Neutral Citation Number: [2004] EWHC 868 (Ch)
Case No: HC 04C0052
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 27/04/2004

Before :

THE HONOURABLE MR JUSTICE LIGHTMAN
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Between :

	(1) QUEEN’S MOAT HOUSES PLC
(2) NORFOLK CAPITAL HOTELS LIMITED	
Claimants	
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	CAPITA  IRG TRUSTEES LIMITED	Defendant	

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Mr Ewan McQuater QC (instructed by Freshfields Bruckhaus Deringer, 65 Fleet Street, London EC4Y 1HS)
for the Claimants
Mr Gabriel Moss QC and Ms Felicity Toube (instructed by Slaughter and May, One Bunhill Row, London EC1Y 8YY)
for the Defendant

Hearing dates: 24th-25th March 2004
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Judgment
Mr Justice Lightman: 
PRELIMINARY
1.	This action is a claim by the Claimants Queen’s Moat House Plc (“QMH”) and Norfolk Capital Hotels Limited (“Norfolk”), which is one of the subsidiaries of QMH, for a declaration that upon the true construction of a Trust Deed dated the 12th December 1983 as subsequently amended (“the Trust Deed”) they are entitled to withdraw as security from the charge created by the Trust Deed the lease of the Royal Court Hotel in Sloane Square London (“the Sloane Property”) which is vested in Norfolk.  The Defendant Capita IRG Trustees Limited (“the Trustees”), which is the recently appointed replacement trustee of the Trust Deed, opposes the application.
2.	The Trust Deed is a deed entered into by QMH (therein referred to as “the Company”) and subsidiaries of QMH to secure the issue of debenture stock by QMH which matures on the 1st October 2020.  The Trust Deed contains detailed provision for maintenance of a security cover for stockholders of the value between 150% and 175% of the nominal stock outstanding (“the Relevant Security Percentage”), for topping up the security cover if the value of the security falls below the minimum 150% cover, for withdrawal of security to the extent that the value of the security cover exceeds 175% cover and (in clauses 11A and 11B) for substitution of alternative security approved by the Trustees of equal value for property charged.  Clause 1 of the Trust Deed is a definition clause and in that clause there is the critically important definition of the term “value”.  In a word the clause defines value as the value ascribed by a valuation subject to a proviso (“the Proviso”) that no value shall be attributed to any leasehold property provided as security if the term of the lease expires before the date that is 45 years after the final maturity of the stock in 2020.  Such a leasehold is referred to as  “a short leasehold”.
3.	The lease of the Sloane Property is for a term of 65 years expiring on the 24th June 2042 and is accordingly a short leasehold.  The current security cover for stockholders provided by a portfolio of hotels is 153% of the nominal stock outstanding.  This level reflects the open market value of the portfolio of hotels on a going-concern basis.
4.	In  dispute in this action is whether the Claimants are entitled under the terms of the Trust Deed to substitute nil for the Sloane Property and obtain its withdrawal from the charge subject  only to paying the costs of the transaction.
5.	The Claimants are in financial difficulties and are anxious to be able to deal with the Sloane Property free from the constraints imposed by the Trust Deed and in particular in a manner enabling QMH to raise the wherewithal to make payments due to stockholders.  The Trustees are anxious to retain the Sloane Property as security because the present level of security cover, though above the minimum 150% cover, is inadequate in case of a hotel group in financial straits, for forced or distress sale prices are unlikely to be obtainable which anywhere approach the current open market going-concern value of the hotels.
6.	In this judgment I shall first give an overview of the relevant history and facts.  I shall then give detailed consideration to the terms of the Trust Deed and consider in turn the issues of construction and estoppel.
FACTS
7.	On the 4th November 1993 a valuation was completed by Jones Lang Wootton (“JLW”) at the request of the Trustees, which valued the property mortgaged under the Trust Deed (“the Specifically Mortgaged Property”) at £137.5 million.  Clause 10 of the Trust Deed provided that, if the value of the Specifically Mortgaged Property was less than 150 per cent. of the nominal value of the stock outstanding and QMH did not within 6 months make good the deficiency, there should be a default entitling the Trustees to enforce the security.  The valuation of JLW indicated that there was a shortfall of £178.5 million.
8.	By reason of its financial difficulties QMH was unable to make good the deficiency. QMH was therefore in default.  As an inducement for the agreement by the stockholders to agree a waiver of the default and as consideration therefore, shortly before the 5th November 1993 QMH agreed with the Trustees to procure the grant to the Trustees as part of the Specifically Mortgaged Property of fixed first legal charges over four properties which were the subject of floating charges and were valued on an open market existing use value at £7.2 million.  The grant of the fixed charges would reduce the shortfall in security by this sum.  One of these four properties was the Sloane Property which was vested in Norfolk.  The view of QMH and Norfolk was that, since the four properties were already the subject of floating charges, there was little to be lost by giving the Trustees the benefit of fixed charges.  But the provision of the fixed charges was perceived to be a gain by the Trustees and the stockholders.  At a meeting on the 30th November 1993 the stockholders, informed of the agreement of QMH to procure the grant of these fixed charges, voted to direct the Trustees to waive until March 1994 their right to enforce the security on the grounds of the default.
9.	Both the Trustees and QMH wanted the four properties brought into charge as soon as possible notwithstanding that the certificates of title were not available at the date of charge, and the Trustees accordingly agreed that the properties could be brought into charge with no certificates of title or valuations.  On this basis the four properties were charged to the then current Trustees (Guardian Royal Exchange Assurance plc) by a Deed of Assurance made on the 8th March 1994 between QMH, Five Star Inns Limited, Norfolk and the Trustees (“the Deed”).  The Recital to the Deed stated that the Deed was supplemental to the Trust Deed and in clause 2 the Deed provided that the four properties were charged by way of first legal mortgage “to the intent that the same shall henceforth form part of the Specifically Mortgaged Property and be held by the Trustees upon and subject to the trusts and provisions declared by and contained in these presents relating to the Specifically Mortgaged Property”.
10.	In March 1994 the stockholders voted to extend the waiver of the default until the end of June 1994.  It may readily be inferred that the execution of the Deed was part of the inducement for such extension. 
11.	  In May and June 1994, JLW provided the Trustees with a valuation of the properties then charged by QMH and its subsidiaries to the Trustees for the purposes of assessing the security cover.  The 1994 Valuation included the Sloane Property.  Subsequent valuations valued the Sloane Property separately and a draft circular to shareholders dated the 7th March 1994 stated that for technical reasons it was not included in the valuation of the Specifically Mortgaged Property or the Relevant Security Percentage.
12.	Thereafter there were on-going negotiations between QMH and its subsidiaries, the Trustees and the stockholders for the financial restructuring of QMH.  An agreement in principle was arrived at on the 1st July 1994, and at a duly convened meeting of stockholders held on the 27th April 1995 the stockholders authorised the Trustees to enter into the Fourth Supplemental Trust Deed which in clause 3 waived all breaches of covenant and events of default occurring on or prior to the date thereof in connection with the value of the Specifically Mortgaged Property being less than 150% of the nominal value of the stock outstanding.
13.	 Various documents have been put in evidence.  First and foremost is a draft “Questions and Answers” for the stockholders’ meeting held on 27 April 1995, which was apparently supplied by QMH to the Trustees for use at the meeting.  It was not apparently used, but the information contained was information communicated by QMH to the Trustees.  Two draft Answers are relied on by the Trustees.
14.	Answer 5 reads as follows:
 “The [Sloane Property] along with various other properties, was added to the Specifically Mortgaged Property last year to improve the underlying value of the Stockholders’ security by upgrading to fixed charge properties those properties which were only subject to a floating charge.  The hotel is held on a lease which expires in 2042 and therefore cannot be included within the value of the Specifically Mortgaged Property for the purposes of the security cover covenant.  However, the underlying value of the fixed charge on the hotel is of course held for the benefit of Stockholders.”
The answer plainly recognises the application of the Proviso in respect of the Sloane Property, for it is the reason why the value of the Sloane Property could not be included within the value of the Specifically Mortgaged Property.
15.	Answer 16 reads:
“[The security granted by the Deed] was over the various properties that were already subject to floating charges in favour of the Trustees.  They were upgraded to fixed charges in respect of such properties to improve as far as possible the underlying value of the Stockholders’ security.  The Banks agreed to this security being granted as the properties were already charged and therefore the Stockholders already ranked ahead of the Banks anyway.”
The upgrade included the priority over preferential creditors which was afforded to the Trustees as chargees under the Deed and was not previously available to them as holders of floating charges.
16.	 There have also been put in evidence hand-written notes from a Steering Committee meeting (a representative group of beneficiary stockholders with whom the Trustees dealt in connection with the renegotiation of the terms of the Trust Deed) dated the 19th April 1995 which refers to the short leasehold status of the Sloane Property.
17.	The Fourth Supplemental Trust Deed was executed on the 29th April 1995.  It recited that it was supplemental to the Trust Deed and the Deed.  The Fourth Supplemental Trust Deed made certain amendments to the Trust Deed and provided in clause 7 that the Trust Deed, the Deed and the Fourth Supplemental Trust Deed should be read and construed as one deed.  
18.	Thereafter the Relevant Security Percentage was achieved.  The valuation provided by QMH (as at 31st December 2002) on the 14th March 2003 makes it apparent that the cover requirement on the value of the security was at that time only just met.  QMH provided a further valuation dated the 27th February 2004 (as at the 28th December 2003) on the 5th March 2004 (stamped “copy” but unsigned) pursuant to the requirements of clause 16(D) of the Trust Deed which shows that the threshold continued only just to be met.  QMH is in financial difficulties.  The profit and loss accounts for the group as at the 29th December 2002 show a trading profit but a loss after payment of interest.  The figure inserted into the Balance Sheet said to derive from the profit and loss account shows a deficit of £401.3m.  More recent reports (Financial Times 2 January 2004) state that QMH  “is struggling with” a debt of £640m which had forced QMH shares to be suspended in an effort to arrange a refinancing.
19.	By letter dated the 12th January 2004 QMH gave notice to the Trustees under clause 11B of the Trust Deed seeking to withdraw the Sloane Property from the Specifically Mortgaged Property on tendering a nominal sum and the expenses of the transaction.  The Trustees however rejected the notice and insisted that QMH could only withdraw the Sloane Property from the Specifically Mortgaged Property upon payment to the Trustees in its place of its full open market value.  QMH (together with Norfolk) thereupon on the 13th February 2004 commenced these proceedings.  The critical urgency on the part of QMH of obtaining a determination of its entitlement to meet its pressing obligations (and in particular its liabilities for interest) out of the proceeds of sale of the Sloane Property or fresh monies raised on the Sloane Property resulted in a direction being obtained for an expedited trial without the disclosure of documents which is normal when issues of estoppel are to be tried.  The lack of admissible evidence has particular significance on the issue of estoppel by convention. 
CONSTRUCTION OF THE TRUST DEED
20.	Clause 1 of the Trust Deed is the definition clause.  The relevant provisions read as follows:
“1.	Definitions
(1)	In these presents and the Schedules hereto unless there is something in the subject or context inconsistent therewith the following expressions shall have the following meanings:
… (D) ‘eligible property’ means any immovable property approved for the proposed charging or release by the Trustees.
…  (H) ‘immovable property’ means freehold [and] leasehold … property…
…  (MM) ‘Relevant Security Percentage’ means:
… (c) in respect of any valuation on or after 30th June 2001, 150% ….
… (N) … ‘Specifically Mortgaged Property’ means the freehold and leasehold properties hereby expressed to be charged … and all capital moneys and investments representing the same …
… (U) ‘Valuation’ means in relation to immovable property a valuation made by professional valuers approved by the Trustees on an open market basis or such other basis as the Trustees may approve …
(W) ‘value’ in relation to any immovable property means the value ascribed thereto by a Valuation as at the date not more than six months (or such longer period as the Trustees may agree) before the date at which such value falls to be determined
PROVIDED THAT
… (iii) no value shall be attributed to any leasehold property the term of which expires before the date 45 years after the final maturity date of the Stock.”
21.	Power is reserved to QMH and its subsidiaries at any time to add to the Specifically Mortgaged Property by specifically charging in favour of the Trustees any other eligible property and/or by paying to the Trustees to be held as part of the Specifically Mortgaged Property a sum of money.
22.	Clause 10 provides for topping up and withdrawal of security from the Specifically Mortgaged Property.
“10.	VALUATION OF SPECIFICALLY MORTGAGED PROPERTY AND WITHDRAWALS
…(B)	If the aggregate value of the Specifically Mortgaged Property shall be in excess of one and three-quarters times the aggregate nominal amount of the Stock outstanding on the relevant Valuation Date any Charging Company (if it is a subsidiary, with the consent of the Company) may withdraw eligible property or money from the Specifically Mortgaged Property without substituting other immovable property or money, provided that the Specifically Mortgaged Property remaining immediately after such withdraw shall have a value of not less than one and three-quarters times such aggregate nominal amount of Stock….
(C)	If the aggregate value of the Specifically Mortgaged Property shall be less than the Relevant Security Percentage of the aggregate nominal amount of the Stock outstanding on the relevant Valuation Date such deficiency shall within six months after the Valuation Date be made good by any Charging Company (if it is a subsidiary, with the consent of the Company) specifically charging in favour of the Trustees and to their satisfaction as part of the Specifically Mortgaged Property eligible property of a value as shown by a Valuation as at such Valuation Date not less than the amount of such deficiency or, at the option of the Company, by any Charging Company paying to the Trustees to be held as part of the Specifically Mortgaged Property a sum of money equal to the amount of such deficiency or partly in one way and partly in the other.
(D)	All rights of withdrawal under this Clause shall cease upon the security hereby constituted becoming enforceable and the Trustees determining or becoming bound to enforce the same.
23.	Clause 11 of the Trust Deed provides for substitution of alternative security:
“(A) SUBSTITUTION OF SPECIFICALLY MORTGAGED PROPERTY
ANY Charging Company … may … withdraw all or any part of the Specifically Mortgaged Property charged by it upon any Charging Company (if it is a subsidiary with the consent of the Company) … charging by way of first specific charge in favour of the Trustees and to their satisfaction as part of the Specifically Mortgaged Property other eligible property or by paying to the Trustees to be held as part of the Specifically Mortgaged Property a sum of money or partly in one way and partly in the other provided that the Trustees shall be satisfied that at the time of such substitution the value or amount of the eligible property and/or money being substituted is at least equal to the value or amount of the Specifically Mortgaged Property or part thereof being released from the charge …
(B)	The Trustees upon receiving notice in writing from the Company of the proposed withdrawal and upon receiving also:-
(i)	if they so require, a certificate of professional valuers approved by the Trustees or at the discretion of the Trustees a certificate signed by any two Directors of the Company or, as the case may be, a Charging Company as to the value of the property to be withdrawn and where appropriate of the eligible property to be charged; and
(ii)	money or charges by way of first specific charge on such properties as aforesaid and any ancillary documents required in connection therewith and payment of any costs or expenses incurred in connection with the substitution shall release and surrender to the Company or to the Charging Company or as the Company or the Charging Company may direct the property to be withdrawn so that the same thenceforth no longer forms part of the Specifically Mortgaged Property.
(C)	All rights of withdrawal under this Clause shall cease upon the security hereby constituted becoming enforceable and the Trustees determining or becoming bound to enforce the same.”

THE CRUX OF THE DISPUTE
24.	The crux of the dispute between the parties is the status of the Sloane Property as security.  On the one hand (as the Deed made clear) the Sloane Property was intended to be made, and was made, the subject of a fixed charge, part of the Specifically Mortgaged Property and added value for the stockholders.  On the other hand (as the Trust Deed and the Fourth Supplementary Deed made clear and as was reflected in the later property valuations) the Sloane Property as a short leasehold was for the purposes of the valuation to have a nil value attributed to it.  The dilemma raised is how at the same time the grant of the fixed charge over the Sloane Property could add value for the stockholders and could have been or could have been intended to be available on request by the Claimants to be released from the charge for no consideration under the provision of Clause 11.
CONSTRUCTION
25.	In my judgment on the face of the Trust Deed, the definition of the term “value” in clause 1 and (with it) the Proviso are clearly and unambiguously applicable on a notice of withdrawal of Property from security under clause 11, and the onus must accordingly be on the Trustees to establish grounds for holding that the Claimants are not entitled to the relief which they seek.
26.	Mr Moss for the Trustees on a variety of grounds submits that the Proviso has no application to clause 11.  He first seeks to invoke the opening words of the definition clause, namely “unless there is something in the subject or context inconsistent therewith”.  He contends that there is something in the subject or context inconsistent with the application of the Proviso in clause 11.  Mr Moss submits that: (1) the court can and should take into account the improbability that the parties intended to agree to something which was legally ineffective (see BCCI v. Ali [2002] 1 AC 251 at 269 para 39 per Lord Hoffmann); (2) if the Proviso applies to clause 11, the intended charge by way of legal mortgage over the Sloane Property can only have effect in law as a floating charge because of the right of Norfolk unilaterally to require the release of the Sloane Property from the charge; and (3) this negation of the parties’ expressed intention that the Trustees should have a fixed charge demonstrates the necessary inconsistency and so precludes application of the interpretation clause.  In support of this submission he quotes and relies on the decision of the Privy Council in Agnew v. CIR [2001] 2 AC 710 and in particular the statement of Lord Millett (at p. 723) where he said:
“If the chargor is free to deal with the charged assets and so withdraw them from the ambit of the charge without the consent of the chargee, then the charge is a floating charge.  But the test can equally well be expressed from the chargee’s point of view.  If the charged assets are not under its control so that it can prevent their dissipation without its consent, then the charge cannot be a fixed charge.”
27.	Ingenious though this argument is, I reject it on two grounds.  The first ground is that the existence of a right unilaterally to require a chargee to release property from a charge does not render what is otherwise a fixed charge a floating charge.  There is a critical difference between the right of a corporate chargor to deal with and dispose of property free from charge without reference to the chargee and the right of a corporate chargor to require the chargee to release the charged property from the charge.  The right of a corporate chargor in the course of its business to deal with or dispose of charged property without reference to the chargee (save in exceptional circumstances) is inconsistent with the existence of a fixed charge: it is consistent only with the existence of a floating charge.  But there is no inconsistency between the existence of a fixed charge and a contractual right on the part of the chargor to require the chargee to release property from the charge.  This must a fortiori be the case where the right to require the release (as in the present case) ceases on the security becoming enforceable and the chargee determining or becoming bound to enforce it.  
28.	The second ground is that even if the effect of the conferment of the right to withdraw the Sloane Property from the charge had the legal effect of transforming what would otherwise have been a fixed charge into a floating charge, there would be no question of this transformation rendering what the parties intended to agree into something which was legally ineffective.  The intentions of the parties as expressed in the Trust Deed are relevant and relevant only to establishing their mutual rights and obligations.  Their intentions are accordingly relevant in establishing the right of the Claimants to withdraw security from the Specifically Mortgaged Property and the obligation of the Trustees to give effect to that right.  But the question whether the charge conferring such right and imposing such obligation is by reason of such conferral characterised as a fixed or floating charge is a question of law and the intentions of parties in this regard and the fact that the answer to this question may come as a surprise to the parties is nothing to the point: see Smith v. Bridgend CBC [2002] 1 BCLC 89 para 42.  The primary intention of the parties to confer the right and impose the obligation is effectuated, albeit at the cost of disappointment of the mistaken expectation of the parties that the transaction conferring the right and imposing the obligation can be characterised as a fixed charge.
29.	Secondly Mr Moss submits that it is necessary to construe clause 11A in a commercially realistic manner and that this requires that, where the Specifically Mortgaged Property includes a short leasehold with real value (as in this case), Clause 11A should not be read in a manner permitting the value of the security held to be negated by removal of the short leasehold from the security for no consideration, but should be read instead as by implication requiring that the Proviso shall not apply.  In a word his argument is that, unless the Proviso is disapplied, there can be no point in ever including short leaseholds as part of the Specially Charged Property.
30.	Though it is open to the Claimants to withdraw a short leasehold from the Specifically Charged Property, there is a point in creating a specific charge over it.  First, the charge until the short leasehold is withdrawn constitutes security and in particular, so long as the security cover remains below 150% of the nominal stock outstanding, the charge of the short leasehold is at the very least a comfort to the Trustees.  The Trustees can enforce the charge unless and until the Claimants seek to invoke clause 11, and the Claimants know that if they seek to do so whilst there is a deficit of security, the Trustees will in all likelihood enforce the security.  Secondly clause 11C places a limitation on the right to withdraw a short leasehold from the Specifically Mortgaged Property, and provides that it shall cease to be exercisable on enforcement of the security.  Whatever the commercial limitations on the security so provided, which was a matter for the parties, the language of the Trust Deed does not admit of the construction for which Mr Moss contends.
31.	Mr Moss’s third submission is that the commercial purpose of clause 11 includes the protection of the stockholders as beneficiaries of the Trust Deed from a diminution in value of the Specifically Mortgaged Property by requiring substitution in all cases of property or money of equal value before a property can be withdrawn and this precludes substitution of nil value for a valuable short leasehold.  He refers to the requirements and formalities laid down in clause 11B.  The short answer to this submission is that the clear and unambiguous language of the Proviso makes clear that the security afforded by a short leasehold is defeasible notwithstanding the inevitable diminution in value of the Specifically Mortgaged Property.
32.	In his fourth and final submission on construction Mr Moss submits that there should be read into the Proviso to give business efficacy the words “except for the context of clause 11”.  There is no need in the interest of business efficacy to read in such words nor is it apparent (as suggested by Mr Moss) that anything has gone wrong in the drafting.
33.	I accordingly hold that the Claimants’ case on construction must succeed and that they are entitled on payment of the expenses of the transaction to require the withdrawal of the Sloane Property from the charge to the Trustees.
ESTOPPEL BY CONVENTION
34.	The Trustees contend (1) that there was a common understanding between the Claimants and the Trustees when the Deed was executed that the Proviso should not apply if and whenever the Claimants withdraw the Sloane Property from the Specifically Mortgaged Property; (2) that a statement made by the Claimants to the Trustees passed “across the line” between the Claimants and the Trustees which produced a belief or expectation to this effect in the mind of the Trustees and which would make it wrong to allow the Claimants to challenge the belief so engendered; and (3) that it would be unconscionable for the Claimants to go back on this statement.
35.	I can deal with this contention very shortly.  The starting point is the statement of principle by Lawrence Collins J in T&N Ltd v. Royal & Sun Alliance [2004] 2 LLR 106 at 131-2, at paras 190 and 193:
“This is a case in which the contract contains words which are clear and unambiguous.  It would take very exceptional circumstances indeed for them not to be given effect in accordance with those terms…  I accept the submission by T&N that since the effect of any estoppel by convention will be the same as the rectification of the exclusion wording (i.e. to change and contradict the true meaning of the written contract) the court should require the same standard of proof from the Royal as it would for rectification i.e. convincing proof of the allegedly shared or common assumption to the same effect.”
36.	As I have already held, the Trust Deed clearly and unequivocally provides that the Claimants are entitled under clause 11 (when read with the Proviso) to withdraw from charge the Sloane Property on payment merely of the expenses of the transaction.  The Deed and the Fourth Supplemental Trust Deed made plain that the provision of clause 11 applies to the Sloane Property.  Accordingly an estoppel by convention can only be available in very exceptional circumstances and the burden on the Trustees is the same onerous burden which applies in claims for rectification.
37.	The only and best evidence of the common understanding of the parties as to the rights of the Claimants under clause 11 of the Trust Deed are to be found in the Deed and the Fourth Supplemental Trust Deed.  I have already set out in my recital of the facts the substance of the minimal evidence adduced in this regard, which is merely to the effect that the Claimants intended by the Deed to provide additional security for the Trustees and stockholders in the form of the fixed charge over the Sloane Property.  There is no evidence that the parties at the time of the Deed addressed their minds, let alone communicated to each other, any understanding or expectation as to the application of clause 11 or the Proviso.  At the most, all that can be inferred is the expectation that the Claimants would not seek to withdraw the Sloane Property from charge before the 150% minimum cover was once more achieved.  Indeed any attempt to withdraw before that date was calculated to trigger enforcement on that ground and that would have brought clause 11C into play.  That period has now long expired.
CONCLUSION
38.	I therefore hold that the Claimants are entitled to the relief which they seek.