Property developer granted ‘proof before answer’ in breach of contract case against Clydesdale Bank

A property developer who entered into an agreement with a bank to sell 26 homes he had purchased with loan funding after he became liable to repay more than £2.5 million in loans is challenging a bid by the lender Clydesdale Bank to terminate the contract.

Clydesdale Bank claimed that the pursuer William Burnside failed to pay the rental income from the properties to the bank, as required under the terms of the contract.

But a judge in the Court of Session allowed a proof before answer after Burnside argued that the bank, which had been assigned the interest in the secured debt by the lender, had failed in its obligation to sell the properties “with a reasonable time”.

A proof before answer is a hearing on both factual and legal issues and is appropriate where the court needs to hear the evidence before addressing the legal issue.

Lord Clark heard that the pursuer William Burnside was the owner of 26 properties in the Borders, for which Clydesdale Bank had provided the loan funding for him to purchase and develop before renting them out to tenants.

Sale agreement

But in August 2012 Burnside became obliged to repay the loans, which amounted to £2,688,325, and the parties entered into a sale agreement whereby Clydesdale was to arrange for the sale of the properties to be and retain the proceeds to extinguish the debt owed, while Burnside was to manage the properties and remit the rental income to the bank until they were sold.

In June 2015 Clydesdale assigned its rights in respect of the agreement to the defender, Promontoria (Chestnut) Limited, and also assigned to the defender the benefit of the standard securities held over the majority, if not all, of the properties.

By letter dated 10 March 2016, the defender purported to terminate the agreement on the basis that Burnside had failed to account for the rent which he had received for the properties, but the properties had not yet been sold.

Burnside raised an action seeking declarators to the effect that the agreement had not been validly terminated by the defender and remained in force, that the debt referred to in the agreement included all sums (including interest) due to Clydesdale and to the defender, and that after the sale of the properties that debt would be extinguished.

‘Implied term’

Burnside, who relied upon the existence of an “implied term” in the agreement that “the properties would be marketed and then sold within a reasonable time”, was also seeking specific implement of the defender’s obligation under clause 3 to arrange the sale of the properties, arguing that he had effectively become an “unpaid managing agent”.

On behalf of Burnside, Mark Lindsay QC contended that the failures by Clydesdale and the defender following the assignation to comply with the implied term constituted a “material breach” of contract entitling Burnside to withhold performance of his obligations under the agreement.

It was submitted that the obligations were plainly the “counterparts” of one another and that the defender’s breach was of “sufficient materiality”.

It was further contended that the purported termination by the defender had no effect, as it proceeded upon the basis of non-performance by Burnside of obligations in respect of which he was entitled to withhold performance because of the defender’s breach of the implied term.

‘Valid termination’

C. Euan Duthie, for the defender, submitted that no such term fell to be implied into the agreement and that the contract was “validly terminated” as a result of Burnside being in material breach by failing to pay the rental income received.

Further, it was pointed out that there was no averment by Burnside of what a reasonable time would have been in this context.

The defender also argued that it had in fact, in July 2016, taken steps to market the property, with the result that, even if there had been breaches of the implied term prior to that date, they ceased at that point.

The defender, which counterclaimed for recovery of the outstanding debt on the basis that it had validly terminated the agreement, argued that Burnside’s averments were “irrelevant” and should be dismissed.

Pursuer pled a ‘relevant’ case

Allowing a proof before answer, the judge ruled that the implied term was “intrinsic” to the agreement and that the obligation required to be performed within a reasonable time by virtue of the existence of the implied term.

In a written opinion Lord Clark said: “Applying the authorities, the first issue is to consider whether the language of the agreement does not expressly, or by necessary implication, fix any time for the performance of the obligation in question. This involves construction of the terms of the agreement, on the well-established principles, including consideration of the natural and ordinary meaning of the language, having regard to the context and background as known to both parties and, where appropriate, considerations of business common sense.

“The agreement does not contain any terms which indicate that it is perpetual or indefinite. Equally there is nothing in the agreement or in the context or background, or indeed based upon business common sense, which could indicate that the parties had left it entirely in the discretion of the defender as to when the defender wished to arrange for the sale of the properties. There is nothing to indicate that the parties intended to allow that the defender could take a period of time that was in all of the circumstances unreasonable for the performance of the obligation in clause 3.

“I conclude therefore, subject to the entire agreement clause, that the implied term contended for by the pursuer, to the effect that the obligation in clause 3 is to be performed within a reasonable time, would fall to be implied into the agreement.”

He added: “By inference from these averments, the pursuer offers to prove that a reasonable time has elapsed. He does not aver the duration of that period, but where that issue is one to be determined by the court in light of all of the relevant circumstances, I see no requirement for him to do so.

“If it turns out to be the case that the sums of money received in rent were not lawfully retained by the pursuer (for example, because the rental maintenance costs did not exceed the rental income), the issue of precisely when the implied term was breached may well be relevant. Again, however, that is a matter to be determined by the court, at proof, in the whole circumstances. I do not consider that the pursuer can be held to have failed to make out a relevant case by not averring the duration of the period of a reasonable time.”