRG’s case that Investec was seeking to take illegitimate advantage of TRG. TRG made no complaint of economic duress once the immediate pressure to complete the sale of the West Block to Schroders had disappeared: a complaint of economic duress was made for the first time in the Defence and Counterclaim served in February 2008. In the event, the proposal for the immediate part-payment of £500,000 on account of the exit fee was TRG’s proposal, rather than a demand made by Investec. It was made as part of a sensible and fair commercial negotiation between the parties, and was not a proposal extracted from TRG by any threatened breach of contract or wrongful conduct on the part of Investec. (c). Questions arising on the detailed items included by TRG in its calculation of the “Surplus” for the purpose of the EFA[126]The parties were in agreement that it would not be a sensible use of their or the court’s time to go through each of the calculations and items contained in seven files of documents in order to arrive at a final calculation of the “Surplus” and the exit fee due. Rather, they agreed that I should determine certain questions of principle on the construction of the EFA which were in dispute, and then leave them to seek to agree in the light of my judgment the final sum which is due. To a considerable extent, the main issues between the parties have been determined above in my rulings on the proper construction of the EFA. However, the parties also posed for me a detailed series of questions to which I now turn. Q1: Does the EFA permit deduction of(a) redemption payments made to other lenders in order to redeem mortgages, and(b) interest paid to other lenders?[127]Point (a) relates to the payments made to Tristmire and Clydesdale Bank, which held the second and third charges respectively over the portfolio. The answer to (a) is ‘No’: see para. [99] above.[128]Point (b) relates both to secured lenders apart from Investec (Tristmire and Clydesdale Bank) and to unsecured lenders to TRG, such as Leo, ANA Financial Planning Ltd and others. The answer to (b) is ‘No’: see para. [99] above. Q2: Are legal costs of TRG deductible if they are costs incurred in respect of Investec’s charge over the portfolio?[129]TRG claims that it is entitled to treat legal costs it incurred in dealing with Investec’s first charge over the portfolio (in particular, in respect of arranging with Investec for the release of that charge in respect of the West Block at the time of the sale to Schroders) as a minus item in the calculation of the “Surplus”, on the basis that these are “costs” or “expenses” “reasonably and properly incurred by [TRG] in connection with the sale”, within the definition of “Net Sale Proceeds”. I accept TRG’s submission on this point. In my judgment, these legal costs were within the contemplation of the parties as costs likely to be necessary in order for TRG to arrange for the sale of the portfolio (or arrange for its re-financing, as the case might be) in order to achieve the profit which the parties wished to share. I consider that such legal fees fall within the natural meaning of the words “legal fees … in connection with the marketing and sale of the Property” in the definition of “Estimated Net Sale Proceeds”, which provides guidance as to the scope of the costs included in the definition of “Net Sale Proceeds”. I also consider that this construction is further supported by the terms of the indicative offer of 10 August 2004 (which referred to “profit after all costs”), which set out the broad commercial objective which the parties sought to achieve and emphasised the width of the range of “costs” which were appropriate to be brought into account. Q3: Are legal costs of TRG deductible if they are costs incurred(a) in respect of third party charges over the portfolio or(b) in respect of arranging loans from third parties to assist it with funding to carry out the development?[130]As to (a), TRG claims that it is entitled to treat legal costs it incurred in dealing with Tristmire’s second charge and Clydesdale Bank’s third charge over the portfolio (in particular, in respect of arranging with them for the release of their charges in respect of the West Block at the time of the sale to Schroders) as minus items in the calculation of the “Surplus”, again on the basis that these are “costs” or “expenses” “reasonably and properly incurred by [TRG] in connection with the sale”, within the definition of “Net Sale Proceeds”. I again accept TRG’s submission on this point. Although these costs might be said to be somewhat more remote than those referred to in para. [129] above, in my view the reasons set out there also cover these costs. It was clearly in the contemplation of both TRG and Investec from October 2004 that there was a Tristmire charge in relation to the portfolio, which would require to be released in order to effect a sale and realise the profit to be shared. There was no prohibition against TRG giving further charges in respect of the portfolio, and provided it acted reasonably in doing so (and there is no suggestion it did not), I think that the possibility of such charges being given and then having to be released upon a sale were also in the contemplation of the parties, so as to fall within the relevant part of the definition of “Net Sale Proceeds”.[131]As to (b), TRG claims that it is entitled to treat legal costs it incurred in arranging for and dealing with various loans from third parties as minus items on the basis that they qualify as “Management Costs”. In substance, the capital amounts of those loans are brought into account, since they will have been spent to meet (typically) Development Costs or Management Costs (e.g. for refurbishment and redecoration). In my view, the legal costs which TRG incurred in respect of borrowing sums to meet these costs fall within the wide definition of “Management Costs”, as “costs, expenses and charges properly and reasonably incurred in managing the Property”. That view is supported by the width of the notion of costs which Investec referred to as relevant in its indicative offer (“all costs”), the fact that a developer like TRG would be expected to utilise loan finance from third parties to fund the work carried out for the development (so that the legal costs associated with raising such finance would be within the contemplation of Investec and TRG as a cost of managing the Property, and would naturally be assumed to be part of the costs to be taken into account in calculating the profit to be shared) and the fact that sub-paragraph (4) in the definition of “Management Costs” contemplates that marketing, sales and promotional expenditure “in connection with … the financing of the property” is included (since those costs associated with raising finance for the development are included as illustrations of the width of the concept of “Management Costs” – as they are introduced by the words, “including without limitation …” – there seems to be no good commercial basis on which one could infer that the parties intended that legal costs associated with the financing of the property should not also be included). (In this regard, it is worth emphasising that there are special reasons why the interest payable in respect of such loans is not brought into account as a minus item - see para. [99(i)] above – even though the legal costs associated with arranging such loans may be). Q4: Are legal costs of third party lenders (which TRG undertook to meet and did meet) incurred in respect of loans from third parties for the purposes of carrying out the development deductible?[132]In relation to a range of persons (including, e.g. Tristmire) from whom TRG borrowed funds from time to time, TRG agreed to pay the legal costs of the lender in respect of such borrowing. TRG claims that it is entitled to treat the payment by it of these legal costs as minus items in the calculation of the “Surplus”, on bases which depend upon the circumstances in which they were incurred. So far as concerns the fees of solicitors acting for Tristmire in relation to the release of Tristmire’s security at the time of the sale of the West Block to Schroders, it is again on the basis that these are “costs” or “expenses” “reasonably and properly incurred by [TRG] in connection with the sale” (within the definition of “Net Sale Proceeds”) that TRG claims they are deductible. In my judgment, this is a proper deductible item. Investec’s own Facility Letter, at clause 9, provided that TRG should pay all Investec’s expenses (“including legal fees”) in connection with the preparation and execution of the loan facility and in relation to Investec’s security. There was thus nothing unusual in TRG entering into such arrangements with other borrowers such as Tristmire. In my view, this was the sort of cost which was within the contemplation of the parties as falling within the costs and expenses to be deductible in calculating the profit to be shared. Similar reasons to those set out in para. [129] above therefore apply.[133]TRG met other legal fees of Tristmire, in relation to arranging its loan and security at the time of the acquisition of the West Block. These are claimed by TRG as a minus item in the calculation of “Surplus” on the basis that they are part of the “Completion Costs” in respect of that acquisition. The “Completion Costs” include “legal fees and disbursements … reasonably and properly incurred by [TRG] in connection with the acquisition …”. Since such legal fees were similarly payable by TRG in respect of legal advice to Investec, and hence were of a kind within the contemplation of the parties as costs associated with acquiring the portfolio, I consider that these fees do properly fall within “Completion Costs”. There was no suggestion that they were not reasonably or properly incurred, and in my view they were incurred by TRG in connection with the acquisition of the West Block within the meaning of the definition of “Completion Costs”.[134]It appears that TRG may have paid the legal fees of other lenders to it at the time of and in connection with the acquisition of parts of the portfolio. These legal fees would also be proper minus items in the calculation of the “Surplus”, on the same reasoning as in para. [133] above.[135]TRG also paid the legal fees of other lenders to it in respect of arranging finance to allow TRG to expend monies on carrying out the development. In my view, these legal fees are also properly brought into account by TRG as “Management Costs”, by a combination of the reasoning in paras. [131] and [132] above. Q5: How should the surgery be taken into account in “Net Sale Proceeds” and in relation to costs?[136]The position in relation to the surgery which TRG undertook to design and build is set out in paras. [68]-[69] above. By virtue of the fact that TRG had granted a 999 year lease of the property, it was not included in the valuation by King Sturge after service of the Crystallisation Notice nor, therefore, in the “Estimated Net Sale Proceeds”. However, TRG claims the estimated costs of building the surgery, (which have not yet in fact been incurred, but which TRG remains obliged to incur), as a minus item in the calculation of the “Surplus”, on the basis that these are “Development Costs”. It became clear from the evidence at trial that TRG had received consideration for granting the lease and undertaking the obligations to design and build the surgery, in the form of the transfer of 67 Albert Road (worth about £300,000) and a corresponding obligation under the design and build contract for the leaseholder to pay TRG £129,105 when the surgery was completed. The lease and the design and build contract were entered into on the same date (17 February 2006), and were clearly part of the same overall transaction.[137]In my judgment, the consideration received by TRG in return for the grant of the lease and the obligations it entered into in respect of the surgery fall properly to be treated as “Net Sale Proceeds” (i.e. a plus item in the calculation of the “Surplus”), since that consideration is in substance the proceeds of sale of part of the “Property”. In my view, the proper treatment under the EFA of the costs represented by the obligations of TRG under the design and build contract (assuming, which I think is right, that obligations incurred but not yet satisfied by the time the exit fee falls to be calculated are properly treated as costs) is as a minus item in the calculation of the “Net Sale Proceeds”, on the footing that they were costs “reasonably and properly incurred by [TRG] in connection with the sale” (rather than as “Development Costs”). On any view, where the EFA was directed to sharing the profits of the development, the plus side as well as the minus side of the surgery transaction should be brought into the calculation of the “Surplus”. Since the evidence was that the plus side and the minus side roughly cancelled each other out, and in the absence of any more detailed or sophisticated evidence on the matter, I find that the proper application of the EFA requires that the plus side and the minus side of the surgery transaction should be treated as cancelling each other out. That ruling includes the legal costs in relation to dealing with the transfer of 67 Albert Road to TRG. Q6: Are payments of(a) interest on loans to third parties other than Investec,(b) other charges incurred to other financiers or banks or(c) the arrangement fee paid by TRG to Investec deductible?[138]In my judgment, the answer to (a) is ‘No’. The definition of “Surplus” made express reference to “Interest” as a minus item, and the EFA provided a limited definition of “Interest” as referring only to the interest on the loans from Investec. The parties thereby indicated clearly that deduction of interest on borrowing in relation to the calculation of the “Surplus” was to be limited, and would not extend to other interest payments in respect of borrowing in relation to the development. TRG cannot rely on the definitions of other minus elements in the calculation of the “Surplus”, which do not expressly deal with deduction of interest, to claim interest payable in respect of other borrowing as a deductible item. The parties cannot have intended that TRG should be permitted to claim to deduct interest payable to third parties as a minus item by that indirect route, when it clearly could not claim it as a deductible by the direct route of deduction of “Interest”: see para. [99(i)] above. If interest on lending in relation to the development fell to be treated as a deductible under one of the other heads, the reference to “Interest” in the definition of “Surplus” would have been otiose.[139]As to (b), I consider that the answer is ‘Yes’. Arrangement charges for, and the ordinary charges incidental to operating, loan facilities from third parties necessary to carry out the development qualify as minus items either as “Management Costs” (having regard to the wide definition of that term, including costs in connection with financing the property) or as “Development Costs”. In particular, since payment of the legal costs of third party lenders is a minus item (see para. [135] above), it is difficult to see why payment of the charges made by those same lenders in respect of the same loans were not intended to be brought into account as minus items. This is subject to the requirement that such charges have been properly and reasonably incurred by TRG; but there was no suggestion at trial that they were not so incurred. For the avoidance of doubt, I consider that the £3m payable to Tristmire under the Tristmire loan was in the nature of repayment of capital plus interest, and so for the reasons already given does not fall to be treated as a minus item on this basis: see para. [99(i)] above.[140]In my view, the answer to (c) is also ‘Yes’. This is for the same reasons as in relation to (b). It is significant that the provision of finance by Investec was part way through the development of the whole project (i.e. after TRG had acquired and begun to develop the East Block), and that Investec’s profit share related to the profit on the whole project. In light of this, I can see no good reason why the parties should be taken to have intended that the arrangement fee payable to Investec should be treated any differently from charges paid to other lenders. Q7: Are legal fees payable by TRG to its solicitors, Barlow Lyde & Gilbert, deductible if incurred(a) in relation to a possible misrepresentation claim against Portsmouth CC,(b) in relation to a possible defamation claim by TRG against councillors on Portsmouth CC,(c) in relation to arranging for the re-mortgaging of the East Block upon repayment of the loans from Investec,(d) in relation to arranging for the charge in favour of Investec in respect of the loans under the Facility Letter,(e) in relation to arranging for charges in favour of Tristmire and Clydesdale Bank?[141]TRG incurred an obligation to pay fees to Barlow, Lyde & Gilbert in respect of advice regarding a possible misrepresentation claim against Portsmouth CC in relation to the sale of the West Block by Portsmouth CC to TRG. In my view, these costs are not deductible items in the calculation of the “Surplus” and the answer to (a) is ‘No’. These are not costs which fall within the natural meaning of any of the express minus items in the definition of “Surplus”, such as “Management Costs”. Moreover, any proceeds from a claim against Portsmouth CC would not have been brought into account as plus items in the calculation of the “Surplus” (since they would not count as “Net Sale Proceeds” etc), so it is not plausible to suppose that the parties intended that costs associated with realising such a benefit for TRG should be brought into account as minus items in that calculation.[142]The same answer applies in respect of (b), for the same reasons.[143]I consider that the answer to (c) is also ‘No’. The EFA contemplated that at the point when the Investec loans were repaid, the properties in the development would either have been sold (giving rise to the calculation of “Net Sale Proceeds”) or that a Crystallisation Notice would be served, giving rise to a calculation of “Estimated Net Sale Proceeds” upon a hypothetical sale of such properties as had not in fact been sold. On neither basis would there be scope to bring into account the costs of TRG in re-financing the properties. In so far as TRG still held properties which required to be re-financed when the Investec lending was repaid, the calculation of the “Estimated Net Sale Proceeds”, including the notional costs of effecting a notional sale of those properties, would be in place of the actual costs of effecting an actual re-financing of those properties. This conclusion is underlined by the fact that when the Investec loans were repaid, the element of joint venture between Investec and TRG would have come to an end and any arrangements that TRG might make for the future would naturally be expected to be for its own account and at its sole cost.[144]The answer I give to (d) is ‘Yes’, essentially for the same reasons as in para. [133] above, as applied in relation to TRG’s own legal fees in connection with the acquisition of the portfolio. Since TRG is entitled to deduct the legal costs of third parties in relation to arranging for third party charges to be given, I can see no good commercial reason why the parties should have intended any different approach to apply in relation to TRG’s own legal costs in respect of the same transactions.[145]The answer I give to (e) is ‘Yes’, for the same reasons as in para. [144] above. Q8: Are payments of fees of various accountancy firms (Haslers, HJS Group, ENCY Associates and Farwell Partnership) deductible?[146]In relation to this question, I was invited by the parties to review certain invoices as examples, doing the best I could to identify from the invoices the services which had been provided, and then to rule whether such costs should be brought into account as minus items in the calculation of the “Surplus”. It was agreed that it would not be a sensible or proportionate use of the court’s or the parties’ time to go into these matters in any greater detail.[147]The first sample invoice is that dated 3 January 2006 from Haslers, which related to Goldford Investments Ltd (“Goldford”) and gave as narrative:
“In Connection with the preparation of the statutory accounts of the Company for the year to 31 March 2005”
. Goldford was a company which owned the head lease for part of the property in the East Block. TRG sought to acquire the head lease, but it transpired that the only way in which it could do so was by agreeing to buy Goldford.[148]At trial, Investec accepted that costs relating to the acquisition of Goldford are deductible, but it disputed that these fees of Haslers should be brought into account. In my judgment, however, on the facts these fees were in substance a cost sufficiently related to the acquisition of Goldford as to qualify as a minus item in the calculation of the “Surplus” along with other costs relating to the acquisition of Goldford (all of which would fall within “Management Costs”). Once Goldford was acquired, statutory accounts would have to be filed for it, and since it was a wholly owned subsidiary of TRG it was reasonable for TRG to pay for the preparation of such accounts.[149]The next sample invoice is that dated 7 May 2003 from HJS Group. The narrative in this invoice was as follows:
“Services provided in connection with purchase of 25-27 Palmerston Road, including the option to tax on these premises Recharge of fees from VAT Consultant”
Recharge of fees from VAT Consultant”[150]This appears to relate primarily to advice in respect of the tax affairs of TRG. I consider that such matters are too remote from the calculation of “Surplus” under the EFA to be brought into account, for reasons similar to those set out at para. [99(iv)] above. Moreover, it does not appear that any tax advantage obtained by TRG would be brought into account on the plus side of the calculation of “Surplus”, so it is difficult to conclude that the parties intended that costs associated with realising tax advantages for TRG should be brought into account as minus items.[151]The third sample invoice is that of the Farwell Partnership dated 12 January 2004. The narrative in that invoice is as follows:
“In connection with collating documents for analyses of the company assets for the completion of the business profile for the company in view of presentation to financiers for their perusal.” “In connection with the negotiations of a financial facility for the business together with negotiations, correspondence and meetings relating thereto”
[152]This appears to relate to work undertaken for TRG to obtain financing for the development before Investec became involved. In my view, these fees are a proper minus item in the calculation of the “Surplus”, as “Management Costs”, for reasons similar to those given in para. [131] in respect of the legal fees of TRG in relation to arranging for such financing. Indeed, I consider that these fees fall within the express language of sub-paragraph (3) in the definition of “Marketing Costs”, as “marketing … and promotional expenditure in connection with financing … the property …”. There was no suggestion from Investec that, if these costs were in principle deductible (as I hold they are), they could not be deducted because they had not been properly and reasonably incurred.[153]The last sample invoice is that dated 29 October 2004 from ENCY Associates. The narrative in this invoice was as follows “In connection with the book-keeping services and preparation of the VAT return for the quarter ended 31 August 2004 … £165. Correspondence with HJS Accountants and Investec Re: financing …. £300” Correspondence with HJS Accountants and Investec Re: financing …. £300”[154]The first element in this invoice relates to fees for carrying out TRG’s internal book-keeping functions and preparing its returns for tax purposes. In my view, these are not deductible items in the calculation of “Surplus”. As to the preparation of TRG’s tax returns, see para. [150] above. So far as TRG’s internal book-keeping function is concerned, that is not a cost incurred in managing the property, but a cost of TRG in managing itself. Nor is it within any other heads of deductible items.[155]The second element in this invoice appears to relate to arranging the financing for the development from Investec. It is therefore a proper deductible item: see para. [152] above.

Conclusion

[156]Having resolved issues of principle so far as practicable on the basis of the evidence and arguments presented at the trial, it will be for the parties to seek to agree the final figure due in respect of the exit fee payable under the EFA.

Cited in 11 later judgments

and 2 more of the most senior