08 Feb 2017

Recent cases relating to property development are a useful reminder that considerable care and attention is needed, not only in negotiations and dealings, but also (as you would expect) in the drafting and "fine print". 

Types of agreement

Contractual agreements relating to the development of land come in various guises. They commonly include:

  • Promotion agreements - where the landowner and developer agree that the developer will promote the land – ie obtain planning permission etc. - and in return the developer receives "a cut" when the land is sold on;
  • Agreements for sale – where the purchaser agrees to buy or lease the land, usually subject to various conditions being discharged; and
  • Options to purchase - typically these involve payment of an option sum by a developer, and in return the landowner agrees that the developer has, during the option period, the right (but not the obligation) to buy the land. 

In light of the sums often at stake, particularly if planning is granted, the potential for the parties to fall out is considerable. Most of these agreements contain a dispute resolution clause, which commonly provides for any dispute to be determined by an expert or via arbitration – both of which can be quicker and less expensive than court proceedings. Nonetheless, the courts have been kept busy in recent times.

Is there a binding agreement?

In Gladman Developments Limited v Sutton [2016], the High Court considered whether or not a legally binding oral agreement was made between Gladman (the developer) and various landowners, for Gladman to promote the land for development. Gladman alleged the agreement arose at a meeting or in a subsequent telephone conversation. 

A "simple" land promotion agreement does not have to comply with section 2 of the Law of Property (Miscellaneous) Provisions Act 1989 (ie, be in writing, signed and contained in one document; or exchanged documents in the same form) as it does not actually involve the transfer of ownership of the land.

However, as the court observed in Gladman, the more complex the subject matter of the supposed contract the more likely the parties are to want to refrain from committing themselves to being bound until they have a written document. In Gladman, the judge appears to have had little difficulty in finding that there was no binding agreement given the incomplete nature of negotiations, various references to agreements being made "in principle" and correspondence headed "subject to contract". The judge concluded that there was nothing of sufficient substance throughout the whole course of dealing between Gladman and the landowners to justify a finding that the parties had entered into a binding oral agreement.

Interpretation of the agreement

In Dooba Developments Limited v McLagan Investments Limited [2016], the court was asked to rule on a clause in a conditional agreement for sale made between Dooba and Asda. The clause in question gave either party a power to rescind the agreement "if all Conditions have not been discharged in accordance with this Schedule by the Longstop Date". 

In short, Asda rescinded the agreement when, arguably, a number of Conditions had been discharged. In effect Asda maintained that this agreement allowed them to rescind it if any of the Conditions remained undischarged. 

In reaching its view the court considered the most recent Supreme Court case on interpretation of agreements, Arnold v Britton. In that case, Lord Neuberger (quoting in turn Lord Hoffman in Chartbrook Ltd v Persimmon Homes Ltd) said that when interpreting a written contract the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean" and in light of the following:

  • The natural and ordinary meaning of the clause;
  • Any other relevant provisions of the lease;
  • The overall purpose of the clause in the lease;
  • The facts and circumstances known or assumed by the parties at the time that the document was executed; and
  • Commercial common sense; but
  • Disregarding subjective evidence of the parties' intentions.

The court concluded that the literal meaning of the clause was the correct one - as contended for by Dooba – in other words, Asda was not entitled to rescind the contract unless all of the Conditions remained undischarged by the Longstop Date. 

Option agreements

Whilst Helix 3D Limited v Dunedin Industrial Property Nominee Limited [2016], did not relate to a development agreement as such, it was concerned with the terms of an option, which is often the subject matter of development disputes. 

Here, the court again wrestled with the correct interpretation of an agreement: conferring on a tenant of commercial premises an option to purchase the freehold of the premises. The question was whether the tenant had validly exercised the option in accordance with its terms. The option was poorly drafted: amongst other matters, it provided that if it was exercised in the third, fourth or fifth years of the period, the purchase price would be the greater of the open market value of the building (as agreed or determined) and £1.5m plus VAT. In the fourth year, the tenant served notice to exercise the option for a price of £1.5m. It was a condition of the option that notice was accompanied by payment of a deposit of 5% of the purchase price. The landlord disputed that the tenant had validly exercised the option as the market value exceeded £1.5m and therefore the deposit paid fell below the required 5%.

The court once again considered the principles outlined in Arnold v Britton and Chartbrook but in this case it was agreed by both parties that for the agreement to work it was necessary to read words in (or alter them) somewhere. The court eventually agreed with the tenant's argument that there was commercial absurdity in the drafting and that on a true construction of the option agreement the tenant was allowed in years three to five to propose a purchase price and to pay 5% of that.

Commentary

The effect of Arnold v Britton is keenly felt in any dispute where the interpretation of "difficult" clauses is at play. This is arguably a move away from earlier decisions of the House of Lords where the court at times would find a way to reach the "right" result, ie one which made good commercial sense to those in the industry.

Now though if an agreement lacks clarity, the end result can be one which the independent observer might find strange or even not what the parties could have intended.

It is clear that in the post Arnold v Britton world, precise drafting is an imperative.