Area Estates Ltd. v Weir

The Court of Appeal dismissed the vendor's appeal against summary judgment which allowed the purchaser to rescind a contract for the sale of freehold property and to recover the deposit. The court held that Extra Special Condition 7 (ESC 7), which purported to require the purchaser to accept that a prior lease had determined, could not be relied on to bar the purchaser's objection because the vendor, properly advised, ought to have known that the asserted surrender was ineffective as a matter of law. The court treated constructive knowledge (through a properly informed vendor or solicitor) as equivalent to actual knowledge for this purpose and therefore ESC 7 was ineffective to excuse the vendor's obligation to convey good title.

Further, the court rejected the vendor's alternative argument that the subsisting lease was a mere "technical conveyancing defect". Applying the test in MEPC Ltd v Christian-Edwards, the court concluded there was a real risk that the trustee in bankruptcy might assert the lease, so rescission was justified and the deposit had to be returned.

Background and facts:

• On 29 January 2008 the purchaser contracted to buy a freehold property for £400,000 with a £40,000 deposit. The property's title sheet showed a lease granted on 28 April 2004 for nine years in favour of the lessee, Mr Airey.
• Extra Special Condition 7 stated that the lease "determined by operation of law on 31 August 2006" and that the buyer "shall accept the position" and not require proof or raise objection. In truth the lessee had purported to surrender the lease but that purported surrender was ineffective because a bankruptcy petition had been presented against him on 8 August 2006; the petition and later bankruptcy order were registered against the leasehold title.
• The purchaser served notice to complete, sought rescission on the ground of the encumbrance, and claimed return of the deposit; summary judgment was granted below ordering repayment of the deposit and interest.

Procedural posture: This was an appeal from the Chancery Division (Deputy High Court Judge Robin Knowles QC, HC08CO1471) against the December 2009 order granting summary judgment for rescission and repayment of the deposit. Permission to appeal had been given.

Relief sought: Recission of the sale contract and repayment of the £40,000 deposit with interest.

Issues framed:

1. Whether ESC 7 prevented the purchaser from relying on the continued existence of the lease as a ground for rescission; and
2. If not, whether the existence of the lease was merely a "technical conveyancing defect" insufficient to justify rescission.

Court's reasoning:

• The court construed ESC 7 in context with the general conditions, in particular the full title guarantee and the buyer's treated knowledge of register entries, but emphasised that ESC 7 went further by affirming as fact that the lease had determined. The vendor, properly advised, ought to have known that the purported surrender was ineffective because of the pending bankruptcy petition; constructive knowledge was treated as equivalent to actual knowledge for the purposes of excluding reliance on such a condition (drawing on Becker v Partridge and related authorities).
• The court did not need to decide the detailed effect of section 42(3) of the Law of Property Act 1925 but expressed doubts that the statutory provision altered the result relied upon here.
• On the "technical defect" point, the court applied the MEPC test and concluded that the vendor could not show beyond reasonable doubt that there was no risk of the trustee in bankruptcy asserting the lease; the defect was not merely technical and rescission was available.

Conclusion: The appeal was dismissed and the order for repayment of the deposit with interest and costs was upheld.

Appeal dismissed. The court held that ESC 7 could not be relied on to bar the purchaser's objection because the vendor, properly advised, ought to have known that the purported surrender of the lease was ineffective. Constructive knowledge of a defect by the vendor (through proper advice) is equivalent to actual knowledge for this purpose. The presence of the subsisting lease was not a mere "technical conveyancing defect" under the MEPC test, so rescission and repayment of the deposit were appropriate.

Appeal from the High Court, Chancery Division (Deputy High Court Judge Robin Knowles QC, HC08CO1471), where summary judgment was granted on 18 December 2009 ordering repayment of the deposit. Appeal to the Court of Appeal was heard and determined by Carnwath LJ, Moore-Bick LJ and Wilson LJ, judgment given 20 July 2010 ([2010] EWCA Civ 801).