UK: Is There Still Scope For Successful Claims In Respect Of Unsuccessful Negotiations? Generator Developments LLP And Lidl UK GMBH (2016)

Last Updated: 11 August 2016
Article by Keith Conway

Most Read Contributor in UK, September 2017

Generator claimed that land at Wates Way Industrial Estate, Ongar Road, Brentwood, Essex, which was purchased by Lidl, was held on trust on a Pallant v Morgan equity.

Background

A Pallant v Morgan equity arises where two or more persons embark on a joint venture which involves the acquisition of property for the purposes of the proposed joint venture, and one or more of the partners in the joint venture, with the agreement of the others who believe him to be acting for their joint purposes, acquires the property and then subsequently seeks to retain the property for his or their own benefit. In these circumstances, the court will regard the acquiring party(s) as holding the land on trust for the other parties in the proposed joint venture.

The Pallant v Morgan case involved arrangements discussed outside an auction room. The excluded party successfully sued the purchaser when the purchaser, having completed, refused to share the property. Since then a number of cases have developed the equity. Most notably in Banner Homes Plc v Luff Developments Ltd [2000] Ch 372, CA. Banner and Luff made an oral agreement, evidenced in writing to form a joint venture company. The joint venture company would acquire and develop a site, with both Banner and Luff holding fifty per cent of the shares in the joint venture company. Luff then had a change of heart and no longer wanted to partner with Banner in the venture. However, Luff did not inform Banner of this change, thereby preventing Banner from becoming a rival bidder for the development site. There had been extensive discussions between the parties in relation to the joint venture, they had agreed: that the joint venture company would be owned 50:50 and deadlocked, the total funds to be spent on the development, a nine month period to plan the site and obtain planning permission and if there was then no agreement as to how to develop the site after the nine month period that there would be a 'Texas Shoot-out' in order to sell the site and divide the proceeds. However, a shareholders agreement was never completed and Luff proceeded without Banner and purchased and developed the site on its own. Banner successfully brought proceedings against Luff on the basis that a constructive trust had arisen entitling Banner to fifty per cent of the shares of the acquiring Luff company.

The Court of Appeal imposed a Pallant v Morgan equity in Banner's favour. Chadwick LJ stated the requirements for such equity to arise, as follows:

  1. There must be an arrangement or understanding which precedes the acquisition of the property. It is this arrangement that is said to 'colour' the acquisition and leads to a Pallant v Morgan equity if one party decides to act inconsistently with it.
  2. It is not necessary that the arrangement or understanding is contractually enforceable.
  3. The pre-acquisition understanding or arrangement should contemplate that one party will take steps to acquire the property and that, if the acquisition is successful, the other party will obtain an interest in that property.
  4. The non-acquiring party, in reliance on the pre-acquisition arrangement, should do something which confers an advantage on the acquiring party in relation to the acquisition property or is detrimental to the ability of the non-acquiring party to acquire the property.
  5. The advantage/detriment does not need to be as a result of the non-acquiring party staying out of the market. Further, there does not need to be both an advantage and a detriment, existence of either will do. It is essential however, that it would be inequitable for the acquiring party to retain the property in a manner inconsistent with the pre-acquisition arrangement.

However, following Banner v Luff the courts have been reluctant to impose Pallant v Morgan equities due to concerns this would impact on the freedom of commercial negotiations. This was commented upon by Arden LJ in Crossco No.4 Unlimited v Jolan Limited who stated:

"For the law in general to provide scope for claims in respect of unsuccessful negotiations that do not result in legally enforceable contracts would... be likely to inhibit the efficient pursuit of commercial negotiations, which is a necessary part of proper entrepreneurial activity."

Analysis

Generator argued that before Lidl entered into the contract with the vendor, there was a clear understanding between Generator and Lidl that Lidl would acquire the property for the purpose of a joint venture. The parties had agreed that Lidl should be the sole purchaser but that the purchase was for the purposes of the joint venture. Lidl argued that negotiations were always "subject to contract" and there was mutual intention between the parties not to be bound until a binding written agreement in respect of the joint venture was entered into. Accordingly, no constructive trust could arise. Further, Lidl claimed that the commercial context and absence of agreement on crucial parts of the commercial deal indicated that there was never a common intention to enter into any kind of legal commitment. Lidl contended that the terms of the joint venture were not concluded and important terms were yet to be agreed.

Held

The Judge held relying largely on the Court of Appeal decision in Banner, that the fact that negotiations were explicitly subject to contract was not alone fatal to Generator's case and the establishment of a Pallant v Morgan equity. However, the Judge did find that the arrangements of the parties were not sufficient to give rise to a Pallant v Morgan equity. Particularly as: the varying proposals for the Joint Venture Heads of Terms suggested an absence of agreement, no assurances were given by Lidl that Generator would definitely acquire an interest in the property, the Joint Venture Heads of Terms made no reference to a 50:50 split and Lidl funded the entirety of the purchase price. Further, unlike in Banner, where the parties had agreed a 'Texas Shoot-out', the parties in this case had not agreed on the procedure if the development did not proceed.

Keith Conway acted successfully for Banner Homes Plc in their case against Luff Developments Ltd.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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