Option agreement for development land: Court applies commercial common sense

28th January 2022

Why is Fishbourne Developments v Stephens of interest?

The case [1] concerned the interpretation of an option agreement relating to development land.  The parties had differing views on the meaning of the words “development” and “planning permission”.

The correct interpretation was crucial, as it would determine whether the landowner was required to sell the land to the developer at a significantly discounted price.

In order to resolve the dispute, the Court of Appeal considered the correct approach to contractual interpretation.  The court reiterated the importance of first ascertaining the objective meaning of the words of the contract itself.  If, having done that, there remains ambiguity, the court confirmed that the meaning of any disputed terms will be resolved by reference to the factual matrix and commercial common sense.

What advice arises?

Option agreements, like overage provisions and other ‘forward-looking’ development arrangements, can be fraught with risk.  It is notoriously tricky to cater in a contract for unknown future events, for parties with changing and potentially conflicting interests, and to cover all possible eventualities.  However the consequences of getting the contractual position wrong can be devastating, especially where planning is involved.

At the outset of any development venture, when landowners, developers, and perhaps other joint venture partners consider doing business together, a multitude of discussions and contractual negotiations take place and there are therefore multiple opportunities for misunderstandings to arise as to what has been agreed.  That can even occur, as in this case, where terms have been formally documented in completed contracts.  As a result, some of the most frequently encountered forms of development dispute are contractual interpretation disputes.

Developers and other commercial contracting parties and real estate practitioners should therefore note the following legal and practical advice:

• Contracting parties should ensure, from the outset, that the contract is clearly drafted to accurately reflect the parties’ intentions and understanding. Being as clear and precise as possible as to your intentions, objectives and instructions throughout both the pre-contract and contractual negotiation stages will assist.

• Where any underlying assumptions, intentions or other information might assist with the proper understanding of a contract, these should be included within the contract itself (rather than merely in records of pre-contract communications) – in the ‘recitals’ section.

• Remember that pre-contractual communications are not admissible to aid the interpretation of particular contractual provisions. This is a common misconception.

• If a dispute does arise, the starting point must be the actual wording of the contract. If there is real ambiguity, then commercial common sense can be taken into account and may assist with the interpretation exercise.

• If the wording in the contract is clear, but still it does not reflect a party’s understanding, there may have been a mistake in the drafting of the contract and there may be the potential to pursue a claim for rectification and/or professional negligence. Alternatively, if the provision was entered into in reliance on any misrepresentations, there may be some potential to have the contract set aside and financial compensation could be payable. In any of these scenarios, specialist advice will be required.

• It is rare for any contractual interpretation dispute to be clear cut, so it is always worth considering whether there is any scope for settlement. Interpretation disputes often arise by virtue of the fact that there is an ongoing contractual relationship between the parties, plus the litigation risk which is inherent in such cases can often be exploited in negotiations to encourage a commercial compromise. It is therefore usually in the interests of all concerned for the parties to an interpretation dispute to behave in a reasonable and commercially sensible manner.

What happened in the particular case?

In this case the Court of Appeal stressed that “the court must focus on the meaning of the relevant words in their documentary, factual and commercial context. If there is any 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.”

The court concluded that the meaning of a “planning permission” – in the particular option agreement in its particular factual and commercial circumstances – meant a planning permission to develop the whole, or substantially the whole, of the property by the erection of a new building or buildings, involving a change of use from agricultural use.

In relation to the meaning of “development”, the Court of Appeal noted that the deal would make no sense at all if the development to be involved was inconsequential. The Court found that, commercially, there was a clear expectation that the proposed development would enhance value to the land, so as to justify the discounted sale/purchase price.

Consequently, a permission merely to erect a new pitched roof on one of the agricultural buildings at the site did not suffice to trigger the discounted sale provisions in the option agreement.

This case clearly demonstrates the need for option conditions to be clearly defined and understood by all parties.  When it comes to the drafting of option agreements, parties and their legal advisers should, where possible, consider the precise form[s] of development which should trigger an option, and whether provisions should apply to the whole or part of the land.  Finally, the case is also a cautionary reminder that each case, and therefore the correct interpretation of any contractual position, will turn on its own facts.

How we can help

Claire Acklam advises on all forms of developer disputes, both from a pre-emptive risk-management perspective and when it comes to resolving issues after they have arisen.  If you have any queries or concerns in relation to contractual interpretation, mistake or misrepresentation, or if you would like tailored advice or assistance in relation to any development-related dispute, please do not hesitate to contact Claire, who will be very happy to help.

[1] Fishbourne Developments Ltd v Stephens [2020] EWCA Civ 1704