Was an obligation to grant a legal charge specifically enforceable?
Specific performance is a discretionary remedy and, in each case, the court will consider all the circumstances before deciding whether to grant, or refuse, an order. Folgender Holdings Ltd v Letraz Properties Ltd [2019] EWHC 2131 (Ch) concerned a loan agreement in which a lender agreed to lend a borrower £10m to redevelop two properties in London, in return for which the lender was entitled to receive a share of the profits from the subsequent sales.
The properties were owned by companies that were part of a group of companies that included the borrower. When the loan agreement was entered into, the property at the centre of the dispute had borrowing secured against it in the sum of £7.5m. Consequently, the loan agreement provided that the lender would obtain a second legal charge over the property. But the promised charge was never executed.
Two years later, the registered proprietor refinanced and executed a legal charge in favour of a third party. The charge secured a loan facility of £6.5m and prohibited the registration of any disposition of the registered estate without the chargee’s written consent. The prohibition was protected by a restriction registered at the Land Registry. So, when the lender sought an order for specific performance of the obligation to execute a second legal charge, the borrower argued that it would be wrong for the court to order specific performance, or to compel it to execute a second legal charge in a form that could be registered at the Land Registry, or to limit the amount secured by the registered charge to £7.5m.
Specific performance is a discretionary remedy and, in each case, the court will consider all the circumstances before deciding whether to grant, or refuse, an order. Folgender Holdings Ltd v Letraz Properties Ltd [2019] EWHC 2131 (Ch) concerned a loan agreement in which a lender agreed to lend a borrower £10m to redevelop two properties in London, in return for which the lender was entitled to receive a share of the profits from the subsequent sales.
The properties were owned by companies that were part of a group of companies that included the borrower. When the loan agreement was entered into, the property at the centre of the dispute had borrowing secured against it in the sum of £7.5m. Consequently, the loan agreement provided that the lender would obtain a second legal charge over the property. But the promised charge was never executed.
Two years later, the registered proprietor refinanced and executed a legal charge in favour of a third party. The charge secured a loan facility of £6.5m and prohibited the registration of any disposition of the registered estate without the chargee’s written consent. The prohibition was protected by a restriction registered at the Land Registry. So, when the lender sought an order for specific performance of the obligation to execute a second legal charge, the borrower argued that it would be wrong for the court to order specific performance, or to compel it to execute a second legal charge in a form that could be registered at the Land Registry, or to limit the amount secured by the registered charge to £7.5m.
Specific performance is generally unavailable if the order would compel the defendant to break a contract with a third party. But the judge took the view that there was a distinction between a contract made before the obligation that a claimant seeks to enforce, and one entered into subsequently, and that the court should respect the hierarchy of obligations created. Furthermore, it would be deeply unattractive if the lender were to be deprived of a remedy for breach of the borrower’s obligations.
The loan agreement did not restrict the lending secured by the original charge, but did state the current value of the borrowing and, unless the sum secured by the original charge was limited, the security provided by a second legal charge could be eroded at will, which could not have been intended. If a second charge were granted, the lender would notify the proprietor of the registered charge in order to deprive any further advances under that charge of priority: section 49 Land Registration Act 2002. And, given the current level of debt secured by the registered charge, this would put the parties in the position in which they should have been, had the lender obtained a second legal charge as soon as its loan was made.
Could the borrower be required to provide a charge that was capable of registration at the Land Registry? The loan agreement did not say so. But the need for registration was so obvious that the loan agreement did not need to spell this out.
The court will not make an order for specific performance that is impossible to comply with. But the judge took the view that the borrower could secure an agreement that would permit the registration of the second charge and limit the borrowing under the registered charge to £7.5m, or make fresh arrangements with another lender.
Allyson Colby, property law consultant
