The law on informal joint venture negotiations relating to property acquisitions after Generator Developments LLP vs Lidl UK GmbH [2018].

Facts

The case concerned a 'subject to contract' arrangement between Generator and Lidl to buy land at an Industrial Estate in Brentwood, Essex for the purposes of developing a supermarket and a number of residential units. After extensive negotiations and efforts, Generator allowed Lidl to buy the land on behalf of the proposed joint venture knowing the terms of the joint venture were still being negotiated between Lidl and Generator. Once Lidl acquired the land it subsequently reneged on the proposed joint venture, denying Generator any interest in the land and its future development.

We discussed the 2016 High Court decision in an earlier Real Estate Bulletin. The Court of Appeal has very recently considered and rejected Generator's appeal.

The Law

Put simply, a Pallant v Morgan equity will arise when two parties agree that one will acquire property (with the other refraining from the acquisition) for the joint benefit of both, on terms which are not yet finalised. In such circumstances, a constructive trust may arise.

This was the case in the Banner Homes Holdings Ltd v Luff Developments Ltd (No 2) [2000]. There was an informal agreement to form a joint venture and develop a site. However, Luff changed its mind without informing Banner and acquired the site in its sole name and then reneged on its informal agreement with Banner. The court held that a constructive trust was created in favour of Banner. Subsequent courts have been reluctant to apply Banner to commercial negotiations. The facts of Banner were quite unique; including a 'Texas Shoot-Out' in the event the contemplated development did not proceed and the facts suggested that Luff deliberately misled Banner into thinking that an agreement had been made so as to prevent Banner bidding against Luff for the site, resulting in unconscionability.

Following on from Banner was Crossco No 4 Unlimited v Jolan Limited [2011] EWCA Civ. This case side-lined the Banner case, stating that the constructive trust created in Banner was a common intention constructive trust, mostly found in family cases rather than in commercial relationships. Unconscionability was needed to create such trusts. In Crossco, there was no unconscionability, rather carelessness on behalf of the Claimant. The court was reluctant to interfere in negotiations between legally advised parties at arm's length and refused to imply a constructive trust.

Generator's Appeal

On Appeal, Generator was unsuccessful. The Court of Appeal mostly agreed with the Judge's first instance decision. The unanimous judgment delivered by Lewison LJ, dismissed the appeal on eight grounds.

  • The arm's length negotiation of the parties was emphasised. The parties had in fact never reached an agreement on many significant aspects in the contract. Both were advised by lawyers and both were aware that they were not legally bound
  • The proposed joint venture was expressly labelled 'subject to contract'. This was repeatedly used in the draft contracts passed between the parties and their advisors. Therefore, the parties knew there was always a commercial risk that one of the other parties might terminate the relationship and negotiations
  • Generator was aware of the risk that Lidl might contract with another developer
  • There was a draft 'Joint Venture Lock out Agreement' which expressly stated that the parties were in negotiations "with a view to agreeing" or "seeking to agree". It also stated that Generator could "decide not to proceed with the transaction" and give notice to Lidl and withdraw from the Agreement
  • Another important factor was that Lidl's Board had not yet approved the potential joint venture and Generator was aware of this. Again an experienced and well advised property professional would therefore know there was a real commercial risk
  • There was no pre-existing duty or relationship between Lidl and Generator. In previous Pallant v Morgan cases a constructive trust was usually found on the basis of agency, there was no such relationship in this case
  • Unlike Banner, there was no finding of Generator's reliance on an assurance or expectation that they would receive an interest in the land. Furthermore, Generator made no contribution to the purchase price
  • The court stated that as the parties agreed that any arrangement was 'subject to contract'. It followed that the parties should be able to exercise the right not to contract

Conclusion

This case reinforces the importance of formally setting out agreements in writing. In addition, lawyers should be involved in the early stages of negotiations to advise on the potential enforceability of any informal agreements. It is clear that the courts are limiting the application of Banner Homes, in favour of a stricter and narrower approach to the Pallant v Morgan cases. This case is a clear attempt of the courts to generate "a lidl more certainty into commercial negotiations."