Put this one down to experience

The message: Experienced businessmen receive little sympathy from the courts.

The case: The High Court has decided whether a guarantor can delay enforcement on the basis that payment was agreed to be deferred for five years (Spring Finance v HS Real Company, 20.01.11).

Cheval Property Finance specialises in providing short-term lending and bridging loans. In 2006, the business was sold for £6m to a company that was 50% owned by HS Real Company and 50% by another party.

HS Real is an American company owned by trusts set up by Colin Halpern and his wife. It owns a substantial and valuable shareholding in Domino’s Pizza.

The purchase price of £6m was paid with £3m in cash and the balance secured under a loan note guaranteed by HS Real. An initial payment of £1.5m was paid on 1 June 2007 and the remaining £1.5m was to be paid on 1 June 2008. Cheval’s loan note was transferred to Spring Finance in spring 2007, with HS Real’s consent, so HS Real became liable to Spring for £1.5m.

By 2008, Cheval’s financial position had deteriorated and there were concerns about its viability. HS Real failed to pay the instalment of £1.5m due on 1 June 2008, because Halpern thought the previous owners should concentrate on Cheval’s restructuring, rather than calling on the guarantee.

There were complex dealings between the parties to agree terms for the restructuring of Cheval and for the payment of the £1.5m. It was proposed that, in return for Halpern and HS Real agreeing to the restructuring, the £1.5m payment to Spring would be postponed for five years.

In December 2008, a memorandum of understanding setting out those terms was signed by Spring and by Halpern on behalf of HS Real.

The document was marked “subject to contract”. Halpern placed his initials against these words and signed the document at the foot of the second page.

Various issues then arose in connection with certain terms that had been agreed but which needed amendment before matters could be concluded.

Because of a lack of response from HS Real to finalising all the terms, Spring decided to commence proceedings to recover the sum of £1.5m. HS Real then claimed that a concluded agreement had been reached to defer this liability for five years and that Spring was prevented by its conduct from arguing otherwise regardless.

Halpern admitted that he knew what “subject to contract” meant but he claimed that a concluded agreement had been agreed and that he had only initialled the words because this was his invariable practice and not because any agreement was unenforceable until it was formally documented.

The court noted that Halpern was an intelligent and successful businessman and concluded that he was aware that the documentation he signed did not involve either party making any legally binding commitment and was unenforceable.

The court concluded Halpern was so upset with how he had been treated that he had sought to ensure that HS Real did not pay the £1.5m for at least a further five years.

The court rejected HS Real’s arguments that Spring said it would not seek payment under the guarantee for five years in return for Halpern agreeing the restructuring and refinancing of Cheval. The court held that HS Real had not relied upon any representations and, even if any had been made and relied upon, it had suffered no detriment.

The court said that even without legal advice the parties were familiar with complex commitments. HS Real would have known there was no concluded agreement until matters were formalised. All it had been seeking to do was to protect its own interests.

Accordingly, HS Real was held liable to pay the £1.5m with interest and costs.

Summing up: Spring v HS Real

• HS Real signed a memorandum of understanding to delay a £1.5m payment.
• Spring claimed the document was not legally binding and so sought the payment.
• The court found for Spring. It said HS Real knew the document was not legally binding.

First seen in Property Week, 4 February 2011.