Bristol Alliance Nominee No 1 Ltd & Ors v Bennett & Ors

Escrow money held by a stakeholder is held under a tripartite contract, not on trust. It remains payable only when the contractual event entitling a party to it occurs.

A company’s entry into administration does not remove its pre-existing liability to specifically perform an agreement to surrender a lease. Where completion gives the counterparty a contractual right to escrow money, that consequence does not offend the pari passu principle if the money was not an asset available for distribution at the commencement of the administration. The court cannot refuse otherwise appropriate specific performance merely to preserve a prospect that unsecured creditors may later benefit from a contingent interest.

The company operated leasehold retail premises in Bristol and Leicester. It entered agreements with its landlords which varied the rent and provided for the surrender of each lease on notice. The company paid escrow sums to the landlords’ solicitors. Those sums were to be released to the landlords on actual completion of the surrenders.

After notices to complete had been served, the company entered administration. Its administrators refused to complete. The landlords sought permission to bring proceedings for specific performance, and directions as to entitlement to the escrow money.

At first instance, the deputy judge held that the escrow money was not presently payable to the landlords and refused permission for specific-performance proceedings: [2012] EWHC 2050 (Ch). The landlords appealed. The central issue was whether administration and the pari passu principle justified refusing specific performance of the surrender agreements.

1. Appeal allowed. Rimer LJ, with whom Kitchin and Christopher Clarke LJJ agreed, held that the judge had erred in refusing specific performance. The court would order specific performance of the Bristol agreement and invited counsel to agree an order addressing both agreements.

2. The solicitors held the escrow money as stakeholders, not trustees. Their obligation arose under a tripartite contract with the company and the landlord. Until the stipulated event occurred, they held the money to the order of both parties; once it occurred, they had to pay the entitled party.

3. The stipulated event under clause 4.4 was actual completion of the surrender by execution of the transfer. The landlord therefore had no present right to the escrow money merely because the company refused to complete, and no implied term produced that result. If the landlord accepted the company’s repudiation, the price would cease to be payable and the escrow-money condition could not occur. If specific performance were ordered and worked out, completion would entitle the landlord to the money.

4. An agreement to surrender a lease is an agreement for the disposition of an interest in land and is ordinarily specifically enforceable. The principles in In re Bastable, Ex parte The Trustee [1901] 2 KB 518, and the approach in Freevale Ltd v Metrostore (Holdings) Ltd [1984] Ch 199, showed that entry into administration did not materially alter that liability.

5. Specific performance would not confer on the landlord an asset of the company available to unsecured creditors when administration began. The escrow money would become payable only as the agreed consequence of completion. The possibility that refusal might later mature the company’s contingent interest in the money gave no proper basis to favour creditors over the landlord or to refuse the discretionary remedy. The pari passu principle was therefore not engaged.

• Court of Appeal (Civil Division): Allowed the landlords’ appeal and held that specific performance should be ordered.

• High Court, Chancery Division, Companies Court: The deputy High Court judge answered negatively the question whether the landlords were entitled to the escrow money and refused permission to bring specific-performance proceedings: [2012] EWHC 2050 (Ch).