Blackpool Football Club (Properties) Ltd v JSC Baltic International Bank & Anor

In construing a long-term income-sharing agreement, a clause permitting deduction of capital expenditure exceeding the parties’ committed sums did not permit the developer to deduct expenditure funded by unilateral borrowing. The agreement, read as a whole and against its factual matrix, required additional funding to proceed through a consent mechanism protecting the other investor. Capital expenditure funded from excess income could be deducted where income and expenditure arose in the same year. Losses of a hotel operated by a separate company were not revenue expenditure relating to the stands. Any dividends might constitute income of a stand, but the underlying hotel losses had already been accounted for. The agreement concerned actual financial arrangements, so no notional rent could be deducted without a separate agreement.

The appellant, formerly known as Segesta Limited, owned the football ground and had entered into an Investment Agreement with VB Football Assets concerning the development of the South Stand and South West Corner Stand. Net income was to be divided equally. VB Football Assets assigned its rights to JSC Baltic International Bank, which was substituted as claimant.

After the football club’s promotion to the Premier League, the appellant borrowed money from Blackpool Football Club Limited to fund the Third Phase, which included a hotel. The hotel was operated by a separate company wholly owned by the appellant. The appeal from declarations made by HHJ Moulder concerned whether clause 6(A) permitted deductions for capital expenditure and hotel losses, and whether a notional rent could be deducted for occupation of adjoining land.

The appeal was dismissed unanimously. Lady Justice Asplin gave the leading judgment, with Lord Justice Newey and Lord Justice Longmore agreeing.

1. Capital expenditure. Clause 6(A)(i) permitted deductions for capital expenditure exceeding the parties’ initial commitments where the expenditure was incurred in the relevant year and funded from excess income. It did not permit deduction of expenditure on the Third Phase funded by money borrowed unilaterally by the appellant from Blackpool Football Club.
2. Read with clause 6(A)(ii), the remainder of clause 6(A), and clause 19, the agreement provided a mechanism for additional funding. Clause 19 required the appellant to seek external funding and obtain VBFA’s prior written consent to the amount, repayment order, conditions and security. Clause 6(A)(ii), concerning monies required to repay a mortgagee, dovetailed with that mechanism despite the absence of an express cross-reference.
3. The relevant recital, although not an operative contractual term, was evidence of the factual matrix. It showed that the parties contemplated third-party borrowing for the Third Phase, not funding by the appellant or by Blackpool Football Club. Allowing unilateral borrowing to be deducted would deprive clause 19 of its protective function and create substantial overlap with clause 6(A)(ii). The expenditure was therefore irrecoverable because the clause 19 mechanism had not been activated or otherwise agreed.
4. The deduction was annual in operation. Capital expenditure had to be expended in the year in which the relevant income arose. The whole of a loan could not be deducted when borrowed or carried forward as if it had already been spent.
5. Hotel losses and notional rent. The hotel company was a separate legal entity. Its income and losses were its own and its losses were not revenue expenditure in relation to the South Stand or South West Corner. Any dividends declared to the appellant might constitute income of the South Stand, but the hotel losses would already have been taken into account. Clause 6(A) addressed the actual position, not a notional rent for occupation of adjoining land. A deduction would have required a separate agreement.

• Court of Appeal (Civil Division)—on 12 April 2018, dismissed the appellant’s appeal.
• Queen’s Bench Division, Manchester Mercantile Court—HHJ Moulder made declarations in paragraphs 2, 3 and 4 of the order dated 23 February 2017, rejecting the claimed deductions.