Vegie Bar LLC v Emirates NBD Properties LLC

Case No - DIFC Case No. 001/2020, Vegie Bar LLC v Emirates NBD Properties LLC, 15 October 2020 and 17 March 2021.

Jurisdiction - Dubai International Financial Centre, Dubai, United Arab Emirates (DIFC).
Court - DIFC Court of Appeal.

A version of this article originally appeared in the Lexis Middle East Law Alert November/December 2021.

The law

The DIFC’s Real Property Law is based on the underlying principles of English common law, but also incorporates the Torrens system of land registration, seen in countries such as Canada, Australia, and Singapore. It provides that land transactions are to be registered in a central register administered by the DIFC Registrar of Real Property (the RORP) and once registered, the law certifies them to be fully effective and indefeasible.

The background

In April 2011, the Claimant, Vegie Bar LLC (VB), agreed a 10-year lease of two large retail units in Limestone House, DIFC (the Units) with its owner, Union Properties PJSC (UP) (the Lease). VB intended, and was required by the Lease, to operate the units as a bar and restaurant.

Also, in April 2011, UP prepared and lodged with the RORP the Strata Management Statement (SMS) for Limestone House, a legally binding document dealing with the management of the building. Notably, the SMS contradicted the Lease by prohibiting the use of retail units as bars and restaurants.

The Lease agreed that the commencement date was 1 June 2011 and, following a fit-out period, the restaurant must open on 1 December 2011. The fit-out did not happen and the restaurant did not open. In the meantime, neither VB or UP attempted to register the Lease with the RORP. 

In January 2012, UP sold its freehold interest in Limestone House to the Defendant, Emirates NBD Properties (Emirates). The sale was conducted pursuant to individual unit sale and purchase agreements (the SPAs) and did not mention transferring the Lease. The sale of the freehold was registered by the RORP in late March 2012. 

Also, in March 2012, UP agreed with VB to amend the Lease Commencement Date from 1 June 2011 to a date to be determined “once progress of occupancy of the commercial units in Limestone House was achieved”. 

In May 2012, VB obtained the signature of an Emirates employee to a lease registration form and filed this with the RORP attempting to bind Emirates to the Lease. At the time, unit titles had not been created by the RORP and, therefore, the Lease was incapable of being registered against the relevant units. 

Emirates subsequently declined to recognise the Lease noting, amongst other things, that its performance would breach the SMS’ by operating a retail unit as a bar/restaurant.

In January 2014, when the building’s strata title plan was eventually registered by the RORP, title folios were created for the individual units. The RORP did not, however, register the Lease in the absence of Emirates’ consent.

The proceedings

In March 2016, VB who had never traded and was impecunious, commenced proceedings against Emirates with the litigation being funded personally by its manager/shareholder. Curiously, VB did not bring a claim against UP. VB sought an order for possession of the units and damages for losses suffered through the delay in taking possession. 

Following an order in October 2016 that VB pay security for Emirates’ potential costs, VB took in two visits to the Court of Appeal before VB’s manager/shareholder eventually paid on behalf of VB. 

The proceedings became a saga of interlocutory applications. Amongst other things, VB directed by its manager/shareholder, embarked on a hunt for a master umbrella agreement that it alleged must have been signed and superseded the SPAs in assigning the burden of the Lease to Emirates. VB obtained orders for early “English style” standard disclosure against Emirates, non-party document production against the RORP and the DIFC Registrar of Companies and a Court summons against UP. Emirates denied an umbrella agreement existed and, after costly and extensive disclosure, the four parties did not locate one.

In 2019, VB applied for immediate judgment against Emirates. VB alleged that the Lease had been transferred to Emirates by either: (1) assignment in January 2012 or (2) registration in May 2012. Alternatively, Emirates held the units subject to the Lease because Emirates knew about the Lease when it purchased the units. Accordingly, VB alleged there had been fraud by Emirates in acquiring or holding its interest or the Lease bound Emirates as an equitable obligation because of its conduct.

Emirates opposed the applications and cross-applied for immediate judgment asserting it was not bound by the Lease when it purchased the Units, the Lease had not subsequently been registered and, in any event, the Lease was void for uncertainty as a result of the amendment in March 2012 to the commencement date.

What was decided? 

The Court of First Instance dismissed VB’s applications and granted immediate judgment to Emirates ruling that the proposed amended claim had no prospect of success (DIFC [2016] CFI 009 4 Sept 2019). 

VB appealed against all of the Judge's orders also alleging that the Judge "demonstrated apparent or actual bias". In its judgment of 15 October 2020, the Court of Appeal found as follows:

• “Under the Torrens title system, all rights and interests in real property must be registered and, if not registered, will be incapable of defeating a registered owner’s interests. The registered owner has an indefeasible title and, where none of the exceptions in Article 30(3) of the RP Law apply, any person claiming unregistered rights or interests will not be able to enjoy them. The Register is conclusive” [2].
• At the time of purchasing the units, the Lease could not have been transferred to Emirates by assignment under the SPAs which did not mention this as an encumbrance. Further, “the evidence was overwhelming that there was not an umbrella agreement in relation to the sale of the Units”. Finally, there had not been a novation by tripartite agreement between UP, VB and Emirates, see [46]-[47].
• The claim that the Lease was in any event registered in May 2012 was rejected. The RORP could not have registered the Lease as the application to do so preceded the existence of the Unit folios. At the time the title deeds were issued, Emirates had already declined to recognise the Lease. 
• The allegation that Emirates knew about the Lease when it purchased the Units, even if proven, was not an exception to the indefeasibility of title under the Torrens system. Knowledge of a prior interest alone could not result in an incoming owner being bound. As a result, there could not have been a fraud by Emirates in acquiring or holding its interest and the Lease could not have been binding on Emirates as an equitable obligation (per Articles 30(3)(b), 30(4) and 31(h) of the DIFC Real Property Law 4 of 2007) [43], [57]-[61].
• Finally, even if Emirates had purchased the units subject to the Lease, it became uncertain due to the amendment to the commencement date and was, therefore, not a valid or enforceable contract. The Court held that: “It is trite that a lease must have a stated or ascertainable commencement date…. The Lease does not. The commencement date is doubly uncertain…with no measure of how the new commencement date is to be adjusted or revised or in any way arrived at. There is no objective standard, not even the concept of a reasonable time, to resolve the uncertainty. The Court does not fix the date for the parties.”

A warning to company shareholders

It was common ground that VB was impecunious. The proceedings, including the relentless interlocutory applications, had been controlled and funded by its manager/shareholder who alleged he should avoid retribution due to the separate legal personality of VB. 

After the appeal judgment, the Court of Appeal on 17 March 2021 granted orders that VB’s owner be joint and severally liable to pay Emirates’ costs, that costs were payable on an indemnity basis and that 75% of the costs of the entire case be paid in the interim pending detailed assessment. The Court stated:

• that the appeal was “well in the category of pursuit of a speculative claim involving a high risk of failure" and the deficiencies in VB’s case, in failing to understand the system of registration and disregarding the inherent uncertainty of the amended Lease, were such that the appeal was “unreasonably brought”, see [13];
• "…the unreasonableness was in a high degree and not just in hindsight. It included the assertion of bias which should not have been made, and it was prosecuted in a manner causing unnecessary and wasted incurring of costs…. If the expression "out of the norm" is invoked, as a conclusory description, it is satisfied”, see [22];
• “[t]he appeals ground of actual or apparent bias is very serious…In this respect VB was at the least highly irresponsible, although harsher words could be used”, see [20];
• “It is apparent that Mr Alkalajleh has funded the litigation in the hope of himself gaining a benefit… [he] identifies himself with the litigation, success in it would have been to his benefit as substantial shareholder, and there is no realistic other reason for his endeavours…He has funded and controlled litigation by VB, when VB was impecunious, in the hope of a benefit to himself”, see [34]-[40];
• “Mr Alkalajleh was gaining access to justice for his own purposes, and there is no public interest in allowing him to do so without shouldering the burden of costs if unsuccessful”, see [44].
• that a non-party costs order against a director does not represent an instance of lifting or piercing the corporate veil. The Court cited the comments of  Axel Threlfall v ECD Insight [2013] EWCA Civ 144 at [13]: “If a non-party costs order is made against a company director, it is quite wrong to characterise it as piercing or lifting the corporate veil” and in deciding whether or not to make such an order, the court is “entitled to look to the economic realities".

Why is it significant?

The Court of Appeal’s substantive judgment is now the leading case on the application of DIFC Real Property Law and also provides a rare example of a contract being void for uncertainty. The subsequent costs judgment contains a useful warning for individuals considering claims on behalf of defunct companies, especially cases with a high risk of failure. Non-party costs orders are not in the realm of piercing the corporate veil. The judgment also demonstrate the DIFC Court’s willingness to issue indemnity costs and higher-than-usual interim cost payments, in this case 75% rather than the usual 50%, where appropriate.