Royal Mail Estates Ltd v Maples Teesdale (a firm) [2015] EWHC 1890 (Ch)

Summary

The High Court has held that a contract for the sale of land to a company can be enforced, even though the company was not incorporated at the time the contract was exchanged. However, the legal effect of the failure to incorporate the company was that the entity that signed the contract on behalf of the company was personally liable for its performance. In this case, the entity was the firm of solicitors acting for the purported buyer, Maples Teesdale, who were then liable under the contract. The case highlights one of the more serious problems that can arise when using corporate structures to acquire land.

The facts

This case concerned a contract to acquire property on Kensington High Street in Central London (the ‘Contract’), whereby the Claimant agreed to sell the property for £20 million to a new company. The contract was signed on behalf of the buyer company by its solicitors, Maples Teesdale. However, at the time that the Contract was exchanged, the company was yet to be incorporated. In the circumstances, a sale had purportedly been agreed to a party that did not exist.

The Claimant contended that the Defendants’ firm was a party to the Contract and therefore personally liable for its performance. The Claimant claimed that the Contract had been breached, that the deposit must be paid and that it should be paid damages. The total sum claimed amounted to £5.1 million.

In response to the Claimant’s claim, the Defendants made an application to Court for summary judgment in their favour. This decision concerns the result of that application, although the substantive case is yet to be decided at a full trial.

Issues

In order to support its position, the Claimant relied on section 36C(1) of the Companies Act 1985, which provides that:

  • ‘A contract which purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.’

In their defence, the Defendants argued that certain terms of the Contract constituted an‘agreement to the contrary’ for the purposes of section 36C(1), and that they should not be personally liable for the performance of the Contract. In particular, the Defendants relied on a clause stating that the benefit of the Contract was ‘personal to the Buyer’. ‘The Buyer’ was named as the company that had yet to come into existence, so it was argued that it would be impossible for the Defendants to enjoy the benefit of the Contract, even if they had executed it by mistake. By extension, the Defendants argued that the burden of the Contract could not be theirs.

In response, the Claimant argued that the terms of section 36C(1) were clear, and that any‘agreement to the contrary’ would need to be equally clear and specific, setting out exactly which agent would not be personally liable.

The decision

The Court held that the Defendant’s application for summary judgment would be dismissed. There was nothing in the Contract that could be construed as an ‘agreement to the contrary’ to exclude the effect of section 36C(1). Although the Contract had been drafted to agree a sale of land to a specified buyer, the statute would have the effect of altering this.

The Court also found that there was no evidence to suggest that section 36C(1) would not apply if the Contract was signed by the Defendants. A contrary agreement would need to be a clear agreement. The purpose of the statute was to avoid the consequences of the contract with the buyer company becoming a nullity.

In his conclusions, the Judge dismissed the Defendants’ application for summary judgment. While the case may continue until a full trial, it seems unlikely that further evidence will emerge that will enable the Court to come to a different conclusion on this point.

Our advice

It is very common for companies to be incorporated for the sole purpose of holding specific parcels of land. These special purpose vehicles (‘SPVs’) are often incorporated quickly to facilitate a transaction, usually for tax efficiency purposes. This case illustrates the dangers that exist where such structures are employed and highlights a little known provision of company law, which can have very serious consequences in terms of personal liability.

Finally, for completeness, it is worth noting that the Contract was exchanged on 19 December 2008. As of 1 October 2009, section 36C(1) of the Companies Act 1985 was replaced by a corresponding provision at section 51 of the Companies Act 2006. In our view, the Court’s decision would not have been different under the new legislation, but it is worth noting that the relevant provisions have been kept.