Liquidator fights for vacant possession of property

Overview

In this case - a liquidation of a company that owned a property - the court considered whether a tenant breached a requirement under a settlement agreement with the liquidator to deliver vacant possession of the property by failing to require other occupants to vacate the property. The court also considered whether the liquidator was entitled to a payment provided for in the agreement in the event that vacant possession was not delivered, and whether the requirement to make this payment constituted a penalty clause.

Background

The plaintiff Ethafil Limited (“Ethafil”) is the registered owner of a property known as Birmayne House (the “Property”). Ethafil has been in voluntary liquidation since June 2019, when Myles Kirby of Dublin-based Kirby Healy was appointed as liquidator (the “Liquidator”).

The defendant Express Bus Limited (“Express Bus”) was granted a lease of the Property by the previous owners on 15 May 2012 for a term of three years at a rent of €35,000 per annum. A dispute then arose between the parties about whether Express Bus had purchased the Property from the previous owners pursuant to an agreement entered into in February 2015. Under that agreement, Express Bus was granted a further five-year lease of part of the Property and an option to purchase that part of the Property within the first 12 months of the lease on certain conditions.

Litigation ensued, resulting in a series of judgments finding that: (1) Ethafil had purchased the Property on 18 December 2015; (2) Express Bus did not pay the rent due under the lease in full or on time, such that its option to purchase the Property under the agreement had lapsed by the time Express Bus attempted to exercise the option; and (3) Express Bus was also found not to be in lawful possession of the Property.

Ultimately, on 13 October 2022, the Liquidator, on the one hand, and Express Bus and certain related parties, on the other, entered into a settlement agreement (the “Settlement Agreement”) pursuant to which Express Bus and the related parties acknowledged that their occupation of the Property was unlawful and undertook to deliver vacant possession of the Property to Ethafil acting by its Liquidator by 31 January 2023. Clause 9 of the Settlement Agreement provided that the parties would bear their own costs, unless vacant possession was not delivered in accordance with the Settlement Agreement, in which case Express Bus would be required to pay €50,000 towards the costs of Ethafil by 28 February 2023.

On 1 February 2023, the Liquidator’s agents attended the Property for the purposes of securing possession of it. Those agents were prevented from accessing the site and it appeared that a number of other entities were in occupation of the Property.  The next day, Ethafil’s solicitors wrote to the solicitors for Express Bus noting that parties other than those disclosed in the Settlement Agreement also appeared to be in occupation of the Property. It was stated that the undertaking in the Settlement Agreement to deliver up vacant possession of the Property required Express Bus to ensure that “all occupants of the Property vacate the Property by 31 January 2023”. Ethafil demanded payment in the sum of €50,000 pursuant to clause 9 of the Settlement Agreement.

Counsel for Ethafil argued that words “clear and vacant possession” in the Settlement Agreement should be given their natural and plain meaning. He argued that Express Bus committed not only to itself vacate the Property, but also to ensure all other occupiers vacate the property as well. This was a standalone undertaking given to deliver clear and vacant possession. Even if Express Bus had no right to compel other occupants to leave the Property, then clause 9 required Express Bus nevertheless to make a payment of €50,000 to Ethafil if those occupants remained.

Counsel for Express Bus argued that (1) Express Bus did not breach its undertaking; and/or (2) it took all steps open to it to procure compliance with the undertaking; and/or (3) the part of clause 9 of the Settlement Agreement which purports to impose a €50,000 penalty was not enforceable. There was no provision in the Settlement Agreement that Express Bus would ensure others would physically vacate the Property, and Express Bus had no legal right to do so.

The Court’s Decision

Justice Roberts started from the principle from Stapleyside Company v Carraig Donn Retail Limited [2015] IESC 60 that “both text and context are relevant in the proper interpretation of commercial documents”. Justice Roberts did not believe that the plain and ordinary meaning of the Settlement Agreement was that Express Bus was required to take steps to compel other occupants to leave – nor could it have done so as a matter of law. Clause 9 was clearly designed to incentivise Express Bus to do what it could to persuade the other occupants to leave, and if Express Bus was unsuccessful (recognising that this was a real possibility), then it agreed to the terms of clause 9. However, Express Bus simply had no legal basis to compel the other occupants to leave, as it held no interest in the Property. This made this situation entirely different from the usual situation where a party undertakes to deliver clear and vacant possession to another party.

Justice Roberts then turned to the issue of whether clause 9 was a penalty clause, rendering it unenforceable. In Pat O’Donnell & Co Limited v Truck & Machinery Sales Ltd [1998] 4 IR 191, the Supreme Court of Ireland (Barron J) provided an analysis of penalty clauses:

1. Though parties who use the words “penalty” or “liquidated damages” may prima facie be supposed to mean what they say, the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages.

2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage.

3. The question whether a sum is a penalty or liquidated damages is a question of construction to be decided on the terms and inherent circumstances of each particular contract judged as at the time of the making of the contract, not as at the time of the breach.

4. Something will be held to be a penalty if the sum is extravagant and unconscionable in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

5. It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid.

In the present case, clause 9 did not appear to be concerned with a pre-estimate of loss arising or likely to arise from any breach by Express Bus. It was not suggested in clause 9, for example, that the payment of €50,000 was designed in any way to compensate Ethafil for itself having to deal with securing vacant possession from any of the occupants who remained on the Property nor any loss resulting from them remaining in occupation beyond the specified date. The sum was a flat figure payable whether one or more of the occupants overheld by one day or a much longer period. It could not be suggested that €50,000 was a reasonable pre-estimate as at the date of the Settlement Agreement of the likely loss Ethafil would suffer if any of the occupiers remained on the Property beyond 31 January 2023.

The clause was drafted to describe the €50,000 payment as “a contribution towards the costs of the Company”. Justice Roberts noted but did not accept the submissions made by counsel for Ethafil that payment of this “contribution” was merely a fraction of the costs which had actually been incurred by Ethafil/the Liquidator and so for that reason could not be classed as a penalty. However, this did not appear to be correct on the facts in this case. While the costs of the various judgments in the litigation were awarded to Ethafil, those costs orders were compromised in the Settlement Agreement. They therefore did not remain available to Ethafil to now use as a basis to recover costs previously ordered in its favour.

In all the circumstances, Justice Roberts concluded that the clause 9 payment of €50,000 was a penalty insofar as this sum was not a genuine estimate at the time of the Settlement Agreement of the loss likely to be sustained by Ethafil, but was a sum in excess of any such anticipated loss. Thus, if paid, it would be in the nature of a penalty or punishment imposed on Express Bus.

Ordinarily, the finding that a clause is a penalty clause results in the inevitable consequence that it is unenforceable. That does not mean the injured party is cut off from recovery of its losses, since a court can still hold a defendant accountable for losses in a situation where the contract has been breached. Here, it was not disputed that clear and vacant possession was not delivered on 31 January 2023 by three parties who had been identified as occupiers in the Settlement Agreement. However, this scenario did not arise from any breach of the Settlement Agreement by Express Bus, whose only obligation was to itself vacate. Had there been a breach of contract by Express Bus, the payment provisions in clause 9 of the Settlement Agreement would constitute a penalty clause and would thus be unenforceable since the amount specified was not a genuine pre-estimate of damages.

Judge: Ms. Justice Eileen Roberts