Ridgewood Properties Group Limited and others v Valero Energy Limited and another [2013] - A Seller’s ability to perform obligations in third party agreements after sale of land.

The High Court recently considered whether conditional contracts and option agreements contained an implied term against the owner disposing of properties while obligations of the seller remained outstanding and whether by selling, so that it is no longer possible for the owner to perform the obligations in the agreements, the buyer had a cause of action.

The Facts

Texaco and Ridgewood entered into agreements relating to ten properties owned and operated by Texaco as filling stations.

The Phase I agreements provided for Ridgewood to apply for planning permission to build flats and offices above and around the filling stations.  Once satisfactory planning permission was obtained, Texaco would grant Ridgewood a building lease. On completion of the development, Ridgewood would acquire the freehold or long leasehold interest, with a lease back to Texaco of the forecourt and shop.

Phase II and III agreements took the form of an option for Ridgewood to take a building lease rather than a conditional contract.

All the agreements imposed obligations on Texaco to assist Ridgewood in making and pursuing the planning applications and to facilitate access to the sites. The agreements prohibited any assignments by Ridgewood except to group companies. There was no express restriction on assignments by Texaco.  Ridgewood registered notices to protect the agreements with the Land Registry.

Texaco transferred its interest in all of the properties to Somerfield companies, subject to the agreements. The Transfers contained a covenant by Somerfield to observe and perform the covenants referred to in the registers and to indemnify Texaco against any actions or claims in respect of any breach, non-observance or non-performance. Somerfield denied that it was obliged to perform Texaco’s obligations in the agreements.

Decision

The court’s decision of the preliminary issues included the following:-

  1. No term should be implied into the agreements prohibiting a sale of the properties by Texaco.  It was agreed that it was appropriate to imply a term that Texaco was not to do anything that would prevent performance of the agreements.  However, the court was asked whether it was necessary to imply a term that Texaco was prohibited from disposing of the properties during the currency of the agreements.There was nothing in the agreements to prohibit disposals by Texaco and there was no proper basis for implying a term to that effect as the obligations could have been transferred to Somerfield.  If these obligations were not transferred, Texaco was in breach of the admitted implied term not to do anything to prevent performance of the agreements.
  2. It was held that the Landlord and Tenant Covenants Act 1995 applied to neither option agreements where the option had not been exercised (i.e. the Phase II/III agreements) nor to conditions precedents to the grant of a lease (i.e. the Phase I agreements).  As such the obligations in the agreements would not automatically pass to Somerfield.The court held that a clear covenant was needed to place Somerfield under a specific obligation to Texaco to perform the covenants.  A mere indemnity in the transfer was not adequate and a covenant to observe and perform the obligations should be treated as an indemnity covenant only.  By selling to Somerfield in the way Texaco did, they made compliance with its obligations under the agreements impossible.

Conclusions

Careful consideration should be given to how to make a purchaser from the original seller  liable for performance of any outstanding obligations affecting a property that is being sold.

A general covenant to observe and perform obligations and to indemnify a seller may not be adequate. It may be necessary to repeat the obligations in the Transfer to the purchaser or make it clear that the covenants are not by way of indemnity only and are by way of specific performance. The beneficiary of an option or conditional contract may have to oblige the seller not to dispose of its interest without procuring the buyer of its interest entering into a direct covenant with the beneficiary and to protect this obligation by a restriction on the title.

Please note that the above is a summary only of the above case and its implications and is not intended to be fully comprehensive. Each matter will depend on its own particular circumstances and we therefore recommend that legal advice is sought on each occasion.

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Sally Sharp
Partner
T: 0118 957 0362
E: ssharp@pitmans.com