Estmanco (Kilner House) Ltd v Greater London Council

In June 1980 the Greater London Council (“the council”) began to sell 135-year leases of flats in a rehabilitated block of 60 flats. On October 28, 1980, a company was formed for the purpose of managing the facts in accordance with an agreement to be made with the council. The company had an authorised and issued share capital of £3,000, divided into 60 shares of £50 each, and under its articles of association one share was attributed to each flat. Initially all the shares were allotted to the council, but as each flat was sold the share attributable to it was transferred to the purchaser. When all the flats had been sold, the shares were to carry the right to vote, but until that time, although the purchasers could attend and address general meetings of the company, the votes were to remain vested in the council or its nominees. On March 18, 1981, the council entered into an agreement under seal with the company, which provided, inter alia, that the company should collect service charges from the purchasers of the flats sold and provide and maintain certain specified services as from March 25, 1981, and that the council should pay a management contribution in respect of unsold flats. Clause 3 (1) of the agreement provided that the council should use its best endeavours to dispose of all the flats on long leases in the specified form of lease, or as near thereto as the circumstances might admit, and if any lease should cease to subsist before the grant of a superior lease to the company, to grant another long lease in lieu thereof. When all the flats had been sold on long leases, the council was to grant to the company a superior lease in a form annexed to the agreement, thus enabling the company to enforce the terms of the leases against the purchasers of the flats. The leases contained restrictive covenants which were intended to be mutually enforceable between the purchasers. Once all the flats were sold the company, controlled by the tenant owners of the flats, would run the block of flats as landlord.

In June 1981, following local elections as a result of which a political change took place in the control of the council, the council decided on a change of policy. On July 30 its housing committee passed a resolution, which was confirmed on July 31 by the council's finance and general purposes committee, that the 48 flats in the block which remained unsold should be let to high priority applicants on its housing list, instead of being sold on long leases as provided for in the agreement. The purchasers of the 12 flats which had already been sold were offered the opportunity of giving up their flats in return for compensation, but the offer was not accepted. No equivalent offer was made to prospective purchasers in the 35 cases where deposits had been paid and there had been an offer and acceptance “subject to contract.” The three directors of the company, who was employees of the council, but who had been given liberty of action despite such employment provided that they acted in good faith, took the view that the company ought to seek to enforce the contract with the council, and on August 3, they issued a writ against the council, seeking to restrain it from disposing of any of the flats save by long leases, or from doing anything which would be a breach of clause 3 (1) of the contract between the council and the company. At an extraordinary general meeting of the company held on August 18, at which only the council was eligible to vote, a resolution was passed instructing the directors to withdraw the action, and inform the court of the reasons for so doing. The applicant, the purchaser of one of the flats, sought an order that she be substituted as plaintiff, that the company be joined as an additional defendant and that the action be permitted to continue in her name as a derivative action.

On the motion:—