Warnborough Ltd v Garmite Ltd

An option granted as part of a sale of property, where the purchase price is secured by a separate legal charge, is not necessarily a clog on the equity of redemption. The court must determine the substance of the transaction by examining all its circumstances. An option forming part of the sale package may be enforceable where its purpose is to restore ownership to the seller on specified defaults.

Relief from forfeiture is confined to recognised and limited categories. It is unavailable where the option is not essentially security for payment and the underlying bargain is a sale and purchase. Whether a clause is penal is determined by construction at the time of contracting, not by later increases in the property’s value.

Warnborough sold leasehold properties to Garmite for £130,000. The purchase price remained outstanding under an Original Charge, and Garmite granted Warnborough an option to repurchase the properties if specified payment conditions were met. After Garmite fell into arrears, Warnborough exercised the replacement option.

Garmite defended the claim for specific performance on the grounds that the option was a clog on the equity of redemption, that Warnborough was estopped from relying on it, that the conditions for exercise had not been satisfied, and that the option was a penalty or forfeiture provision attracting equitable relief. The court also considered the validity of a later notice of exercise.

1. The claim succeeded. The First Option and Second Option were enforceable. The transaction was, in substance, a sale and purchase, not a mortgage. The Original Charge and Supplemental Charge provided the security for payment. The options were terms of the sale package and were not referable wholly or mainly to the charges.
2. The clog defence therefore failed. The proper approach was to examine the substance of the transaction and all the circumstances. The evidence confirmed the provisional view previously expressed by the Court of Appeal in Warnborough Ltd v Garmite Ltd [2003] EWCA Civ 1544, which was part of the same litigation.
3. The estoppel defence failed. Earlier indulgence and correspondence did not amount to a representation that strict contractual rights would not be enforced. The judge found that no binding assurance was given during the conversation of 24 July 2001. In any event, the evidence did not establish the necessary reliance.
4. The conditions for exercising the First Notice were satisfied. The July instalment remained unpaid for 35 days because Garmite bore the risk of postal delay. There was no express or implied authority to treat posting a cheque as payment, and the usual course of sending cheques by post was insufficient. The authority, if any, had also been withdrawn by the solicitors’ demand for payment to be made immediately. Independently, the insurance payment was overdue and payable to Warnborough through its agent.
5. The Second Notice was also validly served at Garmite’s registered office under Companies Act 1985, section 725.
6. The options were neither penalties nor forfeiture provisions attracting relief. Their essential object was not to secure payment of money, which was the function of the charges, but to enable Warnborough to recover the property and deal with it as owner. The penalty question was determined by construction at the time of contracting. The capital payments would in substance be restored to Garmite on repurchase, and the later increase in value did not make the provisions penal.

The court expressed no view on the discretionary question of relief from forfeiture and did not rule on the application to reopen the trial, since it had no jurisdiction to grant the relief claimed.

The judgment records earlier procedural decisions concerning Garmite’s application for summary judgment:

• High Court: Master Bowman dismissed the application on 2 August 2002.
• High Court: Mr Nicholas Davidson QC, sitting as a Deputy High Court Judge, allowed Garmite’s appeal on 22 January 2003.
• Court of Appeal: the appeal was allowed on 5 November 2003 and the application for summary judgment was dismissed: [2003] EWCA Civ 1544.

The present judgment determined the substantive claim at first instance.