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Saleem Fazal

Saleem Fazal

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Autor
Saleem Fazal

Saleem Fazal

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15. Januar 2021

RED alert - Winter 2021 – 1 von 7 Insights

Common sense prevails once again: Interpretation of option agreement for development land

  • Briefing

Fishbourne Developments Ltd v Stephens [2020] EWCA Civ 1704

Summary

The Court of Appeal considered the interpretation of an option agreement where the parties had differing views on the meaning of the words "development" and "planning permission." This was important as it determined whether or not the owner of the land was required to sell at a discounted price. The Court of Appeal confirmed the approach that should be taken when interpreting contracts.

The facts

Over the years various option agreements had been entered into by the owner of farmland near Fishbourne in West Sussex.

This case concerned the latest option agreement entered into in November 2002. It entitled the grantee to purchase the land amounting to 117 acres and known as Bethwines Farm (the Property) when planning permission had been obtained permitting any development of the Property at a price amounting to 70% of the current market value.

In 2013, the benefit of the 2002 Option was assigned to the Appellant in this case, Fishbourne Developments Limited. In July 2016, Fishbourne obtained a planning permission for the erection of a new pitched roof on one of the agricultural buildings on the Property. This was not of course for the redevelopment of the Property and also did not involve a change of use from agricultural purposes. However, Fishbourne argued that this was sufficient to trigger its right in the 2002 Option to acquire the entirety of the Property at the discounted value. It was clear from the judgement of the High Court and the Court of Appeal that the value of the planning permission for erecting the pitched roof did not justify the discounted purchase price as agreed by the parties in the 2002 Option (or indeed by the previous options).

So this led to the High Court and then the Court of Appeal considering what was meant by the 2002 Option. The relevant clauses in the 2002 Option stated:

  • "Planning Application”: any planning application made by the Purchaser in respect of land which includes the Property or any part thereof to obtain the Planning Permission (our emphasis)
  • “Planning Permission”: means a planning permission granted by the Local Planning authority permitting any development of the Property (our emphasis)

What was the meaning of "development" and "planning permission" which was required to trigger the right to purchase the Property at the discounted value?

Fishbourne argued that the meaning of:

  • "planning permission" could relate to part of the Property given the definition of "Planning Application
  • "any development" should be in accordance with the definition in section 55 of the Town and Country Planning Act 1990 which is "the carrying out of building, engineering, mining or other operations in, on, over or under land, or the making of any material change in the use of any buildings or other land." If that was correct then the erection of the pitched roof would be covered as it required planning permission

The current owner, Ms Stephens (the daughter of the original grantor) disagreed and argued that the planning permission obtained was insufficient to trigger the option.

The approach to interpreting contracts

In order to reach its decision, the Court of Appeal examined the correct approach to interpreting contracts to ascertain its meaning. This is extremely important to understand for parties to legal contracts. Essentially, it is necessary "to ascertain the objective meaning of the words used by the parties {in the context of the 2002 Option as a whole], taking into account the relevant factual background which would have been available to the parties, but excluding subjective evidence of the parties’ intentions."

It is important to note here that it is the objective meaning that is relevant, that is to say, what a reasonable person might understand the words to mean rather than the subjective meaning which is what the actual parties thought they meant. This often causes confusion as the natural approach of many is to establish what the actual parties meant. However, this would lead to continuous disputes as one party would be entitled to displace the interpretation by simply saying that is not what they meant. And so, the court takes the objective approach.

The Court of Appeal also stressed that "the court must focus on the meaning of the relevant words in their documentary, factual and commercial context. If there is an ambiguity, or in other words, there are rival meanings, the court can give weight to the implications of the rival constructions by reaching a view as to which is more consistent with business common sense."

This means that where there is ambiguity, the courts will look at what would make more business common sense and give the words the more appropriate meaning.

The decision

The Court of Appeal found that the terms "development" and "planning permission" used in the 2002 Option were capable of having more than one meaning and so it was necessary to consider what made business common sense.

In relation to the meaning of "development", the Court of Appeal noted that it would make no sense at all if the development was inconsequential. It noted that the option fee was just £1. There was a clear expectation that the proposed development would enhance value to the Property and that would justify the 30% discount. Consequently, the development necessary was one which includes a new building and which involves a change of use from agricultural purposes.

The next question was whether the "planning permission" could be of the just part of the property or needed to be of the whole. The court accepted the use of the words "or any part thereof" in the definition of "Planning Application" but gave more weight to the commercial and factual context given the ambiguity. It made more commercial sense for the option trigger to be that a planning permission was obtained for the whole or substantially the whole of the Property.

Our comments

Option agreements in the context of development are notoriously contentious given the numerous scenarios that may occur in the future, some of which might not be in the thoughts of the parties at the time. They also sometimes include clawback provisions which need to be carefully drafted. Although the courts in this case have applied business common sense to achieve what was perhaps the intended outcome, this no doubt came at some cost and anxiety even for the successful party.

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