Hildron Finance Ltd v Sunley Holdings Ltd

A contract is not reconstrued merely because unforeseen events make its prescribed machinery unavailable. The court must construe the agreement from its words, structure and original factual matrix. Where contractual machinery is essential and subsequent legislation makes performance unlawful, the court cannot substitute a materially different bargain or imply a term to preserve the intended benefit. The contract may instead be discharged by frustration, without fault on either side.

Sunley appealed against the relevant parts of a judgment of Mr Recorder Antonio Bueno QC in the Central London County Court. The dispute concerned an overage agreement made when Sunley sold Greenhill, a block of flats, to Hildron. If the porter’s flat ceased to be required for a porter or employee, Hildron had to sell a new long lease on the open market and divide the net proceeds with Sunley.

After the tenants served and registered an initial notice under Part I of the Leasehold Reform, Housing and Urban Development Act 1993, section 19 made such a lease transaction void. The freehold was later transferred through collective enfranchisement, with £200,000 attributed to the flat. The central issue was whether the agreement could be construed or supplemented so as to give Sunley half that sum, or whether the supervening illegality discharged the agreement.

1. Appeal dismissed. The Porter’s Flat Agreement was discharged by frustration when the statutory collective enfranchisement process made performance of its essential machinery unlawful.
2. The agreement’s commercial purpose was to share capital value if the flat ceased to be required as porter’s accommodation. However, the agreed machinery was narrow and prescriptive. It required a separate open-market sale of a new long lease, with vacant possession, at a price subject to Sunley’s approval. A compulsory sale of the freehold of the flat as part of the disposal of the whole block differed materially in subject matter, valuation method, price control and timing.
3. Following Bromarin A B v IMD Investments Ltd [1999] STC 301, construction in unforeseen circumstances must remain grounded in the words used and the original factual matrix. It cannot be used to make a new bargain. The enfranchisement notice and valuation also preceded the contractual trigger, so there was no causative connection between the trigger event and the statutory sale.
4. There was no scope to substitute machinery under Sudbrook Trading Ltd v Eggleton [1983] AC 444. Nor could a term be implied. Whether the issue was treated as construction or under a necessity test, no broader purpose sufficient to support implication could be identified.
5. Applying Baily v De Crespigny (1869) LR 4 QB 180, it would be unreasonable to impose absolute liability where performance had become impossible through no fault of either party. The court could not use frustration to require Hildron to accept altered performance or transfer part of the statutory sale proceeds.

• High Court (Chancery Division): Appeal from the Central London County Court dismissed. The relevant decision of Mr Recorder Antonio Bueno QC was upheld in its result, although the High Court concluded that the agreement had been discharged by frustration.