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Dry stone walls and steel mills 20 November 2014

What is it about steel mills that creates litigation ?  In Peel Land and Property (Ports No 3) Ltd v TS Sheerness Steel Ltd [2014] EWCA Civ 100, we have recently seen a battle between a landlord and a tenant who were arguing over whether large pieces of plant within a steelworks comprised chattels or fixtures and, if fixtures, whether they were landlord’s fixtures or tenant’s fixtures.   You can see my article about the Court of Appeal decision here.  (Incidentally on 30 October the Supreme Court refused Sheerness Steel leave to appeal, meaning that the Court of Appeal’s decision will stand.)

Now we have Lictor Anstalt v Mir Steel UK Ltd [2014] EWHC 3316 (Ch), with an even stranger set of facts.  The judge was unable to get to the bottom of some of them.  Boiled down to its essentials, the question was this.  If you let me assemble and use your hot strip steel mill (abbreviated to “HSM” in the judge’s decision) on my land and I sell my land to a third party, can you recover your mill or is it now owned by the third party and gone for good?  Actually, it was a good deal more complex than that, which explains why the judgment is no fewer than 88 pages long.

What does a hot strip steel mill look like?  It is big, for a start.  This one was 300 metres long. The judge had this to say about it when she went on a visit of inspection (at [130]):

“I should add that I had the opportunity during the trial of this matter to visit the Site and to view the HSM in situ.  It is not operational at present.  The impression gained was one of enormity and complexity.  The HSM itself is upon prepared foundations and in some cases, is sunk below the surface, positioned over aligned pits and upon specially erected parapet walls.  The electrical connections, lubrication and water pipes are themselves extremely large and durable as are the means by which they are attached to the HSM itself.  All of the fixings and boltings are also of an extremely heavy duty nature.  Further, the HSM stands in a building or shed which is some 300 metres in length.”

Not your usual chattel/fixture dispute then.

The facts

Lictor owned a hot strip steel mill (in pieces) which was surplus to requirements.  It agreed with Alphasteel, a related company, that Alphasteel could erect the mill on Alphasteel’s own land, and use it to make steel, and keep the profits.  An agreement (“the April agreement”) was signed between the parties to this effect, but it also provided that the mill remained the property of Lictor, despite being erected on Alphasteel’s land, and that Lictor could enter on the land (on reasonable notice) and dismantle the mill and remove it when it wished.  Despite little evidence of any reason why Lictor should want to enter into such an agreement, the court held it to be genuine.

Alphasteel became insolvent and administrators were appointed.  The administrators hived down the assets of Alphasteel (including such interest as Alphasteel had in the mill) into a subsidiary company (which became known as Mir Steel) and then sold the shares in Mir Steel to Libala.  The administrators made clear to Libala that ownership of the mill was disputed, but nonetheless both parties went along with the sale in the knowledge that the transaction made it impossible for Alphasteel to comply with its obligations in the April agreement to allow Lictor onto the land to dismantle and recover the mill.

So the issue became: if the mill was a chattel, then it still belonged to Lictor and Lictor could recover it.  But if it was part of the land, then ownership had passed to Mir Steel.  Among the many questions that the court had to resolve, the key one for us was whether the mill had become part of the land or remained a chattel.

Bizarrely, this is a question not dissimilar to the 19th century cases involving looms attached to factory floors.  There are many cases that consider whether a chattel has become part of the land to which it has been affixed (or into which it has been built).  Many of these cases are now suspect after the House of Lords case of Elitestone Ltd v Morris [1997] 1 WLR 687 in which the House of Lords favoured a threefold distinction (a chattel; a fixture; or part and parcel of the land itself), rather than the twofold distinction between fixtures and chattels previously adopted.  However they still offer useful guidance.

The judge held that the mill had become part of the land and therefore was no longer owned by Lictor.  Her reasoning is too lengthy to set out here, and it would be misleading to pick out specific paragraphs from it.  You can see it in paragraphs 184 onward of her judgment (click here).

It is useful to recall here that the parties’ subjective intentions (as expressed in the April agreement) were not relevant – no more than the parties’ subjective intentions are relevant in a dispute as to whether an arrangement constitutes a lease or a licence.  The label given by the parties is irrelevant.  The judge quoted from Lord Browne-Wilkinson in Melluish v BMI (No 3) Ltd [1996] AC 454 at 473:

“The terms expressly or implicitly agreed between the fixer of the chattel and the owner of the land cannot affect the determination of the question whether, in law, the chattel has become a fixture and therefore in law belongs to the owner of the soil…  The terms of such agreement will regulate the contractual rights to sever the chattel from the land as between the parties to that contract and, where an equitable right is conferred by the contract, as against certain third parties.  But such agreement cannot prevent the chattel, once fixed, becoming in law part of the land and as such owned by the owner of the land so long as it remains fixed.”

Equitable rights 

So far, so conventional.  But one additional issue arose, which is likely to be unfamiliar to many readers.  The court held, following earlier cases including Cookes v Morrison, Jones & Taylor Ltd [1914] 1 Ch 50, that the agreement allowing Lictor to remove the mill in the future created an equitable interest over the land in favour of Lictor.

This equitable interest would be binding on anyone acquiring an interest in the property – except for equity’s darling, the bona fide purchaser of a legal estate for value without notice.  As the property in question comprised registered land, notice in this case equated to protection by means of a notice on the register.  This had not been done.  So even though Libala was aware that Lictor was claiming ownership of the mill, and claimed the right to enter on the land to remove it, Libala (or more accurately its subsidiary company Mir Steel) took free of Lictor’s rights when Alphasteel’s assets were transferred from Alphasteel to Mir Steel, because they had not been protected at the Land Registry.

Lictor did not lose everything.  The court held that Mir Steel was liable for procuring a breach of contract in relation to the April agreement.  Intention to cause loss is not a necessary element of the tort of inducing breach of contract.  The judge said (at [257]):

“Libala and Mir intended to purchase Alphasteel’s assets including the HSM. That end was achieved by getting Alphasteel to execute the [relevant legal documents to achieve the sale], in other words by getting Alphasteel to do the very thing it had to Mir’s knowledge promised not to do under the terms of the April Agreement.  Mir intended those steps or means to its end of purchasing the assets.  All the parties were aware of the content of the April Agreement.  Accordingly, in my judgment, it intended to procure the breach of the April Agreement.”

The lessons for us 

The case contains a lot of law, and would make good reading for a rainy Sunday afternoon (click here for the transcript).

But for the property lawyers among my readers (the majority of readers, I suspect), there are two lessons:

First, a hot strip steel mill may well be part of the land on which it sits (the similar issue in the Sheerness Steel case did not need to be resolved, as the judge held that many of the items were either chattels or tenant’s fixtures, which the tenant was entitled to remove – or would have been entitled to remove had the lease permitted it).

Secondly, an agreement under which a party retains a right to enter land to remove items on it creates an equitable interest over the land in favour of that person – which needs to be protected if it is to give priority against third parties.  This could apply, for example, in the case of a hire purchase agreement under which items installed into a property (an alarm system, for example) remain the property of the hirer and can be removed if payment is not made as required.  This is probably an area of law new to many people.

And there is also a lesson for any readers who are lawyers but not property specialists. Remember this extract from Holland v Hodgson (1872) LR 7 CP 328 by Blackburn J.  It might come in handy one day:

“Thus blocks of stone placed one on the top of another without any mortar or cement for the purpose of forming a dry stone wall would become part of the land, though the same stones, if deposited in a builder’s yard and for convenience sake stacked on the top of each other in the form of a wall, would remain chattels.”

If this can happen with something as simple as blocks of stone, think what could happen with the component parts of a steel mill !  Mr Taylor, a partner at Fox Williams who acted for Lictor, was – not surprisingly, in my view – apparently unaware of this area of law.  About Mr Taylor, the judge observed (at [79]):

“Rather surprisingly, [Mr Taylor] stated in cross examination that he was not aware of the law relating to the annexation of chattels to the land.  Given that he is a qualified solicitor who has been on the Roll for a considerable time, I find this difficult to accept and on the balance of probabilities, consider it unlikely to be the case. “

Given that Mr Taylor is a partner in the Corporate group, he might be entitled to feel a bit miffed about that comment.

 

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