Court allows appeal on land sale contract, ordering specific performance after rejecting VAT refusal due to lack of evidence.

THE SUPREME COURT

APPEAL NO 118/2001

DENHAM J

MURPHY J

MURRAY J

BETWEEN:

CYRIL FORBES

Plaintiff/Appellant

AND

JOHN TOBIN AND JEANETTE TOBIN

Defendants/Respondents

JUDGMENT OF MR JUSTICE FRANCIS D MURPHY DELIVERED THE 17th DAY OF July, 2002

By an undated agreement made in or about the month of March, 1998, the above named defendants/respondents, John Tobin

and Jeanette Tobin, (the vendors) agreed with the above named plaintiff/appellant, Cyril Forbes, (the purchaser) for the sale to

him, for the sum of £180,000, of the premises therein described as:-

“ALL THAT AND THOSE the lands and hereditaments being the garage premises at Inistioge situate in the Barony of

Gowran and County of Kilkenny and more particularly delineated in the map attached hereto and thereon outlined in

red.”

By plenary summons issued on the 21st May, 1999, the purchaser instituted proceedings claiming specific performance of the

contract. By order dated the 29th March, 2001, McCracken J. refused the order for specific performance: declared the

agreement for sale aforesaid rescinded but ordered the vendors and each of them to repay to the purchaser the deposit of

£18,000 together with interest thereon. That order was made pursuant to the judgment of the learned trial judge delivered on

the 8th March, 2001. This is an appeal by the purchaser from the said order and judgment.

The contract for sale contained two material special conditions. First, a provision (at special condition number 5) that the

vendors would make application for the first registration of title in fee simple free from incumbrances of the property for sale in

the Land Registry and that the sale would be subject to and conditional upon the same being affected and further that the

closing date for the sale would be fourteen days after such registration. The second relevant special provision related to Value

Added Tax and was in the following terms:-

“7 In addition to the purchase price, the purchaser shall pay to the vendor an amount equivalent to such Value Added

Tax as shall be exigible in relation to the sale, same to be calculated in accordance with the provisions of the Value

Added Tax Act 1972 and to be paid on completion of the sale forthwith upon receipt by the purchaser of an appropriate

invoice (whichever be the later).”

Apparently the vendors were registered as full owners of the property for sale being the property now comprised in Folio 1791F

of the Register of Freeholders (County Kilkenny) on the 11th December, 1998, the completion date of the property was

therefore the 25th December of that year.

Difficulties with the title of the vendors to the property had delayed the production of the contract for sale and,

understandably, further time elapsed before the registration of the title as aforesaid. Whether it was this passage of time or a

difference of opinion which had emerged between the solicitors for the vendors, James P. Coughlan & Co. (C & Co.) and the

solicitors for the purchaser, Boe Kiely Hogan (PKH) as to the construction and application of special condition aforesaid which

caused it is not clear but the correspondence between the respective solicitors became more acerbic and certainly less

focussed on the material issues. From the outset - and indeed before the execution of the contract - a difference of opinion

had arisen in relation to the clause relating to V.A.T. In a letter of the 30th March, 1998, PKH said:-

“We understood that there was no question of VAT being charged on the purchase price. Please advise us as to the

amount of the VAT element and the VAT charge.”

By letter dated the 28th April, 1998 C. & Co. explained the position in the following terms:-

“Our clients’ accountant Mr. Richard McElwee is in consultation with the Revenue Commissioners regarding the VAT

situation on the within property transaction.

The vendors have carried out two vatable activities from the property.

1. Shop and petrol pumps.

2. Garage business.

The Revenue Commissioners have requested confirmation from the vendors confirming whether or not the purchasers

will be carrying on a vatable activity from the property.

Please note this will determine if a charge to VAT arises on the within transaction.

Accordingly we require written confirmation of the following:-

1. Is the purchaser registered for VAT

2. Does the purchaser intend carrying on a vatable activity from the property

3. Confirm the exact nature of the vatable activity.

Once we receive the above requested information we have been informed by Mr. Richard McElwee that the Revenue

Commissioners shall make a ruling on the VAT situation herein.”

Throughout the remainder of 1998, while the title of the vendors was being registered, and into 1999, C. & Co. maintained that

V.A.T. was payable on the transaction because it involved the sale of a business.

In letters dated the 15th and 17th December C & Co. pressed for completion on the 22nd December, 1998, that is to say, some

days before the actual date for completion.

By letter dated the 26th January, 1999, C & Co. forwarded to PKH replies to the requisitions raised together with the documents

relating thereto and a “completion notice”

In relation to V.A.T. the solicitors for the vendors stated as follows:-

“We would be obliged to receive balance purchase monies in the sum of £162,000 together with:-

(A) Written confirmation from the Revenue Commissioners confirming that your client is registered for VAT or,

(B) Cheque in the sum of £22,500 being VAT payable herein.”

The contention that VAT was payable was supported by a further reference to Mr McElwee’s letter dated the 30th November,

1998 which supported the case that the transaction involved was the sale of a business and as such would give rise to a

liability to V.A.T. unless the purchaser was registered for that tax.

In their letter dated the 8th February, 1999, PKH drew attention in the clearest terms to the error into which the vendors’

solicitor had fallen when they pointed out:-

“The regulations your clients’ accountants quote refer to the position on the sale of a business. This transaction is not

the sale of a business, it is a simple sale of a site with a building. No VAT is payable on the sale of the site and building

unless your client has developed the building. Depending on the extent of this development and whether or not

VAT was paid there may be a VAT liability on this sale. In this regard a distinction must be made between any monies

expended by your client as distinct from any monies expended by any oil company.

Please confirm by return:-

1. Whether or not your client expends any money on the development of the building.

2. If so furnish copies of the invoices showing the VAT liability paid.

Please note that our client is not taking over any liability on foot of the lease agreements and supply agreement. The

property covered by these agreements remains the property of the owner. Your client should arrange for the removal

of such property.

Our client is willing able and ready to complete this purchase.”

It was in this letter that the point was taken - and then by the purchaser’s solicitor - that V.A.T. might be payable because of

development work carried out by the vendor. In a flurry of communications between the 8th February, 1999 and the 2nd March,

1999, C & Co. continued to assert vehemently that the sale was the sale of garage premises and business and that accordingly

the regulations quoted by Mr. Richard McElwee correctly set out the basis on which V.A.T. must be paid by the purchaser on

closing or alternatively that he, the purchaser, must prove that he was registered for that tax. PKH were equally clear that the

sale was “a straightforward sale and purchase of portion of a fee simple property” and that there was no question of any

business being acquired. C & Co. did not take up the suggestion that development work might have been carried out by the

vendor.

With the time fixed for completion approaching C & Co. wrote once again on the 9th March, 1999, insisting that the sale

extended to the business carried on by the vendor. By that stage the vendors’ solicitors apparently recognised that the written

contract contained no provisions to that effect but contended instead that:-

“... your client agreed to this verbally at the same time as he purchased the premises and that this verbal agreement is

enforceable if not having to come within the ambit of the Statute of Frauds”.

On the 30th March 1999 - the date fixed for completion by the second completion notice - C & Co. wrote to PKH in terms which

included the following:-

“.... our client has instructed us that he shall invoke his rights under the contract for sale, seize the deposit and deal

with third parties in respect of the sale of this property.

With regard to your point regarding VAT liability on this matter per your letter of 22nd March 1999 please note that we

have at length stated that we are no longer stating that VAT is chargeable by virtue of the fact that it is the sale of a

business as we have accepted that this is not the sale of a business and accordingly the Revenue Commissioners were

informed of the sale of real property only and furnished us with a letter confirming that VAT is still chargeable on the

sale of the real property.

With regard to the Burmah agreements and the property belonging to Burmah please note that this is a matter for our

client and as per the terms of the contract you are obliged to complete the purchase of the property in its entirety and

once again we would advise that on the close of business of this evening the statutory period of notice of the 28 day

completion notice will have expired and our client instructs us that he will seize the deposit and “walk away” from the

within contract for sale as you have failed to complete the purchase of the real property within the prescribed period

allowed under the valid completion notice dated the 2nd March 1999.”

What appears from the contents of the correspondence was that the solicitors on behalf of the vendor did belatedly recognise

that the contract for sale was not a contract for a sale of business and that accordingly the basis in which they had

approached the potential liability to V.A.T. was entirely erroneous. The correspondence does not make it clear that C & Co.

ever appreciated the alternative basis on which V.A.T. might become exigible. The statement in the letter of the 30th March,

1999, to the effect that the Revenue had been informed that a contract for sale was “of real property only” was unhelpful and,

perhaps, irrelevant. What the purchaser sought to ascertain, and was unquestionably entitled to know, were the facts which

gave rise to the contract for sale becoming a vatable transaction. The material facts would have consisted of any development

having been carried out on the property by the vendors or their predecessors in title after the year 1972. There could be no

doubt but that the purchaser was entitled to particulars of the work done, the expenditure involved and proof by way of

statutory declaration or otherwise that this expenditure had been incurred and did constitute development within the meaning

of the relevant legislation. Insofar as C & Co. purported to provide information prior to the expiration of the period fixed by the

second completion notice this was done on the basis of advices given by their accountants or opinions expressed by the

Revenue authorities. C & Co. never came to grips with the fact that such advices and opinions were no better than the facts

on which they were based: the crucial issue was the development of which the vendors should have been aware: not the

advices or rulings which presupposed this information.

It is true that in a letter dated the 2nd March, 1999, from R. McElwee & Co to the Inspector of Taxes dated the 2nd March,

1999, which had been included - perhaps in error - in the letter dated the 9th March, 1999, from C & Co. to PKH it was stated

that:-

“Within the period from the 1/4/93 to date of cessation of trading from the premises an amount of £3,000 was spent by

Mr Tobin on capital expenditure, however some minor improvements were carried out by Burmah Castrol to the

forecourt canopy and petrol pumping equipment at their expense. Mr Tobin has a ten years sale contract with Burmah

Castrol. The £3,000 capital expenditure incurred by Mr Tobin was in respect of the concreting of an existing adjoining

side yard.”

This was indeed information of the utmost importance but C & Co. appeared to have placed little reliance on it or perhaps failed

to appreciate its importance. Certainly the solicitors for the vendors never appeared to have made any explicit reference to it -

less still did they provide verification of the monies spent in developing the property.

As the vendors relied on the completion notice served by them and the failure of the purchaser to complete within the time

thereby stipulated to give them the right to forfeit the deposit and terminate the agreement the purchaser instituted these

proceedings.

In the statement of claim delivered on the 31st May, 1999, the purchaser pleaded the contract for sale and in particular special

condition 7 aforesaid and then went on to allege as follows:-

“6 The defendants have stated Value Added Tax is exigible in respect of the salebut have changed the basis on which

they alleged Value Added Tax is exigible in the course of the sale:-

(a) The defendants originally alleged that Value Added Tax was exigible by virtue of the fact that the property in

sale was being sold as a going concern as a business, but have accepted that this is not in fact the case and that

the purchaser is purchasing the property only and not the business that may have been carried on by the vendors

thereon.

(b) The defendants now allege that Value Added Tax is exigible by reason of a development of the property since

the year 1972, such as would give rise to a charge to Value Added Tax, but the vendors have not furnished the

purchaser with evidence of such development, which would be a condition precedent to liability for Value Added

Tax.

(c) The defendants have failed, refused or neglected to demonstrate to the plaintiff how Value Added Tax is

exigible in respect of the said sale.”

As to that allegation the vendors in their defence said:-

“(2) Paragraph 6 of the Statement of Claim herein is denied. At all material times the defendants have demonstrated

adequately and explicitly the basis upon which VAT is exigible through extensive inter parties correspondence and in

particular by letters from the plaintiff’s solicitors to the defendants dated April 3rd 1998, January 26th 1999, February

8th 1999, March 19th 1999 and most recently March 30th 1999. By the said letter of March 30th it was clearly stated

that the defendants accepted that VAT was not exigible by reason that it was a sale of business and further it was

accepted by the defendants that the sale did not involve the business. The defendants however inserted their claim in

reliance upon advices from the Revenue Commissioners who confirmed to them that VAT was chargeable on the sale of

real property.”

In the proceedings before Mr. Justice McCracken the correspondence between the solicitors and in particular the letters

referred to by the vendors in their defence was explored in detail.

In his judgment delivered on the 8th March, 2001, the learned judge commented upon the correspondence in the following terms

at p. 7:-

“Unfortunately this rather lengthy correspondence which took place over several months could probably be described as

a comedy of errors. The contract for sale on its face is clearly only a contract for the sale of property, and does not

include any of the standard clauses which one would expect on the sale of a business as a going concern. This was

pointed out to the defendant’ s solicitors on a number of occasions, but they refused to accept it. On the other hand

the plaintiff’s solicitors appeared to have been operated under a totally mistaken apprehension as to liability for value

added tax on the sale of property. Liability for value added tax does arise in the sale of a business as a going concern

where the purchaser is not himself registered for value added tax but it is also payable under certain circumstances

where property has been developed in whole or in part after the 31st October 1972, and this appears to have been

ignored by the purchaser’s solicitor until after the service of completion notice. This may be understandable, because of

the basis on which the vendor’s solicitors were claiming value added tax, but the fact remains, and it now seems to be

conceded that value added tax is payable on the transfer of an interest in property where there has been a

development of that property by or on behalf of the vendor subsequent to the 31st October 1972 in circumstances

where the vendor was entitled to recover any part of the value added tax chargeable to him or the purchaser or

redevelopment of the property.”

Later in his judgment the learned judge said:-

“The above facts give rise to a number of issues. Clearly the first of these is whether, when the plaintiff issued the

proceedings, he himself was ready, willing and able to complete in accordance with the terms of the contract. He was

refusing to pay the value added tax, and it now transpires the transaction is subject to value added tax, although not on

the basis on which it was originally claimed by the defendants...... There is, therefore, the very odd situation that the

defendants appear to have been correct all along in requiring value added tax, but for all the wrong reasons. In my view,

therefore, and with some reluctance I must find that the plaintiff is not entitled to an order for specific performance,

because his refusal to pay value added tax meant that he was not willing to close in accordance with the contract.”

I believe that it would have been correct to say that the plaintiff was not, at the date of the issue of the plenary summons, in

a position to complete the sale because the queries or requisitions in relation to V.A.T. had not been dealt with by the vendors

in accordance with their contractual obligations in that behalf. The statement that the plaintiff was disentitled to a specific

performance because of his “refusal to pay value added tax meant that he was unwilling to close in accordance with the

contract” was, in my view, erroneous. PKH stated repeatedly that their client was prepared to complete the sale and indeed to

pay V.A.T., if exigible, in accordance with the provisions thereof. The issue between the parties was whether or not such tax

was exigible. PKH had pointed out repeatedly and correctly, as events confirmed, that the sale was not the sale of a business

and that accordingly V.A.T. could not be payable on that basis. It was, as I have noted, PKH who drew attention to the fact

that there might be a V.A.T. liability on the sale of the land if a development had taken place thereon and called upon C & Co to

furnish particulars of monies expended on any such development and invoices related thereto. That request was not addressed

by the vendors’ solicitors in correspondence. It does, however, appear from the evidence given by Mr. McElwee that he had

been informed that Mr. Hogan had asked for vouchers for the expenditure of £3,000 and that he, Mr. McElwee, had not been

able to trace any invoices nor could Mrs. Tobin manage to obtain them from the contractors who carried out the works.

Unfortunately no reference was ever made in the correspondence to these investigations nor any alternative evidence offered

in proof of the expenditure. Indeed, as the correspondence demonstrates, the solicitors for the vendors continued at that stage

to maintain that V.A.T. was payable because the transaction involved the sale of a business.

The statement contained in the letter from PKH of the 11th March, 1999, stating that the purchaser was unwilling to pay V.A.T.

should be read in the context of paragraph 4 (b) of that letter which made the purchaser’s position abundantly clear, namely:-

“(b) The contract contains the usual standard VAT clause in the Special Conditions. Under that clause our client is liable

to pay VAT “as shall be exigible” under the VAT Act 1972. No such exigibility arises on the information furnished to us to

date. You will see from previous correspondence that we have requested information as to why your client says VAT is

exigible. The only reason you have given us is that set out in paragraph (a) above, which reason we do not accept.”

The vendors did not furnish particulars of the monies obliged to have been expended or any evidence in support of the belated

claim that it was so expended. The purchaser was being merely furnished with conclusions or opinions expressed by others on

information which the vendors consistently refused to provide notwithstanding the repeated and well founded requests for it.

In my view the learned trial judge erred in concluding that the purchaser refused to pay value added tax. His only refusal was to

pay value added tax, first, on the erroneous basis that the contract was one for the sale of a business and, secondly, on the

basis that the property had been developed by the vendors or their predecessors in title without being given adequate evidence

to support that contention. The purchaser expressed and demonstrated his willingness to pay the value added tax if the same

was payable and for that purpose sought evidence - as opposed to opinions or rulings - to enable a conclusion to be reached

by the purchaser in that regard.

The learned trial judge having held that the two completion notices served by the vendors were defective - against which there

is no cross-appeal - I believe the learned trial judge was mistaken in declining to make an order that the contract ought to be

specifically performed. Accordingly I would allow the appeal and refer the matter back to the High Court to make such further

order or direct such inquiries as may be necessary to give effect to that decision.