Bell & Scott

In this month's issue we comment on a case in which a land owner managed to secure a valuable share in the uplift in value of a piece of land which it sold when the land was developed and a case which serves as a warning to tenants to do their homework on the planning status of premises before they take on a lease.

Aberdeen City Council sold 11 acres of land to Stewart Milne for a residential development just off the B9119 outside Aberdeen. Stewart Milne paid the Council £365,000 up-front for the land which did not have planning permission for the proposed development when sold. The sale contract provided that the Council would get a top-up payment in the shape of a “profit share” once Stewart Milne had satisfactory planning, ground surveys, road, sewage and water consents. Once all the consents and surveys had been obtained and cleared, Stewart Mine was to send a notice to the Council informing it that it wished to buy out the “profit share” for all or any part of the development. The contract allowed Stewart Milne to calculate what the sum would be and permitted the deduction, from that sum, of all allowable costs incurred in obtaining planning permission and making the land suitable for development. The contract stipulated that the Council’s “profit share” would be “40% of 80% of the estimated profit or gross sale proceeds or lease value of the land less the allowable costs”.

Stewart Milne cleared all of the conditions in the contract and carried out the development using a special purpose vehicle company (SPV) which it owned.

In December 2006, Stewart Milne’s solicitors wrote to the Council informing it that it had sold the land, along with other land, to Stewart Milne Westhill Limited – the SPV within its group. The gross sale proceeds for the land stated in the letter were £483,020 and the allowable costs to be deducted from that amounted to £559,696. Given that the figure for allowable costs was greater than the gross sale proceeds, there was no “profit share” left for the Council.

The Council challenged that position arguing that because the sale to a related company did not take place at arms length, the open market value of the land, at the point of transfer to the SPV, should be taken into account and not the gross proceeds of sale. When Stewart Milne sold the land to the SPV, the open market value of the land was in the region of £5,670,000 – more than 11 times greater than the gross sale proceeds stated in Stewart Milne’s solicitors’ letter. If the open market value were to be applied, as the base figure for calculating the “profit share” due to the Council, then it was entitled to £1,700,000. The contract did not, however, provide for an open market valuation to be carried out. The Council was simply to get the gross sale proceeds less any allowable costs. If the Council was to succeed, the court would have to make a decision based on what the parties probably intended at the time of entering into the contract as opposed to what the final contract actually said.

Stewart Milne argued that a contract is a contract and the words chosen by the parties to that contract were final in determining the issue.

Finding in favour of the Council, the court decided that the parties, in approaching the calculation of the “profit share” in the event of sale, must have contemplated a sale at arms length and at open market value. Otherwise, it would be within the power of Stewart Milne, in every case, to defeat the Council’s entitlement to receive any amount by way of “profit share”. It would have been commercially “strange” that the Council would have ever signed up to a contract that allowed for that and, indeed, Stewart Milne could not have thought, on any reasonable view, that the Council would have done so.

Another profit share case has just been decided in the House of Lords, where Persimmon, on appeal, won against its development partner Chartbrook. In both cases, the courts have been willing to look beyond the actual words, used in the contracts, to their intent and commercial purpose. The lead judge in the Persimmon case commented that “there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction a court is allowed where it is clear something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant.”

Many developers will have spent hours over the last year picking over the bones of conditional missives and option agreements for sites the length and breath of the country, looking for the elusive “get out of jail free card”. If there is none, either negotiating a walk away fee or, if the seller is up for it, renegotiating and restructuring those deals into a more palatable form may be the way forward.

One of the ways forward may be a deal structure that addresses pressure on value, agrees a price deferral and a sharing of risk all in an effort to add certainty to financial closure of a deal in otherwise uncertain times. Whilst sharing the risk via a “profit-share” arrangement makes good sense, it also makes good sense to get the detail of that part of the deal fully bottomed-out as if you were agreeing the figures for a headline price. Relying on the court to rectify a contract is a high stakes game.

Whilst the outcome for Aberdeen City Council and Persimmon is favourable, two parties have lost and all parties have, no doubt, spent a fortune on lawyers and experts. When landowners and developers are looking at deals that share in risk and reward to maximise their return whilst limiting their exposure, both sides must be clear on both the intended outcome and the terms of the deal and then ensure it is worked through in the contract. Failure to do so will result in judges interpreting contracts at huge cost and delay.

Cases referred to Aberdeen City Council v Stewart Milne Group Limited [2009] CSOH and Chartbrook Limited (Respondents) v Persimmon Homes Limited and others (Appellants) and another (Respondent)[2009] UKHL 38

A full text of the Stewart Milne decision is available on the Scottish Court Service website accessible here and the Persimmon decision is available on the House of Lords website accessible here

Purvis was the tenant of an area of land just outside Ratho Village. It had taken a five year lease from the owner, Brewsters, in 2006 at an annual rent of £45,000. The land had been used for around 40 years as a concrete batching plant. That use of the land had stopped in 1998 and, until Purvis took its lease, the land had been used for a variety of short term storage lets.

Purvis’s lease allowed it to use the land for “the storage of bulk road materials or for such other purposes as may from time to time be approved in writing by the landlord.”

Prior to signing the lease, Purvis had been given a copy of a planning consent issued in 1990 by Brewsters’ agent. This consent showed that part of the site had permission for use for storage purposes. The agent also said that he believed that the site also had permission for industrial use (within Class 5 of the Schedule to the Town and Country Planning (Use Classes) (Scotland) Order 1997) but that this was not something the landlord would warrant. Purvis went ahead and signed the lease.

The lease was in standard form and included the usual obligations not to do anything which would contravene statutory requirements (including the Planning Acts) or cause a nuisance to neighbours. There was also the usual statement that the landlord did not warrant that the land or any part it was authorised for any specific use under the Planning Acts.

Despite the use stated in the lease and the planning consent shown to it, Purvis installed heavy plant and crushers and used the site for recycling bulk road materials.

Given the noise and dust created by this use, a neighbour complained to Edinburgh Council. Two weeks after the lease was signed, the Council served an enforcement notice requiring Purvis to stop recycling construction and demolition materials within two months.

Purvis appealed against the issue of the enforcement notice. The reporter dismissed that appeal on the grounds that the former industrial use (the Class 5 use) had been abandoned in 1998 and the interim short term uses for storage were within a different use class and, therefore, planning permission for either of these uses was required. The reporter then looked at the planning policy and the adverse impacts of the intended use such as noise, dust and vibration and decided that a planning permission for a Class 5 use should not be granted. Purvis accepted that it had no prospect of obtaining a planning permission for storage use alone (Class 6).

Brewsters invoiced the rent but Purvis refused to pay arguing that the lease was at an end due an event outwith the control of both the landlord and the tenant – the lease had been “frustrated”. It did so to avoid having to pay £45,000 per annum rent for the whole lease period as it was contractually obliged to do.

Purvis’s position was that the reporter’s decision and the planning authority’s stance were “supervening” or “subsequent” events outwith the control of and not due to the fault of the parties which rendered the only use permitted by the lease illegal. It also argued that the landlord could not enforce the storage use as this would require the tenant to act illegally. Brewsters wholly disagreed with this position.

The court considered what must be present before a contract can be said to be over due to frustration. There must be a “supervening or subsequent” event which is: (a) not the fault of either party; (b) not covered in the contract; and (c) the cause of a significant change in the nature of the parties’ obligations which they could not reasonably have foreseen.

Here, the planning permission for the land was undoubtedly available and was given to Purvis before the lease contract was signed. Therefore, there was no “supervening or “subsequent” event which operated to frustrate the contract. Purvis signed the lease, including the use clause, the undertaking to comply with statute and accepted the exclusion of warranty by the landlord with its eyes wide open and in full knowledge of the planning position. The landlord could, therefore, enforce its lease contract and the tenant had to pay the rent.

This case illustrates a salutary lesson to all of the value of doing your homework properly:-

Check the planning use against the user clause of the lease very carefully and ensure that both permit the intended use.

Do not rely on a past use to get you out of any planning enforcement difficulties – the reporters give weight to planning permissions, not anecdotal evidence.

Given that a lease is a contract that puts costly obligations on a tenant and most leases will provide that the contract continues no matter what happens. A failure to look under every stone before the tenant gets into the lease could mean that a tenant is left with a property which it has to pay for and maintain but which it cannot use for the purposes of its business.

Case referred to Robert Purvis Plant Hire Limited –v- David Farquhar Brewster, Alex Kinloch Brewster and The Firm of Alex Brewster & Sons [2009] CSOH 28.

A full text of the decision is available on the Scottish Court Service website is accessible here

The Scottish Government has published NPF2 which includes infrastructure projects such as a high speed rail link to London.

NPF2 has been agreed following extensive periods of public consultation and parliamentary scrutiny.

Details of the final developments included in NPF2 are available on the Scottish Government’s website accessible here

The Scottish Government has brought in regulations to implement the EU Directive 2004/35/CE on environmental liability and the prevention and remedying of environmental damage. The main aim of the regulations is to establish a new kind of civil mechanism to be deployed in the cases foreseen by the Directive, based upon the ‘polluter pays’ principle.

The regulations are available on the Office of Public Sector Information’s website accessible here.

The Scottish Government's legislation to tackle climate change has been passed by MSPs in the Scottish Parliament. The Climate Change ( Scotland) Bill sets a target of reducing emissions by 80 per cent by 2050 and an interim target for a 42 per cent cut by 2020.

For the commercial property sector, there will be rate relief for energy efficiency improvements made to properties as part of the Bill. The details of how the relief for improvements will work in practice will be given by the Scottish Ministers in regulations at a later date.

The Bill also provides for a regulatory regime to assess and enforce improvements to the energy efficiency of commercial properties. Regulations will be brought forward by Scottish Ministers to identify how this process will work in practice. It is thought that this will involve making what are, at the moment, the recommendations to improve energy efficiency within Energy Performance Certificates, mandatory requirements.

Details of the Climate Change ( Scotland) Bill can be accessed on the Scottish Government’s website accessible here.

An Historic Scotland consultation seeks views on the removal of the duty of planning authorities to notify Historic Scotland of certain types of listed building consent application. The paper details a pilot scheme which explored whether faster listed building consent could be issued to applicants without a reduction in the quality of decisions; how it was designed and operated; and an analysis of the pilot’s findings.

Details of the consultation are available on Historic Scotland’s website accessible here

A Scottish Government statement on the future of affordable housing investment has been published backed by the Scottish Federation of Housing Associations, the Convention of Scottish Local Authorities and Homes for Scotland.

improving the efficiency and effectiveness of housing associations' activities across the board, including procurement;
setting a standard for development performance, which will in future be a requirement for receipt of Scottish Government subsidy;
awarding three-year budgets to those associations and groups of associations that are best placed to make use of funds;
supporting collaborative groups as a way of bringing local authorities and housing associations together; and
a new focus on sharing best practice

Details are available on the Scottish Government’s website accessible here

More than 1,343 new council homes will be built in Scotland this year backed by £26 million from the Scottish Government.

Seventeen councils across Scotland will share the money to create a new generation of council houses for rent as part of the largest council house building programme for 30 years and is expected to support 3,000 jobs.

Details can be accessed on the Scottish Government’s website accessible here