Scrowther v Watermill Properties [2009] EW Misc 6 (EWCC) Newcastle upon Tyne County Court

Continuing the Norwegian theme we appear to have adopted for such cases, here we have a example of an ex-sale and rent back agreement, void and gone to join the choir eternal. It is an interesting County Court case on collateral agreements to sale of property. And it is something of a synecdoche for the past decade.

Miss Scowther owned a property in Morpeth, purchased under the right to buy in January 2003. In September 2006, she contacted Watermill, who set themselves as out providing a form of sale and rent back scheme aimed at those who wanted to stay in the property for the next 10 years or more.

Watermill proposed an agreement under which the property was valued at £125,000. Miss Scowther would receive 75% of that, less the redeemed charges on the property. She would be given a six month assured shorthold tenancy at a monthly rent of £593. If she did not leave the property for 10 years or be made to leave due to breach of tenancy in that time, she would then receive a payment of a further 15% of the sale price, styled a ‘bonus’. At the trial there was some dispute over what Miss Scowther understood of this including the nature of the tenancy and the effect of breach of tenancy. the court found it had been explained to her by Watermill, but she had not had made clear to her the effect of being evicted for rent arrears within the 10 years.

The precise terms of this agreement were not set out in a single document. instead bits of it were strewn across a variety of sources:
oral discussions between the vendor and the purchaser’s representative, a client quotation form signed by the vendor, a letter sent to the vendor and a document entitled “Frequently Asked Questions” sent to the vendor during the course of negotiations.

The FAQ did not actually mention that the ‘bonus’ would be forfeit if she had rent arrears, or was evicted for this reason.

The sale progressed, although in January 2007, the main mortgagee, G E Money, obtained a possession order for mortgage arrears and Waternill themselves obtained a £2,033 charge for money loaned to Miss Scrowther. At the date of sale in February 2007, once all charges were redeemed, Miss Scowther received £7,413 and the 25% of the sale price, £31,250, was paid to Watermill. Miss Scrowther was given a 6 month AST for rent of £593 per month.

Miss S shortly accrued rent arrears and proceedings were begun by Waterill. In September 2007, a possession order was made, plus arrears of £1,781.25, mesne profits and costs. Possession was given in November 2007. After carrying out some £5K of works, the property was re-let by Watermill at £525 per month

Miss S brought proceedings for the repayment of the £31,250, aided pro bono by Matthew West.

Watermill argued that there was a valid collateral agreement to the sale in terms:

that the Claimant pays back to the Defendant from the sale the sum of £31,250 (25% purchase price), in consideration of which:

1. The Defendant enters into the contract for sale;

2. The Claimant is not required to give vacant possession which the Defendant would otherwise be entitled to under the contract for sale. She remains in her own home as desired and avoids the cost of relocation;

3. The Defendant enters into the tenancy agreement and assumes all responsibilities as landlord, including mortgage payments, buildings insurance payments and maintenance of the Property;

4. The sum of £18,750 (15% purchase price) to be repaid to the Claimant on vacation of the Property following the completion of 10 years of satisfactory tenancy, or where the Defendant terminates the tenancy without breach by the Claimant (“the Rentback Bonus”).

On this, the court rather tersely observed that the sale was a sale at market value. “No doubt it would have been possible to devise a scheme with the purchase price being 75% of market value but that was not this scheme”. Further, while it is true that Miss Scrowther was not required to give up possession her status of occupation changed significantly. She became a tenant under the assured shorthold tenancy with no security of tenure at an above market rent (see below).

However under the tests set out by Arden J in Hanoman v Southwark L B C [2008] AER(D) 146 [para 47] (our note here), there was a collateral contract in this case, “The terms of the collateral contract can be gleaned from the documents signed by Miss Scrowther, the letter sent by Mr Botsford on 3rd October 2006 and the FAQs and the fact that Miss Scrowther signed the authority and paid over the £31,250 to Watermill on completion”. There was no mistake on Miss Scrowther’s part and she had had the benefit of legal advice (although see below).

On Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, s.2 provides:

(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.
(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.
(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.
(4) Where a contract for the sale or other disposition of an interest in land satisfies the conditions of this section by reason only of the rectification of one or more documents in pursuance of an order of a court, the contract shall come into being, or be deemed to have come into being, at such time as may be specified in the order.

Miss S argued that if the collateral contract contradicted any of the terms of the contract for sale it would be invalidated by section 2., as per Business Environment Bow Lane Ltd v Deanwater Estates Ltd [2007] LT & R 389. Although Hanoman allowed a valid collateral contract not avoided by s.2 LPA, even though it was not included or refered to in the contract for sale, Hanoman could be distinguished here. In Hanoman, the collateral contract did not require rectification of the lease, nor was it an agreement as to the terms on which the lease was granted. Here:

In reality Miss Scrowther is paying £31,250 for the privilege of selling the property at the contractual price of £125,000 with the possibility of recovering £18,750 after 10 years. In effect the purchase price is at best £112,500 (£125,000 – £12,500) and probably £93,750 (£125,000 – £31,250). These features are inconsistent with the price stated in the contract for the sale of the property and thus, he submits, the collateral contract is void under section 2.

In response, Watermill argued that

The agreements should as far as possible be construed so as to respect the autonomy of the parties. The collateral contract is not an agreement as to the terms of the contract for sale or as to the terms of the tenancy agreement – it runs parallel with them both. Second she submitted that the effect of section 2 if it were to apply would be to render the entire set of agreements void.

Held:
i)The payment of £31,250 is, in effect, a reduction of the price and inconsistent with the contract for sale. It does not run in parallel with it. The collateral contract is within section 2 and void.
ii) Section 2 affects only the collateral contract and not the contract for sale or the assured shorthold tenancy.

It was unnecessary to consider the Unfair Terms in Consumer Contracts Regulations, but if it had been, the term relating to the Rentback Bonus, limiting it to 15%, rather than the full 25% would have been unfair on the facts.

Watermill to pay the £31,250. But ordered that “Miss Scrowther is impecunious. There is accordingly a real risk that if the appeal succeeds that any sums paid to Miss Scrowther would not be repaid. In those circumstances I would provisionally also grant Watermill a stay of execution pending appeal.”

This is an interesting result and we’ll keep our ears open for an appeal.

It is also something of a synecdochical morality play for the Noughties, of course, or perhaps a series of Hogarth paintings in modern dress. Miss S setting debt against the equity in her Right to Buy property and then trading the title, following the blandishments of Watermill. Watermill setting up an agreement that gave them at the very worst, the property for 90% of the market price and a tenant at above market rent for 10 years. The court heard that the rent in the area was in a range of £400-£600 per month but council properties were usually at the lower part of the scale, the market rent more likely to be £500-£525 per month. At best, Watermill got the property for 75% of the market value and the cost of possession proceedings. Watermill did have the cheek to raise the £5K it had had to spend on renovating the property after getting possession as a painful expense that it should have been spared.

And then there was the arrangement of Miss S’s conyenacing solicitors on the sale. Watermill quite rightly said she could choose any she wanted, but if she chose one of their approved panel of conveyancers, Watermill would pay her solicitor’s fees. Conveyancing for free! how could Miss S resist? Sweeney Miller, a firm on Watermill’s panel, were instructed: “Some time around the end of October 2006 Watermill sent Sweeney Miller an e-mail introducing Miss Scrowther and giving brief details of the transaction. The e-mail included an authorisation form for Miss Scrowther to sign in relation to the £31,250.” As it happens, the Court notes that Sweeney Miller’s advice to Miss S, was inaccurate (stating that she would receive the full £31K back after 10 years) “and/or may have fallen short of what was required”. One might well have views about the propriety of a solicitor accepting payment of their fees by the buyer in the sale in which they are acting for the seller, apparently as a matter of routine.

It is to be noted that Watermill, also suitably emblematically, have fallen victim to the credit crunch and are no longer buying new properties, having bought some 360. One presumes that these are now worth less than 75% of the 2007 market value.