REF/2015/0343

PROPERTY CHAMBER LAND REGISTRATION
FIRST-TIER TRIBUNAL
LAND REGISTRATION ACT 2002

IN THE MATTER OF A REFERENCE FROM HM LAND REGISTRY
BETWEEN
STEPHEN JOHN JAMES EVANS
APPLICANT
and

STONELEIGH PAVILIONS (BIRKBY) LIMITED 
(formerly MDC (Birkby) Limited)
RESPONDENT

Property Address: Apartment 2, Stoneleigh Pavilions, Stoneleigh Mews, Bryan Road, Edgerton (HD2 2AH)

Title Number: WYK922783

Before: Judge Owen Rhys

Sitting at:  Leeds Employment Tribunal

On: 8th February 2016

Applicant representation:	Mr Walder of Counsel instruxcted by Ison Harrison Solicitors
Respondent representation:	Mr Buckingham of Counsel instructed by Milners Solicitors
_____________________________________________________________________

DECISION
_____________________________________________________________________

1.	By contract dated 8th July 2014, the Applicant purchased a long leasehold title created by a Lease dated 22nd October 2009 (“the Lease”) and made between M D Computers Limited (1) (“the Landlord”) MDC (Birkby) Limited (2) (“the Management Company”) and Christian Sharp (3) (“the Original Tenant”).  In the Lease, the premises demised are described as Apartment 2, Stoneleigh Pavilions, Stoneleigh Mews, Bryan Road, Edgerton (HD2 2AH) – I shall refer to them as “Apartment 2”.  The term demised under the Lease is 999 years, and a premium of £174,995 was recorded as having been paid by the Tenant.  The freehold title is registered under Title number WYK630762, and the Lease is entered in the Charges Register (along with others).  The Tenant was registered with title to Apartment 2 on 15th July 2010 under Title number WYK922783. A restriction in the register was entered on the same date, in these terms: “No disposition of the registered estate (other than a charge) by the proprietor of the registered estate is to be registered without a certificaste signed by MDC (Birkby) Limited (Co.Regn. No. 6952337) of Westfield Farm, Westgate Hill, Bradford, West Yorkshire BD4 0SL that the provisions of clause 3.19.5 of the registered lease have been complied with.”  I shall refer to this as “the Restriction”.

2.	 The Lease is a fairly typical residential lease of a flat situated within a small estate.  The Landlord gave a covenant for quiet enjoyment, and further covenanted to effect insurance of the building containing Apartment 2.  The Management Company covenanted to enforce the covenants in the Lease as against other leaseholders, and “to use its reasonable endeavours to provide the services and facilities in accordance with the provisions of the Fifth Schedule.”  The Fifth Schedule contains a comprehensive scheme for the repair and maintenance of the Building and Common Parts of the Estate (as defined).  As one would expect, the Fifth Schedule also contains detailed provisions for the calculation and payment of a service charge by the Tenant to reimburse his share of the Management Company’s expenses and outgoings.

3.	The Tenant’s covenants are contained in clause 3 of the Lease.  These include the payment of rent to the Landlord – initially a sum of £250 per annum – and the Service Charge to the Management Company.  Clause 3.19.5 is in these terms: 

“upon every assignment transfer or underlease (excluding an underlease for a term not exceeding 1 year granted at a rack rent without payment of fine) 
3.19.5.1	to procure the assignee transferee or underlessee (as the case may be) shall enter into a deed of Covenant with the Management Company and the Landlord to observe and perform the covenants on the part of the Tenant contained in the Lease
3.19.5.2	to resign membership of the Management Company”.

4.	In 2011 the Management Company changed its name from MDC (Birkby) Limited to its present name.  As at July 2014, there were ten issued shares in that company, one of which was held by the Tenant.  The Landlord itself, and a Director of and shareholder in the Landlord, Mr Michael Dunbar, each held one share in the Management Company. The only Director named at Companies House is a Mr Richard Greaves. He has made a witness statement in which he states that “Whilst I have been a director of the Respondent since 30th September 2010 I have had little or no involvement in the day to day running of the Respondent during that period. This has been delegated to Shaun Mellor of One o One Properties Limited who fulfilled the role as managing agents and to Michael Dunbar ….”  It appears that although Mr Dunbar has both conducted himself as a Director of the Management Company, and has been treated as such (see Mr Greaves’s statement), he was not formally appointed as a Director until 9th February 2016. 

5.	The dispute arises in this way.  By a contract dated 8th July 2014 (“the Contract”) the Applicant contracted to purchase Apartment 2 from the Tenant at a price of £325,000.  On 8th July 2014 Milners solicitors wrote to the Tenant’s solicitors, Ramsdens, stating that “…. We confirmed that our client will accept £30,000 from your client in respect of the indebtedness that is due.  We understand that you are due to exchange contracts shortly. Please note that we are advised that the management company will not be issuing a consent to the transaction (as required by the restriction in the title) until these sums are paid.”  The letter is headed: “Our client – MD Construction Ltd”.  At exchange, completion of the Contract was agreed for Friday 11th July 2014. On the morning of 11th July Milners solicitors contacted the Applicant’s solicitors, Ison Harrison (“Ison”), to inform them that “management company consent to the transaction will not be granted owing to an outstanding debt from Mr Sharp from the time he purchased the property.  We are seeking settlement of the debt out of the sale proceeds but I understand the matter continues to be disputed.”  These words are taken from an email sent at 10.10 on 11th July to a Jeremy Hewardine, a commercial property fee-earner in Ison.  I heard oral evidence from Mr James Smith of Ison, who was the conveyancer acting for the Applicant, as to the events of 11th July.  His evidence, which I accept, is that he and his supervisor, Mr Bancroft, were out of the office that day, and completion was managed by a trainee.  He said that Ramsdens did not inform him of Milner’s letter dated 8th July.   Should it be in any way material to me decision, I find that neither the Applicant nor the fee-earners instructed on his purchase, had any inkling of the contents of Milners’ letter of 8th July or emails of 11th July 2014.  Mr Hewardine himself was, according to Mr Smith, on leave in Russia at the time.  Completion of the Contract took place on 11th July 2014.  On that date an executed TR1 was delivered to the Applicant, and in turn Ison released the completion monies to the Tenant’s solicitors.  These funds derived from a loan to the Applicant from Coventry Building Society, who took a charge over Apartment 2 in the usual way.

6.	On 8th August 2014 Ison applied to Land Registry to register the Applicant with title to Apartment 2.  Land Registry raised a requisition relating to the Restriction and required a certificate from the Management Company in accordance with clause 3.19 of the Lease. At that date, the Applicant had not executed a Deed of Covenant as required, nor had the Tenant resigned as a member of the Management Company.  It is not clear to me, therefore, how the Management Company could have been expected to issue the certificate in any event.  Nevertheless, on 26th September 2014 the Applicant applied to Land Registry in Form RX2 (“the Application”) for the disapplication of the Restriction in regard to the Applicant’s registration.  On the same day Mr Smith wrote to Milners by email on 26th September asking for the certificate, and intimating that an application to disapply the Restriction would be made unless the certificate was forthcoming.  The letter produced the following response from Milners, dated 29th September 2014:
“I refer to your email dated 26th September 2014.
Please find enclosed for your attention a copy of an email I sent to Jeremy Hewardine dated 11 July 2014.  This is self-explanatory and at the time of writing I am waiting for a reply.
My instructions remain that no consent is to be issued at this time.
As you will have noted Ison Harrison originally acted for my client when the Property was sold to Mr Sharp and that not all of the purchase price was paid over.  I am instructed that approximately £30,000 remains outstanding. As such therefore my clients retained a vendor’s lien on the Property.  That lien does not appear to have been protected by registration at the time.
When my client discovered that Mr Sharp was about to sell the property I advised Mr Sharp’s lawyers of this fact and also yourselves through my e-mail of 11 July 2014.
I am now concerned to see that you intend to apply to the Land Registry to dis-apply the restriction.  Please be in no doubt that any such application will be objected to by this firm.  Furthermore you will note from my email to Jeremy that I had raised the question of a conflict of interest.  As stated this matter relates to a vendor’s lien from a time when Ison Harrison were acting for my client.  It will be wholly inappropriate therefore for Ison Harrison to act in a manner which prejudices that interest.”

7.	Before describing subsequent events, a number of points should be made about this letter.  First, although there is a reference to “consent”, there is no provision in the Lease requiring a licence to assign – hardly surprising in the case of a 999-year lease granted at a premium.  In this context “consent” must mean the provision of the relevant certificate. Secondly, it is clear that the letter is written on behalf of the Landlord, not the Management Company.  The references to “my client” can only apply to the Landlord.  The earlier letter of 8th July to which the writer refers is expressly written on behalf of “MDC Construction Ltd”.  Further, the basis of the refusal of “consent” is said to be the existence of a vendor’s lien – arising out of Landlord’s sale to the tenant in 2009.  Thirdly, the reason for the refusal of “consent”, as stated in this letter, is the same reason that has been given consistently throughout this dispute, namely that the Tenant owes money to the Landlord.   This alleged debt arises out of a Works Charge Deed of Covenant dated 22nd October 2009 (the same date as the Lease) and made between the Landlord (1) and the Tenant (2) (“the Works Charge”)  The purpose of the Works Charge is apparent from the terms of clause 4.1, whereby the Landlord agreed, subject to the tenant making certain payments not to exceed £70,000,  “to provide or procure the provision of such of the Works as the Seller reasonably considered necessary for the proper completion of the Estate”.  The Works are defined in the Second Schedule, and consist of various construction works.  The Management Company is not a party to the Works Charge.  Although certain items of relating to maintenance and the continuing provision of services are listed in the Second Schedule, these are excluded from the Landlord’s obligations under the Works Charge.  Its obligations are clearly to complete the construction of the Estate.

8.	On 29th October 2014 the Applicant executed a Deed of Covenant in favour of the Management Company, whereby he agreed to pay the rents and observe and perform the covenants of the Tenant under the Lease.  On or about 11th February 2015 the Tenant executed a Stock Transfer form whereby he transferred his share in the Management Company to the Applicant.  The Respondent had objected to the Application by letters dated 26th January 2015 and 5th February 2015, on the basis that the Applicant had failed to comply with the steps required under clause 3.19 of the Lease – i.e there had been no “resignation” by the Tenant by the date of these objections.  However, despite having been served with the executed Stock Transfer on 11th February 2015, the Respondent persisted with the objection, explained in Milner’s letter to Land Registry dated 18th February 205.  They point out to Land Registry that a transfer of shares in the Management Company may not take place unless the Directors of the Company approve.  They explain: “Ison Harrison are well aware that our client (the management company) has a number of issues with the Applicant which we have requested are resolved.  These issues were made aware to all parties (both Ison Harrison and the Applicant’s solicitors) prior to the transaction which they are now trying to register taking place…… The restriction … is there to protect the interest of the management company, the other occupies [sic] of the Stoneleigh Pavilions estate and deal with situations where there is an issue with one member (which in this case is the Applicant).  The management company are not refusing to issue the consent but they do require a number issues [sic] to be addressed before that consent can be issued together with authority to register the share transfer.”  Although Milners state in this letter that the Tenant is the party applying for the disapplication of the Restriction, that is not correct.  The Application was made by the Applicant.

9.	Since the dispute could not be resolved, the Chief Land Registrar referred it to the Tribunal on 13th May 2015. Statements of Case were filed.  The Applicant pleads at paragraph 16 that the Tenant had complied with clause 3.19.5 of the Lease in all respects, and “the Respondent is unreasonably refusing to provide the certificate required by the Restriction on account of alleged issues between Christian Sharp and MD Computers Limited, the original landlord of the Property and/or MD Construction Limited, the current Landlord.”  The Respondent’s position is summarised in paragraph 17 of its Statement of Case as follows:
The Respondent has made the Applicant and Mr Sharp aware of a number of issues that need to be resolved prior to the consent required by the Restriction being granted.  This was made aware before the sale to the Respondent completed.  Until those issues are resolved the Respondent is entitled to refuse to register a transfer of the shares and therefore issue the certificate required by the Restriction“

10.	The jurisdiction in this case derives from section 41(2) of the Land Registration Act 2002 (“the 2002 Act”), which states, baldly, that: “The registrar may by order— (a) disapply a restriction in relation to a disposition specified in the order or dispositions of a kind so specified….”   Neither Counsel has been unable to find any judicial decision as to the scope of this power.  Mr Walder, for the Applicant, has referred me to the Land Registry Practice Guide 19A: Restrictions and Leasehold Properties (updated 24 June 2015), and a passage at para. 3.3 as follows: “The registrar may cancel a restriction only where they are satisfied that it is no longer required.  As an alternative you may be able to apply to the registrar to make an order to disapply the restriction under section 41 (2) of the Land Registration Act 2002.  It will not usually be possible to cancel (rather than to disapply) a restriction where, for example, the restrictioner cannot be traced or contacted or where it is claimed that a consent or certificate required under the terms of the restriction is being unreasonably withheld.”  Mr Buckingham, for the Respondent, has referred me to the relevant passages in Emmett & Farrand on Title (10.07) and Ruoff & Roper:Registered Conveyancing (44.019), but accepts that these provide scant guidance as to the principles to be adopted.  

11.	It is axiomatic that a restriction does not confer any interest in property.  Schedule 4 to the Land Registration Rules 2003 set out the standard forms of restriction. The clear purpose is to provide protection to an interested person against the registration of a transaction which might adversely affect that person’s interest.  The protection may require notice of the transaction to be given, or an order of the Court to be obtained, or, as in this case, for a certificate to be submitted with the application to register the transaction.  In a standard lease, such as the Lease in this case, there will almost invariably be a covenant by a tenant who assigns his interest, to procure the execution by his assignee of a Deed of Covenant rendering the assignee directly liable on the covenants in the lease. The interests of the landlord, and, in appropriate cases, the leaseholders’ management company, would be prejudiced if the assignee of a lease is registered without having executed such a deed. The rationale for a restriction, requiring a certificate confirming that this obligation has been complied with, is obvious.

12.	In my judgment, that is also the clear purpose of the Restriction in this case.  It is designed to allow the Management Company – which is to provide the certificate – to prevent registration of an assignee who has not executed the Deed of Covenant and is not in a position to take up membership of the Management Company.  In the present case, however, the deed has been executed and delivered to the Management Company, and the tenant has executed a Stock Transfer to the assignee, the Applicant.  That document has been lodged with the company for registration in the register of members.  There is nothing more that either the assignee, or the Tenant, can do by way of compliance with clause 3.19.5 of the Lease.  

13.	However, the Respondent argues that it is not obliged to issue the certificate because the Tenant remains on the register of members, and he has not therefore resigned membership of the Management Company.  Accordingly, there has not been compliance with clause 3.19.5 and it is not required to issue the certificate.  It is agreed that a Stock Transfer has been lodged for registration, but it is argued that the directors of the Management Company have the right to refuse to register the transfer of a share, by reference to Article 3(a) of the Articles of Association.  These provide that: “The directors may, in their absolute discretion and without assigning any reason therefore, decline to register the transfer of a share….”  Mr Buckingham has referred me to In re Smith and Fawcett Limited [1942] Ch 304, CA for the proposition that directors must exercise their discretion bona fide in what they (and not the court) may consider to be in the interests of the company, and not for any collateral purpose.  He cites Popley v Planarive Ltd [1997] 1 BCLC for the proposition that if the directors’ decision was one which a reasonable board could consider to be in the interests of the company, then the court presumes that they acted bona fide and had good grounds for the decision.  He also cites Mactra Properties Ltd v Morshead Mansions Ltd [2009] 1 BCLC 179 in the landlord and tenant context.  Finally, he cites a group of cases, including W v Lord Chancellor [2015] EWCA Civ 742, to demonstrate that the absence of good faith means dishonesty, and this Tribunal should not make a finding of dishonesty against the Respondent’s directors on the basis of documentation and witness statements alone.  Such a serious finding could only be made if there had been a full trial of the issues, with oral evidence and cross-examination of witnesses.

14.	For his part, Mr Walder makes these broad submissions on behalf of the Applicant.  First, that there is a broad discretion to consider the individual circumstances of a case and the relevant restriction.  In circumstances such as the present, where the Restriction is demonstrably being used for a purpose that amounts to an abuse of process, the registrar can be ordered to disapply it.  Secondly, on the true construction of the Restriction and/or clause 3.19.5 of the Lease, the Tenant can only be obliged to use his best endeavours to comply, otherwise it would give rise to a situation (as here) where the Management Company could prevent the tenant from disposing of his legal estate merely on a whim, and for a reason that has nothing to do with the covenants in the Lease.  Thirdly, the Respondent’s decision whether to issue a certificate is the exercise of a contractual discretion.  As a matter of law such a discretion must be exercised reasonably, and, given the reasons for the decision that have been made known, this has not been the case.  Accordingly, the Restriction should be disapplied.

15.	It is common ground between the parties that there is a discretion to whether to disapply the Restriction in any given case.  The Applicant accepts, quite rightly in my view, that the Restriction should not be cancelled outright, since it must remain on the register for the future protection of the Management Company in relation to any subsequent assignment or underletting. The issue before me, therefore, is whether I should direct the Chief Land Registrar to disapply the Restriction on the facts of this case.

16.	I have no hesitation in exercising my discretion in directiong that the Restriction should be disapplied, to enable the TR1 in favour of the Applicant (and the legal Charge in favour of his mortgagee). My reasons, which are set out in no particular order, are as follows:
a.	As I have explained, the purpose of the Restriction is to protect the Management Company against an assignment or underletting of Apartment 2 in circumstances where the assignee or underlessee does not enter into a direct covenant with the Management Company to comply with the Tenant’s obligations to pay the service charge and the other covenants in the Lease.   In this case, the Applicant has entered into such a deed, and has further applied to be registered as a member of the Management Company by virtue of a share transfer by the Tenant.  Accordingly, the protection afforded by the Restriction is no longer required.  
b.	The Management Company has chosen not to register the transfer for its own reasons, but the Tenant has done all that he can to comply with clause 3.19.5 of the Lease.  He can do more than to procure execution of the Deed of Covenant by the assignee and to “resign” from the Management Company.  I agree with Mr Walder’s construction of clause 3.19.5.2 of the Lease, namely that the Tenant should be treated as having complied with his obligations if he has taken all steps open to him in order to cease to be a member of the Management Company.  Mr Buckingham submits that clause 3.19.5.2 requires the Tenant to bring proceedings in the Companies Court to challenge the refusal to register the assignee as a member, and it is only if these proceedings succeed that the certificate may be issued.  Such a construction is, in my view, entirely devoid of commercial common sense.  It cannot possibly have been the intention of the parties to the Lease to give the Management Company in effect a veto over the registration of an assignee in these circumstances.
c.	Further, the Management Company’s refusal to issue a certificate in this case is unreasonable.  It is refusing to issue a certificate because the Directors have not approved the transfer of the Tenant’s share to the Applicant, and the Respondent claims that it cannot therefore be compelled to issue the certificate.  That is, of course, an entirely self-serving argument.  It is relying on its own refusal to register the transfer as a reason for withholding the certificate.  On examination, however, its reasons for refusing registration are (at minimum) unreasonable.  It was made absolutely clear from the outset – see Milners’ letters of 8th July 2014 (to the Tenant’s solicitors) and 29th September 2014 (to the Applicant’s solicitors) – that the threat to withhold  the certificate was being used in order to strengthen the Landlord’s claim to monies allegedly due from the Tenant under the Works Charge.  The Management Company is not a party to the Works Charge, and it is not entitled to any payments from the Tenant under it.  It is an entirely separate agreement made between the Landlord and the Tenant.  
d.	By paragraph 15.3 of its Statement of Case the Respondent alleges that “… the Applicant appears to be relying on the fact that there is a dispute between the freeholder of the Property and Mr Sharp as opposed to the Respondent themselves.  This ignores the clear obligations of the Respondent to both the freeholder and the other occupiers of the Stoneleigh Pavilions development. This is the purpose of clause 3.19.5 of the Lessee and the Restriction.”  No explanation has been provided as to how the Management Company or the other lessees can be affected by or interested in the alleged claim by the Landlord under the Works Charge.  Mr Buckingham was quite unable to help me on this point – other than by referring to a reference to “lighting” in the Second Schedule of the Works Charge.  Manifestly, the dispute is an entirely separate one between the Landlord and the Tenant relating to the initial purchase premium payable in 2009.  
e.	Under clause 3.3.1 of the Works Charge, the Tenant covenants with the Landlord “not to transfer the leasehold interest in the Property except to a person who on or prior to completion of such a transfer…executes and delivers to the Seller  [i.e the Landlord] ..” a deed of covenant requiring the assignee to comply with the Works Charge.  This requirement was not protected by a restriction or notice – although it was briefly the subject of a unilateral notice in 2011 which was removed at the insistence of the Tenant.  Accordingly, the Applicant will not be bound by this obligation.  The Management Company, by refusing to register the transfer to the Applicant until the alleged monies due are paid to the Landlord, is in effect enforcing this covenant on behalf of the Landlord.  It is treating the Restriction as protecting the Landlord’s interests under clause 3.3.1 of the Works Charge, as opposed to the Management Company’s interests under clause 3.19.5 of the Lease.
f.	Mr Buckingham relies on the “seminal” decision of the Court of Appeal in re Smith and Fawcett., and the following passage in the leading Judgment of Lord Greene MR: “The principles to be applied in cases where the articles of a company confer a discretion on directors with regard to the acceptance of transfers of shares are, for the present purposes, free from doubt.  They must exercise their discretion bona fide in what they consider – not what the court considers – is in the best interests of the company, and not for any collateral purpose.”  (see page 306).  It is not entirely clear to me whether the exercise of a power for “collateral” purposes necessarily involves bad faith.  However, in the present case it is manifest that the refusal to register the Applicant as a member is effected for a “collateral” purpose – namely to compel either the Tenant or the Applicant to pay £30,000 to the Landlord. Indeed, paragraph 17 of the Respondent’s Statement of Case says as much – the “other issues” referred to being the dispute between the Tenant and the Landlord.
g.	Given the close connection between the Landlord and the Management Company there is clearly a real possibility that the interests of the Landlord are being confused with the interests of the Respondent.  Mr Dunbar is a 50% shareholder in the Landlord, and also a member of the Respondent.  It is accepted that he has had more or less exclusive management control of the Respondent since incorporation  – see Mr Greaves’s statement – albeit that he was only appointed as a Director in February 2016.  The Landlord and the Management Company instruct the same solicitors.  It would be all too easy to confuse the interests of the Management Company with those of the Landlord. The correspondence that I have referred to demonstrates that this is precisely what has happened.  Incidentally, the Respondent has not put in evidence any Resolutions or Board  Minutes relating to a formal decision not to ratify the share transfer.  

17.	For all these reasons, I have concluded that the Restriction should be disapplied in relation to this transaction, and I shall therefore direct the Chief Land Registrar to give effect to the Application in Form RX2 dated 26th September 2014. I should add that although the Application was premature, for the reasons explained, certainly by the date that this dispute was referred to the Tribunal the Tenant had complied with clause 3.19.5 of the Lease and the Respondent was obliged to issue the certificate.  Costs would normally follow the event. If the Applicant has an application for costs, it should be made in writing no later than Monday 22nd February 2016.  The Respondent may respond within 7 days. I shall then consider the issue of costs further.

Dated this 11th day of February 2016

BY ORDER OF THE TRIBUNAL