Seizure of villa, sales of shares unlawful

• Couple to enforce Privy Council judgment

McPherse Thompson, Assistant Editor - Business

A couple whose long-term lease on a villa was forfeited and their shares sold by property developers Goblin Hill Hotels Limited in Portland, has decided to vigorously enforce a United Kingdom Privy Council order declaring that the seizure and sale were unlawful.

The case was brought by attorney-at-law and notary public John Thompson and his wife, Janet, but although the ruling was made months ago, Mr Thompson said the management has been preventing them from enjoying ownership.

Mr Thompson told the Financial Gleaner that the ruling, which he described as a victory for minority shareholders, meant Goblin Hill Hotels was obligated to restore their shares and allow them to use the villa. But he said members of the management team have refused them entry to the villa.

The hotel's management has since communicated to them that they would be allowed use of the property, but he indicated that there were other issues to be resolved, including compensation for loss of use since the end of 2001 when the villa was seized.

Goblin Hill Hotels had also been ordered to pay the Thompsons' costs at both the Privy Council and the Jamaican Court of Appeal.

When contacted, managing director of Goblin Hill Hotels, Rosalie Goodman, said Mr Thompson has been asked to write to the company's attorneys setting out his entitlements and liabilities.

"Mr Thompson can use his villa, but he also has an obligation remaining to Goblin Hill, which he needs to fulfil," said Goodman. "He has an amount owing to Goblin Hill; when that is cleared, fine. If he doesn't clear it, we would have to go through the same steps of forfeiture again."

The managing director said income earned from the villa while the Thompsons were not using it would be part of his entitlements.

The Thompsons sought declarations from the courts that assessments and special assessments made against them by Goblin Hill Hotels between 1994 and 2001 were excessive, and that the company had wrongfully forfeited their lease on the villa and sold their shares.

The case originated in the Supreme Court on January 16, 2002, and, by a judgment given on November 6, 2006, Justice Sykes set aside the assessments and special assessments and declared that the forfeiture of the lease arrangement and the sale of the shares were unlawful.

Goblin Hill Hotels challenged the ruling and on December 19, 2008, Appeal Court judge Justice Morrison - with whom Justice Smith and Justice Dukharan agreed - rejected the Supreme Court's interpretation of the lease and articles of association of the hotel company and allowed the appeal.

The Thompsons took the matter to the Privy Council. There, Lord Dyson, who handed down the judgment, argued that the main issue that arose on the appeal was a comparatively narrow question of the true construction of article 91(1) of Goblin Hill Hotels' articles of association, and clause 5(b) of the lease.

The question, said Lord Dyson, was whether - as the Thompsons contended and Justice Sykes held - the assessments were to be determined by reference to the whole of the issued shareholding of Goblin Hill Hotels, or - as Goblin Hill Hotels contended and the Court of Appeal held - they were to be determined only by reference to the issued shareholdings of those who were also leaseholders.

The facts of the case were that Goblin Hill Hotels Limited owns 11 and a half acres of land at Goblin Hill, Portland. The company was incorporated in 1969 with the intention of developing the property in phases as vacation homes. The development was structured to achieve approved hotel enterprise status and thereby gain certain tax relief. For that reason, a Cayman Islands company, San San Investments Limited was involved.

The authorised share capital was $54,000, divided into shares of $1 each and classes A, B and C. In phase one of the development, class A and B shares were allocated to the villa units comprising apartment bedrooms, and holders were entitled to participate in the earnings of the company.

Class C shares, comprising 15 per cent of the total authorised share capital, were also issued under phase one and also entitled the holders - developers of the apartments - to participate in the earnings of the company.

According to the judgment, the class C shares were described by Rosalie Goodman as being "designed as an incentive to the developers to remain active and interested in the project after selling off of the shares."

Phase two of the development should have seen the issuance of further shares. However, because that phase was never built, all the unissued shares, including class C shares, were issued to the developer directors on May 30, 1994.

The class C shareholders did not enter into leases with the company. According to the Privy Council judgment, "one of them, Mrs Goodman, explained that by 1994 'political and social conditions did not support the continued development during this time and the three developers decided to purchase the balance of share options at the price at which they were valued in the accounts, which they would hold jointly and severally until they were in a position to complete the development and sell the shares'."

All original shareholders in Goblin Hill Hotels were required to sign agreements, including one recording the undertaking by Goblin Hill Hotels to construct 33 villa units and operate them as a hotel. It also granted the shareholder the option to enter into a lease of a villa unit. Leases were for 99 years at an annual rent of $1.

If the shareholder exercised the lease option, the lessee would agree to permit the leased villa to be operated by the company as a hotel, but only during the "incentive period", which ended in 1989, the 20th anniversary of the start of the development as an "approved hotel enterprise".

The contentious article 91 (1) of the articles of association and clause 5 (b) of the lease agreement provided that, based on the Hotels (Incentives) Act 1968, after the incentive period expired, each year the company's directors would ascertain estimates of the operating expenses and all other costs to the company for the ensuing year. The total sum would be borne by each member, who were covenanted to pay based on assessments and special assessments in proportion to his/her shareholding.

On July 1, 1994, according to the judgment, the Thompsons agreed to purchase the shareholding of one Richard Jones and Robert Randall and to take an assignment of the lease. In so doing, Jones and Randall discharged all outstanding assessments and special assessments relating to the villa.

At that time, Goblin Hill Hotels' assessment with respect to the Thompsons villa was a fixed sum of $13,495 per month. But between 1994 and 2000, the company calculated the amount of the assessments and special assessments by reference only to the shareholdings of those members of the company who also had leases of villas, rather than by reference to the whole of the issued shares of the company.

The Thompsons challenged those assessments, arguing that they should have been calculated by reference to all of the shareholdings and not only those held by leaseholders. They continued to pay $13,495 per month.

However, on January 11, 2002, Goblin Hill Hotels forfeited the Thompsons' lease and sold their shares.

Goblin Hill Hotels persuaded the Court of Appeal to reject the plain and ordinary meaning of article 91(1) partly because, as Appeal Court judge Morrison puts it, they considered that meaning to be "so far removed from good business sense, in the context of what was ... designed as a business venture, that I cannot imagine that this was the intention of the parties. It certainly does result in commercial absurdity."

Before the Privy Council lawyers for Goblin Hill Hotels, led by Dr Lloyd Barnett, argued that if the class C shareholders were liable to pay assessments during the 99-year leases granted to the class A and B shareholders, and they were liable for 15 per cent of the costs of maintaining the villas and grounds for 79 years after the end of the incentive period, that was a very bad bargain for the class C shareholders to have made, and one they were unlikely to have made.

But the Privy Council reasoned that it should not be overlooked that on May 30, 1994, the developers bought all the unissued class C shares. "They must have had their own commercial reasons for doing so, notwithstanding that this was after the expiry of the incentive period, so that there was no longer the prospect of GHHL (Goblin Hill Hotels Limited) deriving earnings from the hotel," Lord Dyson wrote.

In allowing the Thompsons appeal, the Lords said it was their view that since it was Goblin Hill Hotels that was seeking to displace the plain and ordinary meaning of article 91(1) on the ground that that meaning produced a commercial absurdity, "it is for them to demonstrate the absurdity."

They concluded: "In some cases, commercial absurdity is patent and clear on the face of the instrument that has to be construed. But in other cases, the absurdity is less obvious and can only be demonstrated by an explanation of the relevant background facts. In such cases, it is for the party seeking to contend that the literal interpretation produces a commercial absurdity to prove the absurdity."

mcpherse.thompson@gleanerjm.com