UK: Developments in Court

Last Updated: 4 June 2010
Article by Andrew Gregory

Arguably the most active party, as far development was concerned over the last year, was the judicial system dealing with disputes involving developers. Here we look at the cases involving developers and which could have a significant impact on developers in the future.

Title conditions to control development

The owners of the former linoleum factory in Kirkcaldy, Forbo-Nairn Limited, had agreed to sell land which had formed part of their factory site to Murrayfield Properties Limited. With a view to maximising the future development potential of the land retained by Forbo-Nairn, they sought to impose a title condition to ensure that the land being sold and any additional land acquired by Murrayfield Properties Limited in the vicinity of the site, would not be used for residential development.

The clause in the contract between the parties dealing with this issue went into detail about who would be bound by the terms of the clause and included all parties connected with the purchasers. Murrayfield Properties argued that this clause would be binding on them only and that a future purchaser of the site would not have to observe it. The court found in favour of Forbo-Nairn on the basis that the contract had also provided that a Deed of Conditions restricting the use of the property in all time coming would be agreed and signed by the parties. This clearly intended to bind future owners of the property concerned.

When it comes to the need to enforce the title condition, Forbo-Nairn's victory may in the end be a hollow one. The Lands Tribunal in the 2009 case of Clarke v Grantham reaffirmed that the test of proving interest to enforce a title condition is a difficult one to satisfy. The test is to show material detriment to the enjoyment and use of the property. The case of a use restriction to protect the commercial interests of the party benefiting from the condition, has still to be properly tested.

Attempt to pre-empt profit share agreement

Profit share arrangements are often agreed between the sellers of land and developers to ensure that the sellers benefit from any enhanced value of the land, generally, on the obtaining of planning permission after sale. This is particularly the case in a depressed market where sellers will be willing to sell provided they can share in any future uplift in the value. Such a profit share arrangement was entered into by Aberdeen City Council and Stewart Milne Group. The contract had provided that the Council was to benefit from an uplift in the value of the land in the event of three occurrences, one of them being a sale of the land. Stewart Milne Group went ahead and sold the property but did so in an intra-group arrangement at a value which was, according to the Council, one tenth of the actual open market value of the property. Stewart Milne claimed that the Council were not due any uplift in the price.

The argument between the parties ended up in court. The court found in favour of the Council on the basis that when providing for a profit share, the parties must have contemplated a sale at arms length, otherwise the purchasers could have defeated the sellers' entitlement to receive any amount by way of profit share. The court refused to believe that the parties could have intended this. The court conceded that an intergroup sale may have been foreseen but that the Council would not have thought that it would deprive them of their profit share. The case serves as a reminder to all looking to benefit from overage/ profit share arrangements that great care must be taken when agreeing the terms of such arrangements.

Option price - full market value?

Options to purchase land are often agreed by developers and landowners as a manner of securing land for purchase at a future date. Options to purchase also appear in leases and, like options to buy land for development, provide mechanisms for agreeing the price at the time of sale. Such a mechanism was tested in the case of Multi-link Leisure Developments Limited -v- North Lanarkshire Council. The tenants leased a golf course from the Council. Their lease contained an option for them to purchase the golf course and land at a price which was to be the "full market value of the subjects let as at the date of entry for the proposed purchase (as determined by the Landlords) of agricultural land or open space suitable for development as a golf course."

In 2005, the parties entered negotiations for the sale of the land and the Council proposed a price of £500,000. Those negotiations were never followed through and when the tenants exercised their option to purchase in 2008, the Council proposed a price of £5.3 million. The reason for the huge increase in the proposed price was a change in the Structure and Local Plan which earmarked the land for residential development.

The tenants took their case to court arguing that the Council had not valued the land as agricultural land or open space suitable for development as a golf course as required by the lease. The Council argued that they were not bound to value the land on such a restricted basis and were entitled to demand the full market value of the subjects. It was therefore for the court to decide on what basis the land should be valued.

In a move which broke away from previous judgements on the interpretation of contracts, the court ruled that the Council were entitled to ask for a price which equated to the full market value. The court could not comment on whether the amount asked for was correct as that question had not been put before them. In coming to their decision, the court pointed to the fact that the lease was for 50 years and that "much might happen in that relatively long time frame to alter the value of the subjects (the attractions of playing Augusta indoors with Wii may render some golf courses redundant on the slopes of Cumbernauld and elsewhere)."

This case did concern a long lease and not a straight option to buy but it serves as a reminder of the need for clear unambiguous methods for agreeing a price.

Lock-out agreements can work

Sought after development sites are sometimes the subject of intense negotiation by several parties eager to secure the purchase. One such site was at Cockburn Street in the Old Town in Edinburgh. Beaghmor Property Limited had tried to negotiate the purchase of the site twice before and on the third occasion, in order to prevent another breakdown in negotiations, entered a lock-out agreement with the sellers, Station Properties. This lock-out agreement was intended to prevent the sellers negotiating with or providing any information to any other party interested in the site.

Station Properties went on to breach the lock-out agreement by entering into a binding contract with a third party. Beaghmor then inhibited the property to prevent Station selling to the third party and sued for breach of contract. Beaghmor's action was successful in that the Court refused to remove the inhibition (which was limited to the site at Cockburn Street) until Station Properties could find an alternative site which provided security for Beaghmor's claim for damages.

Warranting the position on site

Having sold a site, buyers can look to rely on clauses in a contract warranting the position on site. Upton Parks Homes Limited looked to claim damages from its solicitor for warranting that there were no overriding interests affecting a site sold on their behalf. Overriding interests can obstruct the development of a site and are not readily identifiable from a site inspection. They include the rights of tenants and servitude rights for pipes and cables some of which cannot be identified from the title deeds to the properties. In this case, there was a sewer which sterilised part of the site for development. Upton Park Homes Limited sued its solicitor for granting a warranty that there were no such overriding interests having not checked with the clients whether this was indeed the case. The action failed on the basis that the loss averred was not proved and not properly quantified. However, this case acts as a warning to solicitors not to be granting unqualified warranties and a warning for developers that when buying or selling sites, utility searches should be obtained from utility providers to check the location of any existing services in the site.

Conclusion

The recent heading in Property Week advising that developers are queuing up for sites in Glasgow and Edinburgh can only be encouraging for the development industry. Let's hope 2010 is remembered more for the developments completed and not those resulting in dispute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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