Anglo Continental Educational Group (GB) Ltd v Capital Homes (Southern) Ltd

The two parties to this appeal are locked in battle over a contractual provision for a discount in the calculation of the purchase price for two properties. The appellant, Anglo Continental Education Group (GB) Ltd (“AC”), which is the seller, contends that, in the events which have happened, there is no discount. The respondent, Capital Homes (Southern) Ltd (“CH”), which is the buyer, contends that the discount is allowable but that it cannot be calculated as at completion and so there is to be implied a term for deduction of an estimated amount at completion and for the determination of the true amount thereafter. Both parties say that the agreement is void for uncertainty if that interpretation is not correct. The judge, David Donaldson QC, sitting as a deputy judge of the Chancery Division of the High Court, rejected both their interpretations of the agreement, but declined to declare what in his judgment was the true interpretation of the agreement. Accordingly the meaning of the agreement was not resolved. The parties contend that it was not open to the judge to wash his hands of the matter in this way.

This agreement concerns two properties, 10 and 12 Cavendish Place, Bournemouth, of which AC is the registered proprietor. These properties fall within a conservation area and are subject to restrictive covenants that prevent the development of these properties without the consent of the covenantees, the trustees of the Cooper Dean Estate. Each property has a single dwelling on it and is ripe for development. AC marketed the properties and CH expressed an interest in buying. There were negotiations. AC and CH entered into an agreement dated 4 January 2006, subject to the grant of planning consent for development of the demolition of the existing houses and the construction of not more than 14 flats on the site.

The agreement gave CH responsibility for applying for planning permission. It made two applications, one for 13 flats and one for 14 flats. Both were refused. CH appealed but that appeal was dismissed on 12 February 2007. CH then exercised its contractual right to waive the condition requiring planning consent on 14 February 2007. It followed under the terms of the agreement that the date for completion was then 26 March 2007, being 28 working days thereafter. Completion did not however take place because of a dispute as to the precise amount payable. Since the completion date, planning permission has been obtained for 9 flats.

The relevant provisions of the agreement were clause 14 and clause 1(1). Clause 14 made the agreement conditional on the buyer obtaining a “satisfactory planning permission" (defined, so far as material, as unconditional planning permission) for the “Development”. Clause 1(1) contained a number of definitions, prefaced by the following words:

“In this Agreement:

1.1

the following words and expressions shall have the following meanings for all purposes:”

Accordingly the possibility of defined terms being excluded by the context is ruled out. One of the defined terms was:

“Development: the development of the property as residential flats with not more than 14 two-bedroom units”

Under clause 14, CH agreed to apply for planning permission for the development and use all reasonable endeavours to obtain planning permission. CH had the right to modify the original plans if in its opinion or on the advice of the local planning authority officers it was considered appropriate at any time prior to the decision of the local planning authority. Both parties had the right to terminate the agreement if planning permission was not obtained within nine months (subject to an extension if there was an appeal). If CH wished to prevent AC from terminating the agreement, it had to exercise a right, which was expressed to be exercisable “at any time before the grant of satisfactory planning permission”, to waive the condition for planning condition. If the planning condition was waived, the agreement had to be completed 28 days after notice of the waiver was given. At completion, CH had to pay “the Purchase Price”.

The definition of "the Purchase price” is also in clause 1(1) and it provides:

“Purchase Price: £862,000 (eight hundred sixty-two thousand pounds) less the amount (including covenantees’ fees and costs) required to obtain a deed of release/variation of the covenants contained in entry 1 of the charges registers to both Title No. DT61359 and DT56503 to enable the Development to be implemented.”

When the agreement was made, it was known to both parties that the covenantees would, if planning permission was given, probably require a sum between £8,000 and £10,000 per unit to release or vary the covenants, together with a sum of about £1,500 for costs. It was not its policy to agree to vary restrictive covenants until planning permission was given. There was another important fact, which forms part of the factual matrix. CH enquired of the local authority about planning permission and discovered that there would be no objection in principle to demolishing the two houses in question and replacing them with a single block of flats. This was information known or available to both parties.

AC considered that, under the agreement, no discount was to be allowed where the buyer had waived the planning condition and no deed of release or modification of the restrictive covenants was in existence at the contractual completion date. On 23 August 2007, it issued proceedings against CH claiming a declaration as to the true meaning and effect of the term "Purchase Price." CH filed a defence and counterclaim claiming damages for breach of contract. CH sought the implication of the term into the contract or “other such implied term as the court may determine as would enable the contract to be completed in circumstances where the price was not known on completion date but would be ascertained thereafter". On 3 January 2008 case management directions were given by consent by Deputy Master Lloyd. These included a direction for a stay of the claim and counterclaim other than paragraph 1 and the claim for relief. The proceedings (apart from a counterclaim by CH for damages) were set down for trial with directions for disclosure and inspection and witness statements, and came before Mr David Donaldson, QC, who ordered that the claim and the counterclaim should both be dismissed, with no order as to costs. He also made no order on an application made by AC for the exclusion of certain documents and passages of witness statements on the ground that they contained material which was inadmissible on an issue of construction.

The judge disagreed with the interpretations put forward by both parties. Both parties sought to persuade the judge to make a declaration as to such implied term as he should determine. The judge held that he had serious doubts that he had jurisdiction to do so and in any event he did not consider such a course to be appropriate. He held that, at least in the case of a contractual dispute, a declaration should only be made on the basis of a submission advanced by one of the parties, rejected by the other, contested by adversarial argument.

On this appeal, both parties continue to press for the interpretations rejected by the judge. Miss Caroline Hutton, for AC, submits that the discount is only deductible from the Purchase Price if there has been a grant of planning permission and if the amount required to be paid for release of the covenants has actually been paid. She submits that “the amount” means "the amount, if any,”. She submits that no amount is required for the purpose of enabling the development to take place unless planning permission has actually been given. She also submits that this interpretation makes commercial sense. On her submission, the buyer had had a period of one year in which to obtain planning permission. It then had to decide whether to buy without the discount or to abandon the contract.

Mr Michael Norman, for CH, urges on us a different approach. He submits that the likelihood is that a buyer would wish to waive the planning condition because he is confident that he can obtain planning permission, and that the costs of obtaining a release from the restrictive covenants was always for the account of the seller. He submits that there is a term to be implied into the agreement as a matter of business efficacy that (a) the seller, acting reasonably, would make a provisional estimate of the discount; (b) this estimated amount should be deducted from the sum of £862,000 at completion; (c) the purchaser should with reasonable diligence establish the exact amount of the sum required, if necessary by applying for planning permission, and (d) on the exact amount being established, one party would, as appropriate, account to the other party with interest for the under/overpayment made at completion. On Mr Norman's submission, the Purchase Price can be finally ascertained after completion. Mr Norman models his implied term on general conditions 6.3.5 (dealing with the apportionment of income and outgoings) as varied by special condition 6.9 of the agreement (which I need not set out).

The relevant provisions of the agreement are undoubtedly difficult to interpret in the events which have happened, but in my judgment neither party’s interpretation produces a satisfactory solution. The agreement is not well drafted. In that situation, a principle which has particular potency and resonance is that, if the agreement is susceptible of an interpretation which will make it enforceable and effective, the court will prefer that interpretation to any interpretation which would result in its being void. The court will also prefer an interpretation which produces a result which the parties are likely to have agreed over an improbable result. I agree with the judge that it is improbable that the parties to this agreement would have agreed that there should be no discount for the costs of obtaining the release of the restrictive covenants where the planning condition had been waived.

The starting point in the agreement, in my judgment, is the definition of “Purchase Price”. As already explained, that definition is required to be used in all circumstances. It contains not just a figure, but a formula which needs to be applied to the facts. Miss Hutton attractively argued that the sum of £862,000 was a “headline price”, but the figure of £862,000 is never described in the agreement as a price at all. In my judgment, if there was a “headline price”, it was the Purchase Price as defined. (This price could be increased in accordance with the provisions for overage (which it is unnecessary to describe) in schedule 2.) The crux of the problem is how the formula works. For that, it is necessary to examine the definition of “Development.”

In my judgment, the difficulties of interpretation in this case fall away when it is appreciated that the definition of Development refers not to a physical, completed development but to the buyer's proposal for a development. It cannot mean a development for which planning permission has been given or implemented because clause 14 refers to an application for planning permission for the Development. Under clause 14, the buyer accepts an obligation to apply for the Planning Permission as defined and to use all reasonable endeavours to obtain it. The Planning Permission is defined as "satisfactory planning permission for the Development".

Furthermore, the definition of the Development uses the words “not more than 14 two-bedroom units”. These words, as I see it, introduce a sliding scale into the buyer's proposal, thus making it clear that the meaning of Development accommodates the possibility of change during the currency of the agreement. It thus means the buyer’s proposal for the time being for the development of Property as residential flats with not more than 14 two-bedroom units. That makes it necessary to investigate as a question of fact at the material time what the buyer's proposal was. Moreover, the court would in my judgment imply a term as a matter of business efficacy that the buyer should act reasonably in formulating its proposal. The buyer would therefore be bound to act in an appropriate way on the basis of the advice or information provided by the planning officers of the local planning authority and on professional advice. Accordingly, it should not be difficult to identify the Development at any particular point in time. It will crystallise into the development for which planning permission is given.

This meaning of Development must then be inserted into the definition of the Purchase Price. In my judgment, it is then clear beyond doubt that the discount is not conditional on planning permission. The discount is applicable whether or not planning permission has been granted. Moreover, since the agreement expressly contemplates that the buyer may waive the planning condition at any time, the definition of Purchase Price has to work even though there is no planning permission.

Next, the definition of Purchase Price has to be read with the procedure for completion. Clause 3 provides in the usual way that at completion the Purchase Price and all other monies payable on completion shall be paid by the buyer to or at the direction of the seller. Thus it is clear that the Purchase Price must be a sum which is capable of being rendered into a finite sum of money at the completion date.

On the meaning of Development which I have given above, there is no difficulty in finding the discount at the date of completion. It must be an amount which is reasonably required for the purpose of obtaining a release or variation of the applicable restrictive covenants such as would enable the Development, that is, the buyer's proposal for the time being for the development of the properties as residential flats with no more than two-bedroom units, to take place. It may be possible to ascertain the amount by making enquiries of the Cooper Dean Estate, but if not it will have to be found as a matter of fact (unless agreed). The fact that the Estate would not release the covenants until the planning permission was granted does not present any obstacle. A purchaser acting reasonably would not pay any sum to the Estate until the planning permission was granted. That, therefore, is the only sum (apart from costs) which he can claim. He cannot, in my judgment, claim any uplift on account of the fact that it may take another year to get planning permission, during which period the Estate may have increased its charges. But the submission that the amount must actually have been paid before completion is completely unwarranted. All that is necessary is that payment is “required”.

It is unnecessary to imply the term suggested by Mr Norman. In any event, Mr Norman’s suggested implied term can hardly be described as necessary to give business efficacy to the agreement. The seller would have to monitor the buyer’s planning decisions. Moreover, it might leave the seller unsecured for the unpaid purchase price, because he may not in fact get an unpaid vendor’s lien for a fluctuating or unknown amount. On my interpretation there is no need for any machinery of this kind.

Applying the foregoing, CH would, in the events which have happened, have to justify any discount for the cost of obtaining a variation of the restrictive covenants to allow redevelopment of the properties into more than 9 two-bedroom flats. The parties ought therefore now to be in a position to agree the amount of the discount and avoid further delay and costly litigation. But if they cannot do so, the case will have to be remitted to the Chancery Division to determine the outstanding matters. If, however, everything can be agreed, the only declaration needed is that "In the events which have happened, the Purchase Price for the purposes of the agreement made between the parties and dated 4 January 2006 was £X", inserting the amount.

I accept the submission of both parties that the judge had jurisdiction to make a declaration. The court will usually have in mind a particular meaning before it rejects the parties’ submissions as to meaning. The judge also held that he did not consider it appropriate to make a declaration as to an interpretation not advanced by either party. On this appeal, the parties have had a full opportunity to put forward any interpretation they wish, and the one matter on which they agree is that this court should declare a meaning so that the parties can proceed to completion. For the reasons given above, I would take that course.

That leaves the question of the application to exclude evidence inadmissible on the question of interpretation. It is well known that evidence as to pre-contractual negotiations is not admissible on a question of interpretation save in very limited situations: see Investors’ Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896; Chartbrook Ltd v Persimmon Homes Ltd [2008] EWCA Civ 183. Sometimes, it can be a matter of some difficulty to know whether communications before an agreement is signed are admissible or fall within this exclusionary rule: Square Mile Partnership Ltd v Fitzmaurice McCall Ltd [2007] 2 BCLC 23. The judge considered the evidence de bene esse. The evidence consisted of statements, letters and other documents and the witnesses were cross-examined. The judge did not make any findings on this part of the case. He said he did not find that the evidence was “helpful” without giving more explicit reasons. In my judgment, the parties were entitled to fuller reasons and the judge was in error in not providing them. But the purport of his decision was clear: he was evidently persuaded that some of it was or might have been admissible but that none of the evidence sought to be excluded advanced the parties’ cases on interpretation.

Time and costs should not be unnecessarily spent on evidence about communications before an agreement is made. If a party is served with a witness statement which it considers may contain material which is inadmissible on a question of interpretation, it should seek to establish from the other party the basis on which the evidence is said to be admissible. If he is dissatisfied with the answer, he may in appropriate circumstances make an application to exclude the evidence before replying to it. Another course would be to issue an application to be heard at trial, but this may lead to increased costs and a diversion of the time available for trial to this subsidiary issue. Yet another course would be for the court at the case management conference to direct the parties to identify in writing the precise point which they say the evidence establishes and why they say that that evidence is admissible. This may shorten the time spent at trial on any application to exclude it. At all events, the court should not allow the focus of a case about interpretation to be distorted by a detailed enquiry about material that plays a minor role, if any, in resolving the case. This was such a case. On this appeal, neither party has sought to say that the judge overlooked some important admissible evidence which was challenged as inadmissible.

The judge ordered that there should be no order as to costs on either the claim or the counterclaim. There is no appeal from this costs order. He made no order for costs in relation to the costs of the application. In my judgment, this was consistent with the order he had made on the claim and counterclaim and with the view he had expressed that the evidence was not helpful.

For the reasons given above, I would dismiss both the appeal and the respondent’s notice.

I agree.

I also agree.