Was the vendor of shares in a company that owned a single property, who had served notice to complete on the purchaser, itself ready, able and willing to complete? That was the issue the court had to decide in Midill (97PL) Ltd v Park Lane Estates Limited.
Under the contract the purchase price of £4 million was payable in three instalments: £400,000 on exchange of contracts, a further £800,000 several weeks later and the balance on completion. The purchaser made the first two instalments but failed to complete on the contractual completion date. The seller served a notice to complete but this was not complied with. As a result the seller rescinded the contract and forfeited the £400,000 deposit paid on exchange of contracts, although it refunded the second instalment of £800,000 to the buyer.
The buyer claimed that the notice to complete was invalid as the seller was not 'ready, able and willing to complete' as required by the contract. As the sale was a share sale of the company which owned the property, the contract provided for the seller to deliver a number of things to the buyer on completion. These included a signed stock transfer form, resignations of the directors and company secretary and various items such as the company's books. A board meeting was to be held on completion at which these resignations would be accepted and new officers nominated by the buyer would be appointed.
The buyer alleged that the seller was not in a position to deliver the resignations of the directors and that as a result it was not ready, able and willing to complete. The court disagreed. It found that the seller was waiting for names of the new directors to be supplied by the buyer before the existing directors would sign the relevant resignation forms.
Once those names were supplied, the forms (which had been prepared in draft) could have been signed within an hour or so. Although the outgoing directors were located in Jersey, the documents could have been faxed over in time for completion. The court concluded that the seller would have been able, within the time reasonably required to do so, to set up the necessary administrative arrangements to enable completion to take place. The court commented that, where there were no signs that the buyer would complete on time, it was not surprising that not all of the seller's documents were in order.
The court declined to return the initial deposit paid on exchange of contracts to the buyer. It did not think that the fact that the seller had subsequently sold the property for a higher price constituted special circumstances justifying the return of the deposit
Things to consider
The seller was wise to return the second instalment of £800,000 to the buyer. A clause which provides for a pre-determined sum to be forfeited by one party to a contract as a result of its default can be regarded in law as a penalty clause. Such a clause will be unenforceable unless it is a genuine pre-estimate of loss. It is well established that the normal conveyancing practice of taking a 10% deposit on exchange constitutes an exception to this rule.
However, sellers who take and forfeit deposits of more than 10% cannot benefit from this exception and may be obliged to return the whole amount (not just the excess over 10%). The purchaser initially argued that, as this was a contract for the sale of shares, not land, the established exception did not apply. If this were the case, it could also have challenged the forfeiture of the 10% deposit paid on exchange. However, this submission was not developed further and so the court did not find it necessary to decide the point.
The court said that there would be nothing to stop the parties to a contract agreeing as between themselves that whether or not a deposit should be returned would depend on the outcome of a future sale. While a court would almost certainly have some regard to such an agreement, it seems doubtful whether it would be binding on the court. This is because recent case law has confirmed that the court's jurisdiction to decide whether or not a deposit should be returned cannot be ousted by agreement between the parties.
A seller who suspects its buyer is going to default should still use all endeavours to ensure it is ready, able and willing to complete. This will minimise the risk of a subsequent challenge by the buyer.