JUNE MARIE ANN SCROWTHER v WATERMILL PROPERTIES [2009] EW Misc 6 (EWCC)
[1]that there was no contract allowing Watermill to retain the £31,250; 2. that any contract that was made was void as a result of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989; 3. that she made a mistake in entering into the contract; 4. that Watermill's right to retain the £31,250 is unenforceable:- 1) as a penalty clause; 2) under the Unfair Terms in Consumer Contracts Regulations 1999; 3) as a result of the unjust enrichment of Watermill.[2]Representation[3]Witnesses[4]The Facts 4.1. Watermill's Scheme[1]A sale of the property to Watermill at a price agreed between the parties. That price is intended to be the full market value of the property. A percentage of the proceeds of sale (usually 70% but (as we shall see) in this case 75%) is available for the vendor. It is used first to discharge prior secured loans. Any remaining money is paid to the vendor for any purpose required by the vendor. [It is thus plain that the scheme cannot operate if existing secured liabilities exceed 75% of the value of the property.] The balance of the purchase price is paid to the vendor but immediately forwarded to Watermill pursuant to an authority signed by the vendor. 2. Simultaneously with the completion of the sale Watermill lease the property back to the vendor on a 6 month assured shorthold tenancy at a rent fixed by Watermill. The rent is fixed by reference to the purchase price. In this case it was 5.7% of the purchase price or £593 per month. Miss Scrowther contended that the rent was significantly above the market rental value. Although the tenancy was only a 6 month assured shorthold tenancy which gave no security of tenure to the vendor it was Watermill's intention that, subject to compliance with the obligations under the tenancy the vendor would in fact be able to occupy the property for as long as he or she liked. 3. A sum of money (described by Watermill as "the Rentback Bonus") was payable by Watermill to the vendor on vacation of the property. In the normal case where 30% of the purchase price is retained by Watermill the Rentback Bonus amounts to the whole of the 30% retained. If, however, (as in this case) the amount retained is less than 30% then the Rentback Bonus is less than the amount retained. The Rentback Bonus is only paid if the vendor vacates after 10 years' occupation under the tenancy or if Watermill terminates for a reason other than a breach by the vendor. 4.2. Watermill 4.3. Miss Scrowther's initial approach 4.4. The meeting on 28 th September 2006[1]An agreement signed by Miss Scrowther and witnessed by Mr Botsford purporting to grant Watermill an option to purchase the property for £125,000. The option fee was £1 which was duly paid and the option was exercisable within 6 months. The agreement was not in fact signed by Watermill and it is not necessary to consider whether it was in fact enforceable. 2. A document described as "A Client Quotation Form" and marked "For Illustration Purposes Only". The form explained that the scheme is designed for clients who intend to stay in their homes for a minimum of 10 years and provides a substantial future bonus. The relevant part of the form reads:- Your vacant possession value has been assessed at £125,000 and we would require a report from a Chartered Surveyor (at our expense) in order to confirm. The initial payment to you would then be £93,750. After repayment of your mortgage and any other secured debts you would then have £15,250 available in cash for any purpose. The big advantage is that at any time after 10 years has elapsed if you decide to vacate the property we will then pay you or your nominee the remaining (£18,750) as well. The rent based on the assessed valuation figure would be £593 per calendar month, equivalent to £137 per week. You would save your current mortgage repayments, structural repair costs and building insurance premiums.[1]He explained that the scheme was for people who wanted to stay in their property for a long time. 2. He explained how the scheme worked including the tenant obligations under an assured shorthold tenancy. She was told she would be evicted if she could not pay the rent and that she would have to be sure she could afford the rent. 3. He explained that Watermill normally buy at 70% of value. He performed the calculation and discovered how much would be released to Miss Scrowther after the discharge of the prior secured liabilities. Miss Scrowther said that this was not enough. Accordingly Mr Botsford carried out a calculation based on 75% of value but with a reduced bonus of 15% (the 10% reduction in the bonus reflected the fact that the payment was 75% of the value rather than the usual 70%). 4. Mr Botsford took Miss Scrowther through the documents. He read the documents clause by clause and explained the terms to Miss Scrowther. 4.5. Findings[1]I am satisfied that Mr Botsford did explain the scheme to Miss Scrowther. Included in the explanation were the basic obligations under the tenancy such as paying the rent, and that the scheme was for people staying for a long time. 2. I am satisfied that Mr Botsford did go through the figures as he asserted; I am also satisfied that he told Miss Scrowther the amounts she could expect to receive immediately (based on her figures for the liabilities) and the amounts she could expect to receive on vacation after 10 years – that is to say £18,750. 3. I am also satisfied that Mr Botsford went through the documents with Miss Scrowther before she signed them. I am satisfied that Miss Scrowther did understand the basic elements of the scheme and that she was very keen to proceed. 4. Whilst I am satisfied that Mr Botsford told Miss Scrowther that the £18,750 Rentback Bonus was payable after a minimum of 10 years I am not satisfied that he made it clear to Miss Scrowther or that she understood that if she was evicted for breach of the tenancy agreement such as non payment of rent at any time in the ten year period that she would receive nothing. 4.6. The letter dated 3 rd October 2006 Initial Payment 93,750 Rentback Bonus after a minimum of 10 years 18,750 Total 112,500 4.7. the FAQ document Q: Is there any time scale in which I have to stay in my property? A Following your initial 6 months – no, although please remember that the bonus payment is only made to clients who have been tenants for a minimum of 10 years Q Do I have to move out after 10 years? A No. You can stay as long as you wish but remember – your Rentback bonus is paid on vacant possession. In other words, when you decide to leave, at a time to suit yourself, we would sell the property on and pay your bonus Q What if you cancel my tenancy after 6 months has elapsed, even if I am not in breach of my tenancy agreement. A This is an extremely unlikely situation and has never actually occurred, but to protect you financially our unique guarantee ensures that if we were ever to terminate the tenancy (for any reason other than your breach of the tenancy terms) we would then be simultaneously liable to repay you the full balance of the bonus payment. Clearly this is not a good course for us, since it means that we have paid full market value for a property together with costs and we now have an empty property on our hands! 4.8. The Instruction of Sweeney Miller[1]the property was being sold for £125,000. On completion Miss Scrowther would authorise payment to Watermill of £31,250. 2. Following completion Miss Scrowther would remain in the property paying £593.75 in rent.[1]We understand that a representative of [Watermill] has met with you and explained how the Bonus Rent Back Scheme works and you are happy and understand it. If this is not the case please contact me immediately 2. .... 3. On completion we understand you will authorise us to transfer to the buyer the sum of £31,250 to be held by the buyer. This will be paid back to you when certain conditions are fulfilled. We understand a representative has explained such conditions to you. Should those conditions not be fulfilled then the sum (or some of it) will not be repaid. You are being asked to enter into a contract with the buyer and with any contract there is a risk that one or other party will not fulfil their contractual obligations. Please note it is for you to decide whether the risks of this happening are outweighed by the benefits to you of the scheme.[1]A copy of the client care letter that had been sent to her on 31 st October 2006. 2. A document setting out instructions to act in the sale giving details of the sale price and the amount of secured lending. 3. A Form of Authority under which Miss Scrowther " requested and authorised [Sweeney Miller] to pay [Watermill] the sum of £31,250 …upon completion of the sale" of her property. 4.9. Problems with the mortgagee 4.10. Completion of the transaction 4.11. Events following completion[5]The collateral contract A collateral contract binding the scheme, that the Claimant pays back to the Defendant from the sale the sum of £31,250 (25% purchase price), in consideration of which:[1]The Defendant enters into the contract for sale;[2]The Claimant is not required to give vacant possession which the Defendant would otherwise be entitled to under the contract for sale. She remains in her own home as desired and avoids the cost of relocation;[3]The Defendant enters into the tenancy agreement and assumes all responsibilities as landlord, including mortgage payments, buildings insurance payments and maintenance of the Property;[4]The sum of £18,750 (15% purchase price) to be repaid to the Claimant on vacation of the Property following the completion of 10 years of satisfactory tenancy, or where the Defendant terminates the tenancy without breach by the Claimant ("the Rentback Bonus"). "(1) a pre-contractual statement will only be treated as having contractual effect if the evidence shows that parties intended this to be the case. Intention is a question of fact to be decided by looking at the totality of the evidence; (2) the test is the ordinary objective test for the formation of a contract: what is relevant is not the subjective thought of one party but what a reasonable outside observer would infer from all the circumstances; (3) in deciding the question of intention, one important consideration will be whether the statement is followed by further negotiations and a written contract not containing any term corresponding to the statement. In such a case, it will be harder to infer that the statement was intended to have a contractual effect because the prima facie assumption will be that the written contract includes all the terms the parties wanted to be binding between them; (4) a further important factor will be the lapse of time between the statement and the making of the formal contract. The longer the interval, the greater the presumption must be that the parties did not intend the statement to have contractual effect in relation to a subsequent deal; (5) a representation of fact is much more likely intended to have contractual effect than a statement of future fact or future forecast."[6]Mistake[7]Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. "2(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each. (2) The terms may be incorporated in a document either by being set out in it or by reference to some other document. (3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract. (4) Where a contract for the sale or other disposition of an interest in land satisfies the conditions of this section by reason only of the rectification of one or more documents in pursuance of an order of a court, the contract shall come into being, or be deemed to have come into being, at such time as may be specified in the order." 42 The law relating to collateral contracts is well-established but in connection with sales or leases of land needs to be applied with caution if not the suspicion to which Lord Moulton referred in Heilbut Symons v Buckleton [1913] AC 30 , 47. Thus, if the promise said to be binding as a collateral contract is in truth one of the terms for the sale or other disposition of land it will be unenforceable unless it is contained in the written contract required by s 2 of the Law of Property (Miscellaneous Provisions) Act 1989. It must also be recognised that such a promise may be binding on successors in title of both parties without the need for notice or registration as a Land Charge or in the Land Registry, cf Brikom Investments v Carr [1979] 1 QB 467. In that case Lord Denning considered (p 484) that conveyancers could look after themselves. But he gave no indication of how they could protect their clients from variations to the terms of a document forming part of their title to land of which they did not and could not know." [56… Moreover, I do not consider that the court needs to interpret a collateral contract so far as possible to bring it within s 2 of the 1989 Act: on the contrary, on general principle the court should so far as possible interpret it so that it can be enforced and party autonomy respected. [57] In my judgment, the collateral contract on its true interpretation meant that notwithstanding completion, Mr Hanoman would, subject as hereafter mentioned, be free to seek any appropriate remedy thereafter if he was right about the premium. … "Any appropriate remedy" could on its face include rectification but there is no evidence that the parties discussed the question of amending the lease. Moreover, although Mr Hanoman has sought rectification in his pleading, the lease does not have to be rectified in order to give him a remedy. He now proposes to abandon his claim for rectification and seek only damages or restitution. That remedy does not involve rewriting the terms of the lease, but the giving of a personal remedy against Southwark in consequence of what the lease wrongly contains. As long as rectification is not sought when an order is made in these proceedings, the collateral contract is not in my judgment rendered unenforceable by s 2 of the 1989 Act. The collateral contract is not an agreement as to the terms on which the lease would be granted.[8]Unfair contract terms 8.1. Unfair Terms in Consumer Contracts Regulations ("the Regulations")(1) A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer. Under Regulation 6 (1) Without prejudice to regulation 12, the unfairness of a contractual term shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent.(2) In so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate-- (a) to the definition of the main subject matter of the contract, or (b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange. (e) requiring any consumer who fails to fulfil his obligation to pay a disproportionately high sum in compensation; Under Regulation 8 an unfair term is not binding on the consumer. Item Amount Claimed My Comment Rent arrears £3,144.43 There is already a judgment in the sum of £1,931.25 plus mesne profits from 3/9/07 to the date of actual possession. This can be set off against any judgment. Cost of doing up the property £5,836 It is not suggested that the replacement of the carpets or the redecoration arose out of any breach of the tenant's obligations under the lease. This is not accordingly a recoverable item of loss. Costs associated with purchase such as legal fees £458.25 These are costs associated with entering into the contract; they are not costs caused by Miss Scrowther's breach of contract. They are not recoverable. Costs of surveyor £150 These are costs associated with entering into the contract; they are not costs caused by Miss Scrowther's breach of contract. They are not recoverable. Various costs in relation to Watermill's own mortgage £1,593.75 £7,561.31 These are costs associated with entering into the contract; they are not costs caused by Miss Scrowther's breach of contract. They are not recoverable. In any event as the property was re-let the early redemption fee was not incurred. Costs of marketing 1 – 2% Remarketing costs would be incurred in any event when the property was eventually sold. It is not established that they will be any higher. Administrative Costs I accept that some additional administrative costs over and above the costs allowable in the possession proceedings will have been incurred by Watermill as a result of Miss Scrowther breach of contract. They are difficult to assess but I would have allowed £500.[9]Unlawful Penalty[10]Conclusion JOHN BEHRENS Friday 23 October 2009 Note 1 The decision in the House of Lords did not deal with section 2 or the collateral contract point. [Back]