Development projects can be complex affairs. A number of different parties may be involved, some of whom may be undertaking different roles in different documents.
The case of Meretz Investments A.V. & anr v ACP Ltd & others illustrates the problems that can arise when a party's rights and obligations conflict.
The facts of the case were not straightforward. A landowner granted a development lease under which the developer was to construct some penthouses on the top of an existing block of flats. In return, the landowner was to share in the proceeds of sale of the flats. The developer was obliged to use its reasonable endeavours to build the penthouses within a certain time frame.
In the event that the developer failed to build the penthouses on time, the landowner had the option to require the developer to grant it a sub-lease of the undeveloped part of the property. The landowner obtained a guarantee of the developer's obligations from the developer's parent company.
The preliminary agreement which the parties had entered into anticipated that the developer would need to charge the development lease to a commercial lender. In the event, the finance was provided by the developer's parent company, which therefore took a charge over the lease. The landowner had a second charge to secure its share in the proceeds of sale. All the parties signed a deed of priority to regulate the priorities between the first and second charges.
Eventually the development ran into construction problems and it became clear to the developer and its parent that the project would no longer be profitable. The directors came to the view that they should use the parent company charge to avoid a loss, by exercising the power of sale under the charge.
The landowner exercised its right to call for a sub-lease of the undeveloped part of the property and served notice on the developer. The developer could not grant the sub-lease, since contracts had already been exchanged on the sale between the developer's parent company and a purchaser.
The landowner accepted that the parent company was entitled to exercise its power of sale. However, the landowner claimed damages against the developer, for its failure to comply with the obligation to grant the leaseback, and against the parent company in its capacity as guarantor.
The developer and its parent contended that the leaseback option was conditional on the developer having title to the development lease, so as to be able to perform the obligation to grant the sublease. In addition, they pointed out that the landowner had agreed to the creation of the parents company's charge. They argued that this meant that the landowner must also have agreed that there should be no claim under the parent's guarantee if the developer was unable to grant the sublease as a result of the exercise of the power of sale.
The Court of Appeal held that the fact that the enforcement of the parent company's charge prevented the developer from granting the leaseback did not preclude liability on the part of the developer in damages for failure to comply with this obligation. The obligation to deliver the sublease was unqualified. The parent company was also liable in damages, as guarantor for the developer.
Things to consider
At the time of the preliminary agreement there was nothing circular in the secondary liability for damages vesting in the parent company, as the parties had envisaged the involvement of a third party funder.
When circumstances changed and the parent became the first mortgagee, it should have obtained a qualification to its guarantee liability. Where a party is "wearing more than one hat", it is important that its obligations are consistent.