Meretz Investments NV & Anor v ACP Ltd. & Ors

Priority given to a first mortgagee’s power of sale may make performance of a leaseback obligation impossible, but it does not without clear words discharge the contracting party’s liability in damages. The guarantee of that obligation likewise remains effective.

Inducing breach of contract requires an intention to procure the breach, not mere foresight of loss. Preventing performance by exercising a pre-existing contractual power is not inducement unless the conduct operates on the contracting party’s will. A lawful exercise of an agreed power of sale is not unlawful means for conspiracy, even though it prevents performance and leaves a damages claim.

The appellants were respectively the freeholder of Albert Court and its associated company. ACP held a development lease and was obliged to complete a penthouse development. If it failed to do so by the agreed date, it had to grant the freeholder a sublease of the undeveloped roof space. FP, ACP’s parent, guaranteed ACP’s obligations and later held a first charge over the development lease.

FP exercised its power of sale and sold the lease to Mr Tamimi. ACP could consequently no longer grant the required sublease. Lewison J, whose decision is reported at [2006] EWHC 74 (Ch), held that the claims for substantial damages, conspiracy and inducing breach of contract failed, while ordering an inquiry concerning commission.

The central questions were whether ACP and FP remained liable in damages, whether the sale gave rise to economic torts, and whether a prior judgment prevented reopening the commission account.

1. The appeal was allowed on the contractual claim and dismissed on the economic-tort and account issues. Judgment was entered for Britel against ACP and FP for damages to be assessed for ACP’s failure to grant the development sublease. The question of directions for that assessment was remitted to the judge.

2. The earlier Court of Appeal proceedings established that FP was entitled, as first chargee, to realise its security. Britel could not prevent the sale or obtain specific performance after it. That priority did not, however, qualify ACP’s express obligation under the leaseback option. Once ACP’s breach of the development timetable entitled Britel to exercise the option, ACP remained liable in damages if FP’s sale made performance impossible. FP was liable under its guarantee.

3. The agreement contained no condition that ACP must retain title to the development lease when the option was exercised. Nor could the court add an exception for enforcement of a first charge. The priority of the charge instead meant that Britel’s remedy following enforcement was damages alone. Britel’s claim and Meretz’s separate claim for lost commission could both proceed; there was no required election, although their eventual assessments had to avoid inconsistency.

4. The respondents’ argument that the option had vested in FP failed. Applying Paragon Finance v Pender [2005] 1 WLR 3412, section 114(1) of the Law of Property Act 1925 applied only to mortgages of unregistered land and did not transfer the option through the registered charge.

5. The economic-tort claims failed. Applying OBG v Allan [2007] 2 WLR 920, inducing breach required an intention to procure a breach. FP and Mr Tamimi genuinely relied on firm advice that the sale would overreach the proprietary leaseback right. Their conduct was therefore not directed at procuring a breach. The sale prevented performance under a pre-existing security arrangement; it did not operate on ACP’s will so as to create accessory liability for inducement.

6. For conspiracy by unlawful means, the sale was a lawful realisation of security whose priority Britel had accepted. It was not rendered unlawful because it prevented ACP from granting the sublease and converted its obligation into one to pay damages. The requisite intention to cause loss by unlawful means was also absent.

7. Meretz could not reopen deductions from the proceeds of earlier penthouse sales. Those proceeds were fixed by the judgment of HHJ Seymour QC, and reopening them would in substance reopen the settled account.

• Court of Appeal (Civil Division): Allowed the appeal on the claim for damages for failure to grant the development sublease. It dismissed the appeals on the economic-tort and commission-account issues.
• High Court of Justice, Chancery Division (Lewison J): [2006] EWHC 74 (Ch) ; also reported at [2007] Ch 177. The judge rejected the appellants’ claims for substantial relief concerning the leaseback option and economic torts, and made an inquiry order concerning Meretz’s commission claim.