Specific_Performance_and_Rescission,_Michelle_Stevens-Hoare_-and-_Edward_Rowntree_19.11.09.pdf..pdf

Sara Benbow & Brie Stevens-Hoare © Hardwicke Property Team – November 2009

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RESCISSIONRESCISSIONRESCISSIONRESCISSION,,,, SPECFIC PERFORMANCESPECFIC PERFORMANCESPECFIC PERFORMANCESPECFIC PERFORMANCE & & & & PURCHASESPURCHASESPURCHASESPURCHASES

Presented by

BriBriBriBrie Stevense Stevense Stevense Stevens----Hoare and Hoare and Hoare and Hoare and Edward RowntreeEdward RowntreeEdward RowntreeEdward Rowntree

Purchases & Terminating InterestPurchases & Terminating InterestPurchases & Terminating InterestPurchases & Terminating Interestssss in Property in the Current Economic Climatein Property in the Current Economic Climatein Property in the Current Economic Climatein Property in the Current Economic Climate

1. Two features of property transactions increase the prospects of litigation in the current

economic climate. First there is often a time lag between when the parties become

contractually bound and completion and a time lag means things can change. Second the

vast majority of property transactions are at least partly dependent upon lending.

2. When a recession or a downturn in the property market hits or lending dries up, purchasers

may wish to escape from deals or find they simply cannot fund them and therefore fail to

complete. In such circumstances vendors can look to forfeit the deposit, rescind the contract

for sale and possibly chase for any further losses or to specifically enforce the contract. In a

recession they are likely to be particularly keen to hold the purchasers to their deal rather

than risk going back to a slow and/or falling market. By way of contrast those who

purchased off plan may find their vendor/developers struggling to complete a project and

may wish to escape and purchase something else.

Finding the right to rescindFinding the right to rescindFinding the right to rescindFinding the right to rescind

Generally

3. What is rescission?

4. Rescission involves the termination of a contract in a way that unravels it. It has the effect of

treating a contract which did exist and may have been performed in part or full as having,

with the benefit of hindsight, had no real or substantive existence.

5. When rescission occurs the parties are fully discharged from their contractual obligations,

anything that has passed pursuant to the contract is restored and the contract can never be

revived.


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When it Arises

6. Rescission of a contract can arise in a number of situations. The parties may agree to

rescind a contract or abandon it prior to any performance. A further agreement or novation

may have the effect of rescinding one contract as it is superseded by another.

7. One party may elect to rescind without the other party’s agreement or participation on the

following grounds:-

• Misrepresentation

• Mistake

• Duress

• Undue influence

• Fundamental breach of contract, including renunciation of the contract/party’s contractual obligations

• An express contractual right to rescind

Rescission for Breach – Generally & Purchase Contracts

8. At common law a failure to perform contractual obligations sometimes entitles the other

party, at his election, to treat the contract as at an end, that is to say rescinded.

9. If the contractual term or obligation breached is a condition1 or a fundamental term going to

the root of the contract, the right to rescind will arise2. Historically contractual obligations

were regarded as capable of classification as conditions and simple warranties. A condition

arises when the obligation is so fundamental to the contract that the parties expressly agree

or the contract is construed on the basis they agreed non performance would so undermine

the arrangement between them that the innocent party would be entitled to walk away from

the contract. A simple warranty, by way of contrast, was an contractual promise that

sounded in damages only in the event of a breach.

10. However as contracts have become more complex the Courts have recognised that such a

stark two tier categorisation does not address all cases appropriately and greater flexibility

1 In the technical sense of that designation ie an essential stipulation of the contract which one party guarantees is true or promises will be fulfilled. 2 Bettini v Gye (1876) 1 QBD 183


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has developed3. Accordingly it is now recognised that where a contractual obligation is not a

strictly a condition it may nevertheless give rise to a right to rescind if the nature of the

breach that has occurred and its foreseeable consequences requires it. There are two clear

examples where that flexibility is applied. Where one party by words or conduct make clear

his renunciation of the contract or an unwillingness to comply with all or any key contractual

obligations the innocent other party will usually be entitled to elect whether to walk away or

to hold the other to the terms of their contract. Secondly where the breach and its

consequences are such that performance by the breaching party is no longer possible so

that as a matter of reality the breach as gone to the heart of the contract.

11. In the context of purchase contracts, express contractual terms frequently clarify and extend

the common law right to rescind, at least between exchange and completion, by

• Expressly designating particular obligations or promises as conditions and/or

• Expressly providing for the right to rescind in certain circumstances.

Some of those extensions arise in standard terms and conditions incorporated and some

are bespoke provisions added to a particular contract.

12. All standardised contracts for the sale of land provide for rescission following a failure to

comply with a notice to complete. In addition both the SCS and SCPC provide for the right to

rescind for misrepresentation and the failure to secure a licence to assign where needed.

SCS additionally provides for rescission where the property is rendered unusable between

exchange and completion (because the risk in relation to the property remains with the

vendor).

13. Parties may also expressly create opportunities for the right to rescind to arise. Those

opportunities may be related to the occurrence of events (within or outside the parties’

control) or compliance with contractual obligations that would not otherwise give rise to the

right to rescind.

14. It is common to provide that if certain key events have not happened by specified dates the

parties have the right to rescind. Where planning permission, the consent of a freeholder or

surrender of a third party’s lease is necessary to the purpose of the purchase, the inclusion

of such bespoke rights to rescind is essential. Where there are queries about matters such

as contaminated land or the structural feasibility of proposed project, it may be agreed that

3 Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 1 All ER 474 – See Upjohn LJ and Diplock LJ


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a purchaser is to have limited time to investigate and ability to escape if he is not satisfied,

coupled with express rescission provisions to enable that course.

15. Breaches giving rise to the right to rescind purchase contracts most frequently involve a

failure to complete by either purchaser or vendor. Purchasers commonly fail to complete

because they change their mind or cannot secure funding. If the change of mind arises from

a substantial misdescription or non-disclosure or the non-occurrence of an event which

provides the right to rescind, they may well be entitled to rescind and so secure release from

the obligation to complete. Vendors commonly fail to complete because they change their

mind (believing they can get a better deal elsewhere) or because they have been unable to

secure necessary consents or vacant possession. It should be possible to anticpate all that a

vendor needs in place to proceed to completion and therefore to ensure, by bespoke terms,

that if some key element cannot be secured the vendor is able to rescind.

16. Where the right to rescind depends on a key event occurring or not occurring by a certain

date, usually there can be little dispute about the existence of the right. However, an express

contractual right to rescind, arising as it does from a specific contractual term, is dependent

upon the circumstances provided for having actually occurred on a strict construction of the

provision.

17. Where a right of rescission is said to have arisen due to non-compliance with an obligation

there can be a number of complicating factors.

18. First, actual non-compliance must be established, which may or may not be easy depending

on the nature of the particular duty. If the contractual obligation is not absolute but is a

“reasonable” or a “best endeavours” provision, immediately there is likely scope for

argument4. If the contract fails to provide for a date by which performance occurs, or

provides for it to be within a reasonable period or by a date referable to other events within

one party’s control, non-compliance may not actually occur or arguments about the time for

compliance may arise. Contracts for off plan purchases are particularly problematic in that

sense5.

19. Second, where both parties are or have been in breach of terms of a contract, consideration

must be given to the order in which the breaches occurred. Where both parties breach a

term that could give the other a right to rescind the one who breaches second is entitled to

rescind for the first breach notwithstanding his own later breach. If he elects to rescind,

4 Yewbelle Ltd v London Green Developments Ltd [2007] EWCA Civ 475 5 North Eastern Properties Ltd v Coleman & anr [2009] EWHC B18


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since he is released from his obligations and as the rescission was based on the other’s

breach which pre-dated his own, his failings will no longer constitute a breach of contract.6

20. Where, however, the party whose “breach” was second in time has elected not to rescind

and affirmed the contract7, since the contract and the obligations it creates thus remains

wholly intact, the party whose breach occurred first is then entitled to exercise any right to

rescind created by the second breaching party’s breach.8

21. Finally, if there is a network of inter-dependent obligations it may be necessary carefully to

unravel the true causes of the breach relied upon in order (i) to ascertain whether the

claiming party is responsible for it and (ii) to establish whether he is entitled to rely upon it.

Alghussein9 establishes that as a matter of principle unless a contract contains clear express

provisions to the contrary it should not be presumed, when construing the contract, that the parties

intended a party to be able to take advantage of his own breach against another party. It is fair to

say that is a powerful principle in the process of construction, to which the Courts will strive to

adhere. It is important, however, to be clear that “taking advantage of his own breach” does not

amount to a bar on a party’s ability to enforce his contractual rights if he is or ever has been in

breach. It only bars taking the benefit of contractual rights which in fact arise because of the party’s

own breach. In other words, for the bar to arise it is necessary for there to be a causal link between

the right that a party is seeking to exercise or rely on and his own breach of contract. In Alghussein

reference was made to:-

• a speech of Scrutton LJ10 in which he said in terms “ I think …..all other clauses are to be read subject to

an overriding condition or proviso that the party shall not take advantage of his own wrong and therefore

is estopped from alleging invalidity of which his own breach of contract is the cause….”;

• a speech of Lord Finlay11 in which he said “The decisions on the point are really illustrations of the very

old principle laid down by Lord Coke (Co Litt 206b) that a man shall not be allowed to take advantage of a

condition which he himself brought about.”

6 Northern Foods Plc v Focal Foods Ltd [2003] 2 Lloyd’s Rep 728 7 See below 8 State Trading Corp of India v M Golodetz Ltd [1989] 2 Lloyd’s Rep 277 9 Alghussein Establishment v Eton College [1991] 1 All ER 267 10 New Zealand Shipping Co v Societe des Ateliers et Chantiers de France [1917] 2 KB 717 @ 724

1111

New Zealand Shipping case on appeal to HL [1919] AC 1


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Thus a party who would otherwise have the right to rescind by reason of an event (or non-

event) or the other party’s breach will not do so if his own acts or omissions are a cause of

the breach or the event (or non-event).

22. It follows that great care must be taken in analysing the sequence of events and a tactical

approach must be applied when making decisions whether to assert rescission as well as

considering the situation from a purely commercial standpoint.

Exercising it

23. Rescission is only available against a contracting party12.

24. The exercise of the right to rescind at common law normally requires notice to be given to

the other contracting party in the sense that the contract will not normally be treated as

having been rescinded until such notice is given13.

25. Nevertheless it is not necessary for notice of rescission to be given prior to the

commencement of a claim seeking rescission14. A notice to rescind marked 'without prejudice'

would seem to be void15. Where reliance is placed on a contractual right to rescind under a particular

provision, any notice of exercise of the right should refer to that provision.

26. A party must exercise the right of rescission reasonably and in good faith, and not arbitrarily

or capriciously16. It follows that where the right arises in defined circumstances that relate to

the exercising party’s attitude, discretion or position he may not claim those circumstances

arise purely to escape the contract. So where a vendor has the power to rescind if he is

unable or unwilling to comply with a purchaser's objections, it is enough (if he acted in good

faith) to show reasonable grounds of difficulty or expense17. However, if in fact compliance

presents no difficulty which would make a reasonable vendor unwilling, he cannot use the

request to rescind for an entirely different reason. The burden of proving the absence of

12 Re Northern Bank Finance v Charlton [1979] IR 149

13 Car v Universal Finance Co Ltd v Caldwell [1961] QB 525 – the retaking of goods was sufficient for rescission based

on fraud where the victim was unable to notify the fraudster due to police action 14 West Sussex Properties Ltd v Chichester DC [200] NPC 74

15 Re Weston and Thomas's Contract [1907] 1 Ch 244 at 248

16 Re Dames and Wood (1885) 29 ChD 626 at 630, CA; Re Glenton and Saunders to Haden (1885) 53 LT 434, CA; Re Terry and

White's Contract (1886) 32 ChD 14; Re Simpson and Thomas Moy Ltd's Contract (1909) 53 Sol Jo 376.

17 Duddell v Simpson (1866) 2 Ch App 102; Re Dames and Wood (1885) 29 ChD 626, CA; Re Starr-Bowkett Building

Society and Sibun's Contract (1889) 42 ChD 375, CA; Re Jackson and Haden's Contract [1906] 1 Ch 412, CA; Quinion v Horne [1906] 1 Ch 596


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reasonableness and/or good faith lies with the purchaser in such cases and will not simply

be inferred.

Losing the right to rescindLosing the right to rescindLosing the right to rescindLosing the right to rescind

27. Just as either party to a contract for the purchase of an interest in land may acquire the right

to rescind that contract, so either party having acquired such a right may lose it. Most

commentators identify a number of means by which the right of “rescission” may be lost,

although in some cases these be more aptly be categorised as reasons why the “innocent”

party should not obtain the right in the first place dependant upon the chronology of events.

28. A prime example of this is the requirement that for rescission to take place it must be

possible to restore the parties to their original position, recovering any property transferred

or payments made18. If at the point when the relevant breach occurred this would have been

possible then, subject to the other matters addressed above, a right to rescind will have

arisen. If there is a practical means to unravel the situation then rescission will continue to

be open to the innocent party19. However, if subsequent events render impossible the return

of all parties to their pre-contract positions (or at least a position which, whilst not identical,

is as good20), then the right to rescind is likely to be lost as a result21.

29. Similarly, the right to rescind will be lost if the innocent party with knowledge of all the

material facts elects to affirm the transaction22. Such affirmation may take the form of an

express declaration of his intention to proceed with the contract; more often it is no more

than an act which is inconsistent with an intention to rescind the contract. Each case will be

decided on its own facts, bearing in mind in particular the nature and subject-matter of the

contract and any change of position by the other party or impact on third parties as a result

18 One of those rare points on which the Latin term has survived Lord Woolf’s best efforts, the principle is still generally

referred to as “restitution in integrum” and the form of termination of the contract as rescission “ab initio” 19 So, for example, where a purchaser has gone into occupation before completion and made use of the premises,

rescission may be granted on terms that the purchaser pay “rent” for that period – F&B Entertainments Limited v Leisure Enterprises Limited (1976) 240 EG 455 20 See Roche J in Compagnie Chemin de Fer Paris-Orleans v Leeston Shipping Co (1919) 36 TLR 68

21 Thus a single contract for the sale and purchase of four plots of land could not be rescinded by the vendor upon the

purchaser’s failure to complete because some of the plots had already been conveyed and the planned redevelopment of them had commenced – Thorpe v Fasey [1949] 2 All ER 393 per Wynn Parry J - although one can see how the contrary argument might be put. 22 Aquis Estates Limited v Minton [1975] 3 All ER 1043 CA


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of the relevant act, although no change of position or impact is necessary for an affirmation

to be binding.

30. The requirement of knowledge is key when considering affirmation. It extends not just to the

existence of the facts but also to their materiality, that is to say the innocent party must both

know of the relevant fact and know he therefore has a legal right to choose whether to

affirm the contract or to terminate it if he is to be bound by subsequent conduct said to

amount to an affirmation23.

31. Note that the concept of affirmation thus differs from the equitable principles of estoppel by

conduct: such an estoppel does not require there to be any awareness of the legal right to

which the known fact gives rise. A party may be estopped from rescinding or avoiding a

contract notwithstanding his lack of knowledge of his legal right to rescind, but only if by

words or conduct he led the other party to believe that he was intending to affirm the

contract and the other party acted on that statement or conduct to his detriment24.

32. There are two further principal ways in which the right to rescind is often said to be lost: (1)

the lapse of time; and (2) the intervention of third party rights.

33. Absent something more, mere delay in asserting and exercising one’s right to rescind after

discovery of the relevant facts will not automatically bar the innocent party’s ability to do so.

However, contractual provisions as to rights of rescission and timescale may come into play,

as in respect of the standard conditions of sale of leasehold land (4th edition) considered by

Sales J in Alchemy Estates Limited v Astor25. In any event, delay after the innocent party has

the necessary knowledge will be considered as one of the circumstances of the case and

may be seen as evidence in support of an allegation of affirmation by conduct. Alternatively,

where the delay has contributed to the other party acting on an induced belief that the

innocent party was affirming the contract, it may be relied upon to justify an estoppel.

34. One of the major risks run by an innocent party who delays in exercising his right to rescind

is that a third party will have acquired some relevant right or interest during the intervening

period which prevents a just form of restoration to original positions. That may be a sub-

purchaser or sub-tenant; it may be a mortgagee or the beneficiary of a charging order,

freezing order or trust; it may even be a third party who simply permitted a liability to arise in

reliance upon the relevant contract. Once again, there are no hard and fast rules as to the

23 Peyman v Lanjani [1985] Ch 457 CA; Donegal International Limited v Zambia [2007] EWHC 197

24 Habib Bank Limited v Tufail [2006] EWCA Civ 374 CA

25 [2008] EWHC 2675 (Ch)


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type of third party or the level of interest required to prevent the rescission of a contract; the

court will consider and weigh all the competing factors in deciding whether or not the right

to rescind has been lost. The crucial question is whether the third party acted in good faith

and gave consideration for whatever rights he may have acquired and is seeking to assert26.

35. The availability of specific performance is considered below. It is clearly the antithesis of

rescission. However, a practice has developed in one particular context of pleading both in

the alternative so as to avoid any suggestion that the right to rescind has been waived by

election. That context is the contractual provision sometimes included to permit the vendor

to rescind or annul a contract for the sale of land in circumstances where a requisition or

objection as to title has been raised with which he cannot or will not comply on reasonable

grounds, as mentioned above. The condition may permit the vendor in such circumstances

to exercise his right of rescission notwithstanding any negotiation or litigation which

concerns the requisition, and it might be that he seeks in such circumstances to obtain

specific performance of the contract on terms that he need not comply with the requisition.

In such a case the claim should seek in the alternative rescission of the contract; a failure to

do so may well amount to a waiver of the contractual right.

Specific PerformanceSpecific PerformanceSpecific PerformanceSpecific Performance

Generally & Relating to Land

36. In this jurisdiction the law takes the view that individual parcels of or interests in land or real

property are unique and offer something specific to their owners. In other words one piece of

property cannot effectively be taken as an adequate substitute for another. Accordingly it is

assumed that the purchaser of a particular piece of property (land or buildings) cannot be

adequately compensated by damages with a view to an alternative being acquired.

37. Specific performance is an discretionary remedy dependent upon a subsisting contractual

entitlement and accordingly will not be ordered where:

� an award of damages would adequately compensate for the loss sustained by the breach (which will very rarely be the case for property where it is the purchaser who claims specific performance);

� one of the contracting parties lacks full contractual capacity; � the contract contains a vitiating element e.g. mistake, fraud, illegality; � the enforcement of the order would require the constant supervision of the court; � a 3rd party has acquired an interest for value in the property; � the award would cause exceptional hardship to the guilty party; or

26 White v Garden (1851) 10 C.B. 919


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� the seller cannot make good title.

38. Since specific performance is also an equitable remedy, it will not be granted where the

claiming party has disentitled himself in equity in accordance with normal equitable

principles.

Circumstances unlikely to result in Specific Performance

39. Vendors will often be adequately compensated by damages, and accordingly specific

performance in their favour is less common. However, where it is established that another

purchaser cannot easily be found or a vendor has particular reason or need to divest himself

of the burdens attached to the land quickly, specific performance can be secured27.

40. In the context of the sale of land, specific performance is likely to be refused where

• a vendor has made title strictly in accordance with the contract but has failed to disclose a known defect in the title28

• the property is subject to a spouse's matrimonial home rights, since the effect of the decree would be to compel the vendor to embark on speculative litigation to terminate those rights29.

• the vendor is a joint tenant but purported to sell as sole legal and beneficial owner, as specific performance cannot be ordered against the other joint tenant, and the effect of the decree would therefore be the transfer of the vendor's beneficial half share, which is something quite different from the interest he had contracted to sell30.

Specific Performance with Compensation

41. Where a contract provides for the sale of property and there is a deficiency or defect in the

quantity or quality of the property or the interest/title that can in fact be transferred, a

purchaser may elect specific performance accompanied by compensation for the deficiency

if it is capable of assessment in money.31 In effect therefore the contract is specifically

performed at a reduced purchase price.

27 Miliangos v George Frank (Textiles) Ltd 1976 AC 443

28 Faruqi v English Real Estates Ltd [1979] 1 WLR 963, 38 P & CR 318 Hexter v Pearce [1990] 1 Ch 341, Patel v Ali [1984] Ch

283 29 Wroth v Tyler [1974] Ch 30, [1973] 1 All ER 897 (where the purchaser could not obtain specific performance with compensation)

30 Watts v Spence [1976] Ch 165, [1975] 2 All ER 528.

31 Western v Russell (1814) 3 Ves & B 187


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42. Specific performance along with assessed damages have been given for the absence of a

right to renewal of a lease32, a lease with a shorter a term33 or the possibility of a wife

becoming entitled to dower 34!!

43. Specific performance may also be obtained against someone refusing to complete because

of a defect in what they will acquire if they would get substantially35 what they contracted

for. “Inessential obligations, inability or unwillingness to perform does not lead to a refusal

of specific performance unless it would be unjust to grant the remedy in light of the

hardship, unfairness or discretionary reasons”36. In those circumstances a purchaser forced

to take something less than they contracted for may be entitled to compensation; however,

by definition, if this test has been satisfied then it is unlikely that the compensation would

be significant.

Procedure and Practicalities

44. In most cases the entitlement to specific performance is the subject matter of summary

judgment firstly because it is usually based on largely undisputed facts and secondly

because of the urgency usually associated with it.

45. Given the nature of the remedy, if no acknowledgment of service or defence is received it is

still necessary to make a formal application for judgment in default and support it with

evidence. In whatever context an order is sought it will be necessary for the vendor’s title to

be established and it may be necessary for a more detailed inquiry as to the title. If it is

possible to agree or prove the completion figures when the substantive order is made the

Court will order a time and place for completion. If the figures are not agreed or proved at

that point a subsequent account and/or inquiries will be undertaken and the details for

completion set at that point. An order for specific performance should also identify the party

responsible for the preparation of the necessary deeds/documents.

46. If the defendant does not comply with an order for specific performance of a contract for the

sale of land, the claimant is not entitled simply to treat that as a repudiatory breach and

32 Painter v Newby (1853) 11 Hare 26

33 Leslie v Crommelin (1867) IR 2 Eq 134; Dale v Lister (circa 1800), cited in 16 Ves at 7

34 Wilson v Williams (1857) 3 Jur NS 810

35 Rutherford v Acton-Adams 1915 AC 866 and Mehmet v Benson 113 CLR 295 (Australian)

36 Spry on Principles of Equitable Remedies 7

th Edition p219


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rescind the contract at that point, because once the order is made the Court has ultimate

control of the ordered transaction37. A claimant who then wishes not to proceed with the

transaction must apply for a discharge of the order for specific performance and seek a

money judgement for damages (in respect of the failure to complete and the delay) in its

place.

47. If a vendor wishes and needs to enforce an order for specific performance, after the order for

specific performance/completion by a set date is breached, he must apply for an order that

the purchaser pay the purchase money (so that he has a money judgment to enforce) and

lodge the transfer/deeds required signed in escrow with the Court. Orders may also be

sought for any damages or interest flowing from the delays. The vendor is then free to

enforce the money judgement in the same ways as any other money judgment.

48. Enforcing an order for specific performance against a vendor may be achieved by applying

for an order vesting the property in the claimant/purchaser38, ordering that a designated

person (who may be a member of the judiciary or a specified lawyer) can sign on behalf of

the vendor39 and depositing the funds.

Damages and other consequencesDamages and other consequencesDamages and other consequencesDamages and other consequences

49. Clearly, the consequences to be considered under this heading will depend upon whether

one is dealing with a rescission or a specific performance claim.

(a) Rescission

50. Megarry & Wade40 when considering the circumstances in which a contract for the sale of

land may be terminated for breach refers to the concept of rescission in this context as a

“heresy”. The author’s justification for doing so is based upon the consequences which flow

from such a rescission or, more particularly, the fact that the termination of the contract is

not absolute. The key point is that when an innocent party treats the contract as discharged

by the other’s breach or on contractual grounds, there will still be purposes for which the

contract remains in force. The innocent party may therefore seek damages, obtain

37 GKN Distributions Ltd v Tyne Tees Fabrication Limited (198) 50 P&CR 301

38 Trustee Act 1925 ss48-50

39 Supreme Court Act 1981 s39, exercisable by County Courts by virtue of County Courts Act 1984 s38

40 The Law of Real Property 7

th edition


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repayment or forfeiture of deposits or other relevant sums, or pursue other remedies

anticipated by the contract41.

51. Thus following a rescission by an innocent purchaser (at least in relation to a contract made

after 1 September 198942) he will seek (1) to recover his deposit, and will ordinarily have an

equitable lien over the land to secure its repayment if it was paid to the vendor or his agent

rather than a stakeholder43; (2) to recover on a similar basis and also generally protected by

an equitable lien the interest accrued on the deposit and other sums ancillary to the deposit,

plus the costs of investigating title44; (3) to be indemnified against any obligations he has

taken on in relation to the property, and (4) to be compensated for relevant losses including

expenses or loss of profit on the bargain where the property has increased in value from the

contractual price by the date of the repudiatory breach or other event giving rise to

termination. It may also be possible to extend the claim to cover loss of profit following an

intended conversion or development of the property, but this is a difficult argument and

probably only possible where the vendor knew of the purchaser’s intention to convert or

develop45.

52. Following a rescission by an innocent vendor, the measure of his damages will be such as to

compensate him on normal contractual principles. Often this involves three main elements:

(1) the diminution in value of the property from the contractual price assuming a resale

within a reasonable period; (2) his wasted expenditure on the transaction; and (3) his

ongoing liabilities in respect of the property which would otherwise have come to an end. He

cannot both rescind the contract, thus retaining or recovering the property, and recover the

purchase money46.

53. However, the innocent vendor effecting a rescission may well be able also to forfeit the

purchaser’s deposit47, often pursuant to express terms of the contract of sale,

41 Johnson v Agnew [1980] AC 367

42 At which date s.3 of the Law of Property (Miscellaneous Provisions) Act 1989 came into force removing the limitation

on damages under the rule in Bain v Fothergill (1874) LR HL 158 43 Whitbread Co Limited v Watt [1902] 1 Ch 835; Combe v Lord Swaythling [1947] Ch 625

44 Cabra Estates Plc v Glendower Investments 1992 transcript per Roger Kaye Q.C.

45 Cottrill v Steyning & Littlehampton Building Society [1966] 1 WLR 753; cf Diamond v Campbell-Jones [1961] Ch 22 in

respect of inability to claim loss of profit on a resale 46 Laird v Pim (1841) 7 M & W 474

47 provided it does not exceed 10% of the price. If so, it is treated as a penalty and will be recoverable by the purchaser

in full unless there are special circumstances to justify its level – see Workers Trust Merchant Bank Limited v Dojap Investments Limited [1993] AC 573


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notwithstanding that there is no correlation between the sum of the deposit and the extent

of the vendor’s actual loss following the rescission. Insofar as he has additional losses for

which the deposit does not compensate him, those may be claimed. He must, however,

normally return any part-payment over and above the deposit, as that is generally (although

not inevitably) seen as having been a payment conditional upon the completion of the

transaction48.

54. The normal date for assessment of damages whether in favour of the vendor or the

purchaser is the date of the breach giving rise to the right to rescind. However, this is not set

in stone; the Court may select another appropriate date if adherence to the date of breach

would cause injustice.

55. Where a purchaser’s deposit is forfeit the Court has a discretion under s49(2) of the Law of

Property Act 1925 to order repayment of any part of the deposit. Whilst the statutory

provisions provide no constraints on the Court’s discretion and the Court’s have made it

clear the provision is often going to be of assistance to breaching purchasers. The Courts

have made it clear49 that in considering whether to exercise the discretion

• A deposit is “an earnest for performance” and relief should not be given simply

because completion never happened

• It is well established and understood practice in property transactions that deposits are

forfeit if purchasers do not complete and it is important there is certainty in that

respect

• The vendor has committed himself and the property on exchange

• The purchaser’s inability to complete is precisely the risk the deposit is paid against

• Where the purchaser fails to complete the discretion will not be exercised in his favour

unless the circumstances are exceptional or extraordinary.

(b) Specific Performance

48 Mayson v Clouet [1924] AC 980; McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457

49 Omar v El-Wakil [2001] EWCA Civ 1090 [2002] 2 P&CR 3, Midill (97PL) Ltd v Park Lane Estates Ltd [2008] EWCA Civ

1227


15

56. A party who elects to affirm the contract may claim in the alternative for specific

performance or compensation. As a matter of general principle, specific performance of a

contract will only be granted where damages are inadequate as a remedy but, as explained

above, the nature of land means that even if adequate monetary compensation could be

given the innocent party will not be precluded from seeking a mandatory order. As a result,

in relation to contracts for the sale of land an affirming claimant will often seek damages in

the alternative to his specific performance claim.

57. A successful claimant is not, however, limited to seeking damages only in lieu of specific

performance; courts of equity also have a statutory jurisdiction50 to award damages in

addition to granting an injunction or specific performance51. This jurisdiction is wider than

the common law’s ability to award damages, both in the sense that it may encompass

breach of a purely equitable right52 and in that it permits damages for prospective loss even

where a breach is only threatened53.

58. Where a purchaser seeks specific performance but is awarded damages in lieu, the normal

measure as a starting point is the market value of the property at the contractual

completion date less the contract price. He will then seek the return of his deposit and other

elements as he would on a rescission. However, once again the Court is not obliged to take

the contractual completion date as the appropriate valuation date if that would cause

injustice, for example because of the appreciation of the property between then and trial54.

59. Where damages are sought by an innocent purchaser in addition to specific performance,

these may include the loss of value of the user of the land between the contractual

completion date and the completion under an order for specific performance55. In addition,

any consequential losses such as rent which would have been charged during the period of

delay in completion on buildings which the purchaser would have converted or erected56, or

50 under the Chancery Amendment Act 1858, commonly called Lord Cairns’ Act, now found in s.50 Supreme Court Act

1981 51 See the review of authorities in Regan v Paul Properties Limited [2006] EWCA Civ 1391; Jaggard v Sawyer [1995]

1WLR 269 CA 52 Such as a covenant which would run with the land only in equity – Eastwood v Lever (1863) 43 De G J & S

53 Leeds Industrial Co-Operative Society v Slack [1924] AC 851

54 Wroth v Tyler [1974] Ch 30 per Megarry J

55 Royal Bristol Permanent Building Society v Bomash (1887) 35 Ch D 390

56 Jones v Gardiner [1902] 1 Ch 191


16

additional charges which the purchaser had to pay off in order to complete57 may be

claimed.

60. As for the innocent vendor seeking specific performance, for the reasons stated above it will

be more usual for damages to be viewed as an adequate remedy and thus awarded in lieu.

If so, the measure of those damages will be broadly as for a vendor who elects to rescind.

However, if the vendor’s claim for specific performance succeeds, he may still also claim the

consequential loss elements such as wasted expenditure and ongoing liabilities related to

the delay in completion. There may also be contractual provisions for enhanced interest or

other compensatory measures which would need to be considered and pleaded in such

circumstances.

The impact of insolvenThe impact of insolvenThe impact of insolvenThe impact of insolvencycycycy

61. What happens if between exchange of contracts and completion the vendor or purchaser

becomes insolvent? The answer to that question depends in part upon the formal nature of

his (or its) insolvency, in part upon which of them is insolvent, and in part upon the

commercial value of the bargain.

62. An insolvent company may be addressing its situation (voluntarily or otherwise) in one of 6

ways:

(1) A General Moratorium

(2) A Company Voluntary Arrangement (CVA)

(3) A Scheme of Arrangement

(4) Receivership (LPA or Administrative)

(5) Administration or

(6) Liquidation

63. An insolvent individual is likely to be experiencing one of three types of procedure:

(1) An Individual Voluntary Arrangement (IVA)

57 Grant v Dawkins [1973] 1 WLR 1406


17

(2) LPA Receivership or

(3) Bankruptcy

64. An insolvent partnership

(1) can be the subject of a Partnership Voluntary Arrangement (PVA)

(2) can be placed into Administration, or

(3) there can be petitions to wind it up with or without concurrent petitions for the bankruptcy

of some or all of the individual partners.

65. The impact and structure of these options differ in a number of key respects, which are

sufficient to form a lecture in their own right. For present purposes, it is important to be

aware that there are differences between them as to the extent to which

• they are binding upon the insolvent entity’s creditors and third parties;

• they pass effective control of the insolvent’s relevant assets to an insolvency

practitioner or other professional manager; and

• they are likely to involve scrutiny of any recent or incomplete transactions.

66. Assuming it is the vendor who has become insolvent, the key question is with whom the

purchaser needs to deal in order to complete his purchase. If the vendor is an individual who

has been adjudged bankrupt, his remaining interest in the property will almost certainly

have vested in his Trustee in Bankruptcy, who will therefore need to complete the transfer.

In all other cases, the vendor’s interest remains with him or it, but (particularly in the case of

a corporate entity) may well be under the control of an insolvency practitioner. In any event,

as soon as a purchaser becomes aware that his vendor is undergoing some form of

insolvency procedure, it is vital to find out exactly what is contemplated and to make contact

with the IP in charge of that procedure. It is likely that the IP will be keen to continue with

the sale and realise the asset, provided that the purchase price was an appropriate market

value, or at least not so far from that range as to make him query the bona fides of the

entire transaction. Absent cogent evidence of some substantial wrongdoing or a clear

contractual provision which permits rescission in such circumstances, the insolvency of the


18

vendor is unlikely to present cause to avoid completion of the contract. It may, however,

involve additional applications to the Court if a moratorium is in place.

67. If it is the purchaser who is insolvent, the position is rather more complicated. Whilst an

inability to raise funds for completion is not generally a good reason to avoid an order for

specific performance if one would otherwise be made, and is certainly not a defence to a

claim for rescission and damages, the vendor’s ability to recover sums from an insolvent

purchaser is likely to be extremely limited. Again, the existence and effect of moratoria in

different forms of insolvency situation and the ability of an unpaid vendor to exercise a lien

or to prove as a creditor are sufficiently complex topics to form lectures in their own right.

They need to be considered carefully in the particular circumstances of any individual case in

which this situation arises.

68. Generally, the one option which a vendor will have when dealing with an insolvent purchaser

who fails to complete is to forfeit the deposit in reliance on the terms of the contract. This

should not be caught by any relevant moratorium because of the nature of a deposit as an

“earnest for the performance of the contract58”.

58 Workers Trust Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573

Documents

Specific_Performance_and_Rescission,_Michelle_Stevens-Hoare_-and-_Edward_Rowntree_19.11.09.pdf..pdf