Bell & Scott

In this month's issue we comment on a case where a court’s refusal to look back at pre-contract negotiations on an overage clause proved costly for Persimmon; and (2) a case in which a lady claimed to have a binding contract for the purchase of an apartment on the basis of a reservation form and a deposit receipt.

We also update you on (1) new research into the role of design in new build housing; (2) the extension of the SDLT tax disclosure rules to cover residential properties valued at more than £1m; (3) changes to Planning Advice Note: PAN 41: Development Plan Departures; (4) a survey of planning consents which include affordable housing requirements; and (5) proposed new access to land rights to facilitate transport infrastructure schemes.

Chartbrook entered into a development agreement with Persimmon Homes in respect of a site in Wandsworth. It was agreed that Persimmon would go on to the property under a building licence, develop the mixed use site (residential flats above commercial premises, together with car parking) and then sell the units. The dispute revolved around the price that Persimmon would pay to Chartbrook.

The price payable was the aggregate of the “total land value” together with a “balancing payment”. The balancing payment included an “additional residential payment” which was defined in the agreement as “23.4% of the price achieved for each residential unit in excess of the minimum guaranteed residential unit value less costs and incentives”. Chartbrook claimed that they were entitled to the minimum guaranteed residential unit value plus 23.4% of the net proceeds of sale above that value. Persimmon argued that Chartbrook was entitled to the minimum guaranteed residential unit value or 23.4% of the total net proceeds of sale for each unit, whichever was the greater. On Chartbrook’s interpretation, over £4.6m was due; on Persimmon’s interpretation the sum due was approximately £900,000.

The Chancery Division of the High Court favoured Chartbrook’s interpretation of the contract. Persimmon appealed.

The Court of Appeal had to decide whether Persimmon could rely upon evidence of the parties’ pre-contractual negotiations, which, on balance, the Court found supported Persimmon’s interpretation of the contract. The Court ultimately held that this evidence was inadmissible. The contract could be read in isolation and, therefore, there was no need to have recourse to the pre-contract negotiations.

This case supports a line of authority that makes it clear that it is the final document that counts. Until the contract is signed, the parties cannot be said to have formulated a definitive agreement on the subject matter. Minds could still be changed.

There are some exceptions to this rule, the most notable being the “private dictionary” rule whereby, if a word is capable of two meanings, the pre-contact negotiations can be used as evidence to show the parties reached an agreement based on one meaning only. However, this cannot be used in circumstances where the parties have sought to define the words or phrases in the agreement itself, as in this case.

This was an English case, but the same principles are likely to apply in Scotland. In fact, in Scotland, where there is a much greater emphasis on parties being held to their concluded bargain, the scope for relying on pre-contact negotiations is even more limited. Recent judgments of Lord Reed in MacDonald Estates plc v Regenesis (2005) Dunfermline Ltd and Credential Bath Street Ltd v Venture Investment Placement Ltd emphasise the fact that courts will assume that the words used in formal documents will have been chosen by the parties with care and, therefore, they must have intended them to convey the meaning which they would convey to any reasonable person. It is not the court’s place to undo a bad bargain.

The lessons to be learned are clear. Despite what occurs pre-contract, the parties must ensure the final document reflects the true agreement. Only in very exceptional circumstances will you be allowed to show, at a later stage, that something else was intended. Just in case such an exceptional circusmtance arises, keep an accurate record of the negotiations that took place before the final contract is signed. If it is important that certain words or phrases have a particular meaning, this must be spelt out in the contract.

Of course, effective team work between client and solicitor when reviewing key clauses in an agreement such as pricing, will eradicate uncertainties before it’s too late – and before you face a bill similar to Persimmon’s.

Case referred to Chartbrook Ltd v Persimmon Homes Ltd & Steven Vantreen [2008] EWCA Civ 183.

A full text of the decision is available on the British and Irish Legal Institute website accessible here

The decision in MacDonald Estates plc v Regenesis (2005) Dunfermline Ltd [2007] CSOH 123 can be accessed here and the decision in Credential Bath Street Ltd v Venture Investment Placement Ltd[2007] CSOH 208 can be accessed here

Jacqueline McDougall was interested in purchasing apartment 8W at a housing development at West Links, North Berwick. It was part of a development being marketed by Heritage Hotels Limited (“Heritage”) in 2006. In June 2006, Ms McDougall completed a reservation form and paid a non-refundable deposit of £500 by way of cheque to the developer’s solicitor. Following that, the developer’s solicitor was to send her an offer to sell which she had to accept within 14 days. The reservation form stated that no contract was created between the developer and the purchaser until the offer to sell had been accepted. The developer’s solicitor acknowledged receipt of the reservation form and cashed the cheque. No offer to sell was issued within the 14 day period, despite Ms McDougall’s solicitors pressing for it.

A few months later, Macdonald Hotels (UK) Limited (an associated company of Heritage) wrote to Ms McDougall intimating that it had decided to keep apartment 8W and enclosed a cheque for £502.70, being the deposit plus interest accrued to date. Subsequently, Ms McDougall discovered that Heritage had sold the development at West Links, including apartment 8W, to a company called MH Apartments (“MH”) in October 2006. Ms McDougall then raised a court action against both Heritage and MH. She claimed that both Heritage and MH should honour the agreement contained in the reservation form. She argued that MH should be kept to the agreement because it knew about the contract set up by the reservation form before it bought the development from Heritage.

The court decided that the reservation procedure explicitly stated that there was no contract between the parties until the offer to sell had been issued and accepted. All that Ms McDougall received, when she signed the reservation form and paid her deposit, was a right to negotiate a contract in the 14 day period after signing the reservation form and paying her deposit. Since no offer had been issued by the developer’s solicitor which was capable of being accepted by Ms McDougall, she did not have a legally enforceable right to obtain a title to the apartment. MH could not be in “bad faith” in accepting the title to the development, including apartment 8W, from Heritage. For that to be the case, Ms McDougall’s rights under the reservation form had to amount to a legally binding contract between herself and Heritage for the sale and purchase of the apartment. Whilst the language in the reservation form may have led a purchaser to believe that they had certain rights to the apartment, all she really got was an exclusivity right to apartment 8W during the 14 day period. The action was dismissed as irrelevant.

In the market as it stands, it is hard to imagine a developer not issuing an offer to sell within hours of receipt of a reservation form and deposit, far less months. It is even harder to imagine them not issuing an offer at all. However, it is always possible that a block purchaser may come along and offer to buy the remainder of a development, which may be very attractive to the developer. Developers, therefore, need to be confident about what their sales material says and at what point there is a binding contract or “Missives” in place.

I don’t think anyone would be surprised by the decision in this case. The reservation process leaflet was very clear – expressly stating that there was no contract between the parties until a formal offer to sell had been accepted in writing. In Scots Law, Missives for the sale and purchase of property must be in writing – the norm is that both the offer and acceptance which make up the Missives would also be signed before witnesses but that is not a legal requirement. Despite the fact that a reservation form is a written document which the buyer signs and the acknowledgment or the receipt of the deposit is signed either by the seller or on its behalf, a reservation form generally does not contain the usual detail required for Missives which transfer title to a property. A reservation form gives the buyer an option to buy the property during a fixed period of time only. However, care needs to be taken that it does not contain all the necessary detail for the transfer of the property. If a signed reservation form did contain sufficient detail about the developer’s terms and conditions of sale then it could amount to being an offer to sell and a court may take a different view than it did in this case. Developers should avoid having such detail in their reservation forms despite the fact that most developers will be anxious to ensure that the purchaser is committed as quickly as possible.

As with the reservation form in this case, it is good practice to set out clearly the legal position at each stage of the process:

Signing a reservation form usually only affords the purchaser a period of exclusivity to conclude a formal contract, with the reservation fee being forfeited if they fail to do so. Make the reservation form “subject to contract” or “subject to Missives”.
Once Missives are concluded, there is a binding obligation on both parties to proceed with the sale and purchase, albeit this will probably be conditional on the property getting a habitation certificate and NHBC Cover Note.
When the Local Authority and NHBC or similar insurance provider have passed the property as fit for habitation, the Missives become unconditional, crystallising the date of entry and providing both parties with a legal remedy in the event of failure by the other to perform their side of the contract.

Would the decision have been different in this case if both the developer and Ms McDougall had signed the reservation form and had the form not expressly provided that it was “subject to contract”? I think not, since, in this case, the essential terms and conditions of sale were not referred to. Nevertheless, the best way to ensure that the parties are not caught out, is to review the terms of reservation forms carefully and be clear what they mean.

Case referred to Jacqueline McDougall v Heritage Hotels Limited and M H Apartments Limited [2008] CSOH 54.

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

The Scottish Government has published a research paper into the role of design in the development process for new housing.

The research focuses on investigating how private sector developers across Scotland conceive design and how they engage with design quality in the development process for new housing. The main aim of the research is to provide evidence on the current status of design in the house-building industry in Scotland and suggests how to promote design as a key factor in driving house-building in the future.

The UK Government has announced that it intends to go ahead with plans to extend stamp duty land tax disclosure rules to residential property worth £1m or more. The Treasury plans to publish draft regulations for consultation before the summer recess in order to introduce the legislation in the UK Parliament in the autumn. The move was made in response to concerns over a growing number of specialist companies or "promoters" that were marketing schemes at buyers of high-value residential property in order to avoid stamp duty land tax (SDLT) charges – the schemes used special purpose vehicles (SPVs) to acquire the properties.

“SDLT: ensuring fairness for all” - a consultation response document published by HMRC on 30 April is, however, substantively silent on the proposed new "indirect charge" in relation to these special purpose vehicles.

The response to the consultation is available on the HMRC website accessible here

The Scottish Government has updated Planning Advice Notice: PAN 41 which supplements the general advice on good practice issued in PAN 40: Development Control. The updated PAN 41 includes information on the Town and Country Planning (Development Contrary to Development Plans) (Scotland) Direction 1996 - which authorises planning authorities to grant planning permission for developments which do not accord with the provisions of approved structure plans or approved and adopted local plans, provided that the requirements set out in the Direction are followed.

PAN 41 is available from the Scottish Government’s website accessible here

Between 2005 and 2007, the Scottish Government, in co-operation with 31 out of the 34 Scottish Planning Authorities, conducted its first survey on planning consents issued for new affordable housing in Scotland. Each Planning Authority was asked to insert detail of all planning consents granted with provision for new affordable housing in a register.

The enquiry did not take into account the number of newly built affordable units or units under construction, but simply looked at the number of affordable units at the first stage of delivery, i.e. the granting of planning consent. The survey took into account both full and outline consents and every effort was made to ensure that where developments received both, the units were not double counted.

A summary of the findings has now been produced and is available on the Scottish Government’s website accessible here

New draft regulations have been issued under the Transport and Works (Scotland) Act 2007 proposing powers of entry to land by (1) the Scottish Ministers and (2) applicant promoters of transport infrastructure schemes. The Transport and Works (Scotland) Act 2007 will be the Act which is used in future to deliver major transport projects such as the new Forth crossing.

Both the Scottish Ministers and scheme promoters will have powers to serve a notice of a proposal to make an order under the Act to inspect and survey land for purposes connected with construction, operation or works for transport schemes. The regulations set out the procedures for:

making orders;
considering representations;
proposals for entry to land; and
enforcing access where, subsequent to a determination to take entry, access is prevented.

Scottish Ministers or scheme promoters would be able to obtain access to land by agreement with the owners, tenants and occupiers of the land identified. If, however, agreement cannot be reached, the Scottish Ministers may make a determination on their proposal to enter land themselves. For scheme promoters, where agreement cannot be reached on access with the owners, tenants and occupiers, then recourse can be had to the regulations which allow the Scottish Ministers, in the light of evidence presented, to determine whether access should be granted (subject to such conditions or limitations as they consider appropriate) or not granted.

Apart from the benefits of the provision of more accurate information to assist with the design and development of the proposed schemes, the Scottish Government considers that access to land may also provide an opportunity for greater scheme specification so that the lines of deviation of a linear project, such as a railway line, may be more tightly drawn with consequential potential reduction in blight for property owners.

The Regulations are available on the Office of Public Sector Information website accessible here