Panayotov v Falmouth House Freehold Co Ltd

A payment made by a participating leaseholder under a freehold-enfranchisement participation agreement is contractual consideration, not a loan, where it funds the nominee company’s promises to acquire the freehold and grant a longer lease. Amounts paid before completion are advances on account of that consideration. Express terms providing for interest after completion and repayment only if the purchase fails are inconsistent with an obligation to repay principal within a reasonable time. A court should not imply additional repayment terms where the agreement addresses the circumstances in which money is repayable. Company accounts cannot unilaterally vary bilateral agreements. Loan notes governing only the non-participating tenants’ share do not support implying a loan for the participating tenants’ own interests.

The dispute concerned the characterisation of £111,426 paid by Mr Panayotov Sr under a participation agreement for the collective acquisition of a residential freehold. The appellant, his son and a residuary beneficiary of the estate, argued that the payment was a loan repayable within a reasonable time. The respondent company contended that it was a contractual contribution towards the purchase price and associated costs.

The High Court, Queen’s Bench Division, sitting with His Honour Judge Ralls QC, held that the payment was not a loan. The appeal concerned the construction of the participation agreement, the effect of its interest and repayment provisions, the company’s accounts, and later loan notes issued for part of the acquisition cost. The Court of Appeal also accepted that the appellant had standing to appeal.

Lord Justice Lewison delivered the leading judgment. Lord Justice Moore-Bick and Lord Justice Etherton agreed. The appeal was dismissed.

1. Character of the payment. The participation agreement was the starting point. Properly construed, the payment was the consideration for the company’s promises to acquire the freehold and grant the participating tenant a new long lease. Any payment made before completion was an advance payment on account of that contractual consideration, not a loan. The reference to the new lease being granted for nil consideration meant nil additional consideration.
2. Express repayment provisions. The agreement required monies to be held in an interest-bearing account pending completion. If completion occurred, the company had to account for the interest. If the purchase did not take place, the monies and interest were repayable, subject to abortive costs. Those provisions were inconsistent with an obligation to repay the principal within a reasonable time. Once completion occurred, the principal was intended to have been spent acquiring the freehold.
3. Implied term and accounts. The agreement expressly dealt with the circumstances in which the participating tenant was entitled to repayment. The proposed additional circumstances would require an implied term. Where a written agreement is silent on an additional event, the default position is that nothing happens. The company’s accounts could not unilaterally alter the rights and obligations in the bilateral agreements. The entries showed, at most, that the tenants were contingent creditors under the agreement pending completion.
4. Loan notes. The loan notes were expressly used for the part of the acquisition price attributable to non-participating tenants. No equivalent arrangement was made for the participating tenants’ own flats. The loan element was therefore governed by the loan notes alone, and the court would not reconstruct a different set of arrangements.
5. The possible characterisation of the interim position as a Quistclose trust did not affect the issue after completion. The appellant had received what was contractually bargained for: a long lease.

Order: Appeal dismissed.

• Court of Appeal (Civil Division): Appeal dismissed: [2012] EWCA Civ 1174.
• High Court of Justice, Queen’s Bench Division: His Honour Judge Ralls QC held that the monies paid were not a loan.