UK: Options To Lease For Renewables - Has The Ridgewood Decision Changed Anything?

Last Updated: 15 March 2013
Article by Jamie Grant

Ridgewood Properties Group Limited v Valero Energy Limited

The decision of the Ridgewood Properties Group Limited v Valero Energy Limited (2013) EWHC 98 (Ch) case concerned the enforceability of option agreements by the developer against a purchaser from the original landowner.  The case did not concern renewables but did concern options for "wraparound development" at petrol filling stations, granted by Texaco (T) to Ridgewood (R).  After entering into the options, T sold the sites to Somerfield (S).  When T sold to S, the site was sold subject to the options and S was contractually obliged (to T) to comply with the option agreements and to indemnify T in respect of any breach by S.  S asserted that it was not bound by the option agreements and declined to comply with various positive obligations concerned with facilitating the obtaining of planning permission.

Important Points From The Decision

For renewables developers, the following salient points from the decision will be of interest:

  • Positive covenants by the landowner (e.g. to assist with planning and provide access) will not transmit automatically to a purchaser from the landowner.
  • This is not withstanding the Landlord and Tenant (Covenants) Act 1995 which generally transmits landowner obligations under tenancies and agreements for tenancies to a new landowner.  The court's decision was that an option was not an agreement for tenancy.
  • The obligation by S in favour of T to perform the option agreements was not enforceable by T – following a slightly odd (to Scottish eyes) line of English case law with its origins in privity of contract in leases; nevertheless, the indemnity by S in favour of T was enforceable.

Options for Scottish Renewables

The case really has no implications in Scotland because options are always personal contracts which do not "run with the land".  A developer cannot enforce an option against a purchaser from the original landowner.  For this reason, it is advisable for a developer to:

  1. Obtain a contractual obligation from the original landowner that he will not sell or otherwise alienate his interest without the consent of the developer. Such consent should not be unreasonably withheld if the transferee agrees to enter into a new direct contract with the developer and to provide a standard security (see below).
  2. If the developer becomes aware of a change of ownership, the developer should take immediate steps to enforce performance by the landowner of its obligation to obtain a new contract and a new security, making it clear to the landowner that he could be liable for substantial damages in the event of a failure to do so.
  3. The developer should ordinarily consider obtaining a standard security over the landowner's land.  The standard security should secure both (a) the obligation to obtain a new direct contract with a transferee and (b) damages for any breach of the landowner's obligation to do so.  It is worth noting that a standard security does not make the option agreement real or "run with the land".  The only remedy available to the developer, if there were to be a breach by the landowner, would be to call up the security - in which case the developer would be obliged under the law relating to enforcement of standard securities to sell the landowner's land for the best price reasonably obtainable on the open market. This, however, is almost precisely the opposite of the outcome which the developer wants.  Standard securities in practice are believed to be effective in preventing sales to purchasers who refuse to observe the option because:

    • Purchasers will not ordinarily acquire land subject to an existing security without enquiring as to the nature of the obligations secured and obtaining a discharge of the standard security.  A purchaser is unlikely to want to acquire a property subject to an undischarged existing security which could be enforced and called up.
    • A landowner is likely to be unwilling to incur the risk of becoming liable for potentially substantial damages by failing to require the purchaser to enter into a new direct contract.

Alternative Option For Scottish Renewables

An alternative to the usual and typical "option to lease" structure is for the developer to take an immediate lease of the site instead of an option.  This lease can be terminated if the project does not go ahead and rent does not commence until the project is proceeding.  Such a lease is real and runs with the land and therefore is not affected by a sale by the landowner.   Nevertheless this is not the usual approach in Scotland.

Implications For English Renewables

The law in England is more favourable to developers and to the enforceability of option agreements against successors in title.  Nevertheless, the case of Ridgewood v Valero underlines the desirability of registering both a notice and restriction at the Land Registry prohibiting the registration of any subsequent disposition until the buyer covenants directly with the developer to observe and perform the positive covenants in the option agreement.

© MacRoberts 2013

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The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.

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