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C and D1 had entered a contract for sale of a development site in March 2019 for a price of £2.565 million. The contract was a detailed contract to allow C, the local authority...
UK Real Estate and Construction
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The facts

C and D1 had entered a contract for sale of a development site in March 2019 for a price of £2.565 million. The contract was a detailed contract to allow C, the local authority, to have control over the development of land sold.

The contact was a conditional subject to Satisfactory Planning Permission. It also included an obligation that D1 had to provide C with evidence of a bone fide arm's length construction contract and if on the expiry of the Long Stop Date such evidence had not been provided "the Long Stop Date shall be extended until such evidence is provided" (clause 24.5). C requested evidence of the Building Contract but was not satisfied with the documents provided by D1. C therefore served notice on D1 terminating the contract claiming there had been a substantial breach. D1 countered by serving a notice to complete. C then issued the claim seeking, amongst other things, a declaration that the contract had been terminated and that C was entitled to forfeit and retain the deposit.

D1 assigned the benefit of the contract to D2, and further notices to complete were served by D2. In their Defence and Counterclaim, D2 jointly and severally sought an order for specific performance and, in the alternative, the return of the deposit pursuant to section 49 of the Law of Property Act 1925.

The decision

The key issue was whether the Court should imply into the contract for sale a covenant that D1 was obliged to enter into and/or to provide evidence of the Building Contract within a reasonable time of the contract having become unconditional, which it was common ground had occurred in April 2020.

It was C's case that it was entitled to terminate the contact for a substantial breach of the implied covenant. C argued that it was necessary to imply such term because once the contract had become unconditional on the grant of Satisfactory Planning Permission, there was an obligation imposed on both parties to complete the contract. The obligation to complete was however suspended unless and until the D1 had provided evidence of the Building Contract. C argued that there must therefore be an implied covenant for D1 to enter into and/or to provide evidence of the Building Contract within a reasonable time of the contract having become unconditional.

Ds argued that such term would be inconsistent with the express terms of the contract. D1 could not enter into a Building Contract as it could not specify a start date before completion. As it was not possible to put a start date into a building contract, it was not possible to provide evidence of 'the Building Contract'. As such, failure to comply with those provisions could never be classified as a substantial breach. The contract worked without any term being implied and thus had commercial coherence – it is therefore not necessary to imply a term.

The Judge held that it was both necessary and possible to imply a term in order to give the contract practical and commercial coherence. As the contract was drawn, the Judge found that there was a lacuna. Without an implied term, the words of the contract would allow for D1 to avoid any further obligations under the contract simply by failing to provide any evidence of the Building Contract. Completion could be avoided for any reason at all convenient to D1, whilst C would remain bound by the contract in perpetuity and could neither force D1 to complete by the service of any notice, nor could it end the contract such that it could sell the land to someone else. The Judge held that if the reasonable person in the position of the parties at the time of entering the contract had considered this, they would have agreed that it goes without saying that evidence of the Building Contract had to be provided within a reasonable time of the contract becoming unconditional. A term would therefore be implied and that D1 had been in substantial breach of the same. C had therefore terminated the contact by service of the notice.

On the return of the deposit, Ds argued that clause 4.5 prescribed that C may only forfeit and keep the Deposit when "the Condition Precedent is not satisfied". That was not the current position. Further, C would gain a windfall because the premises had planning permission. There were exceptional circumstances here because D1 had spent £1.4 million in obtaining planning consent and the planning consent was still valid.

The Judge held that the facts relied upon by Ds did not establish exceptional circumstances which would justify departure from the ordinary contractual expectations of parties. There was no evidence that the site had in fact increased in value. A developer would expect to spend money on planning and other expenses to be able to develop the site. None of that was unusual. The Judge therefore refused to exercise her discretion to order C to return the deposit to the D1.

Lesson learnt

The case is a powerful reminder that the ratio in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd does not mean that the court will not imply terms into contracts. If a party can establish a lacuna in the terms which means that the contact may not be performed at the whim of one party – it is likely that the court will find that to be a commercial absurdity and that a term will need to be implied to give business efficiency to the contract. The case is also a stark reminder of how difficult it is for a purchaser to persuade the court to exercise its discretion under s 49 to return a deposit.

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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