Welcome to the latest issue of Bell & Scott’s Strategic Land Update.

Our Strategic Land Unit is the only team in Scotland to focus on legal advice on strategic land deals. For further information see our website.

This e-update is issued quarterly and will also be available to download from our website.

Strategic Land Update seeks to cover a wide range of topics of relevance to those interested in strategic land issues. In this issue, we comment on:

(1) a case that considers the effect of options to buy land; and

(2) a case where a developer lost out on its right to appeal a planning decision.

In addition, we include a number of other relevant news items.

If you wish to discuss any of the items in this edition or require advice on strategic land issues please contact either Bruce Anderson: DD: 0131 718 2399 e: b.anderson@bellscott.co.uk or Caroline Docherty: DD: 0131 718 2383 e: c.docherty@bellscott.co.uk

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Update

Considering your options

In February 2005, a Mr McAlister entered into an agreement with a Mr and Mrs Gibson relating to a house in St Andrews. Mrs Gibson had previously been married to Mr McAlister but title to the house had been taken in Mr McAlister’s name. Under the February 2005 agreement, Mr McAlister granted the Gibsons an option to buy the house within 2 years and granted them a lease of the house in the meantime. This somewhat unusual arrangement was apparently put in place as a means by which a debt owed by Mr McAlister to the Gibsons could be repaid in the form of a discounted option price.

As early as March 2005, the Gibsons exercised their option and stipulated 8 February 2006 as the date of entry (when the title of the house would be transferred to them).

The agreement included an explicit prohibition against any new securities being granted over the property, but, in late January 2006, Mr McAlister granted a security in favour of The Royal Bank of Scotland. The security was recorded only two days before 8 February 2006.

The Gibsons, who saw the granting of the security as a means by which Mr McAlister was preventing himself from giving them good title to the property, raised an action against the Bank to have the security lifted. They argued that the Bank had known about the option and that therefore the Bank had been in bad faith in encouraging and assisting Mr McAlister to breach his agreement with the Gibsons.

The final outcome of the case is not yet known but the Court of Session has issued an opinion on the purely legal arguments which have come before it.

On the one side of the argument there is a long-established principle of property law that anyone is entitled to rely entirely on the property rights which appear in the public registers, so that any other arrangements which have been put in place by a property owner cannot affect a third party. On the other side of the argument is the principle of contract law that no one should be entitled to benefit from their own breach of the basic obligations of good faith and fair dealing.

The Bank argued that a property transaction could only be invalidated by the bad faith of the beneficiary of the transaction (the Bank in this case) if: 1) there was a pre-existing right in favour of someone else; 2) that right was breached by the transaction; and 3) the right was a “real right” (i.e. one that would be registered in the public registers) or at least one which was capable of being a “real right”. The Bank contended that the option in this case did not meet these conditions.

The Gibsons pointed out that they had exercised the option by the time that the Security was granted in favour of the Bank and that, therefore, the right which they had was equivalent to straightforward missives to purchase and, so, was capable of becoming a real right. Accordingly, they argued that the Bank’s knowledge of the option not only meant that the Bank had acted in bad faith but that that was sufficient to invalidate the grant of the security in the Bank’s favour.

Lord Emslie reached the conclusion “without much hesitation” that the Bank’s request to have the case dismissed should be rejected.

He stated that, in his view, it was hard to differentiate between an exercised option and concluded missives of sale. In addition, it did not matter whether the later transaction involved taking title or simply the grant of a security – in either case the beneficiary was receiving valuable rights which encroached on the existing rights of another party. The breach of the fundamental requirements of fairness and good faith in contractual dealings should bar someone from benefiting in those circumstances. Further, it was only necessary for the Gibsons to show that the Bank had knowledge of “some sort of right” in favour of another party for the Bank to be under a duty to enquire further about that right.

Bruce Anderson, Partner, comments:

A house in St Andrews? Strategic Land?!

It is, of course, not the domestic setting of this case which makes it suitable for inclusion in this Update. The legal questions raised by the case are highly relevant to strategic land transactions.

You can easily envisage comparable circumstances arising in a strategic land context. A developer enters into an option to purchase potentially developable land and sets about pursuing allocation of the land for development, investing substantial sums in doing so. Meanwhile, the landowner/seller grants a security over the land to a Bank, borrows heavily against it and, when the developer is in a position to complete the purchase, is not in a position to grant a clear title. Even worse, perhaps the seller defaults on interest payments to the Bank so the Bank calls up the security and sells the land to another developer. Worse yet, perhaps, the landowner/seller, rather than granting a security to a Bank, sells the land to another developer in direct contravention of the option agreement. Where does the original developer stand? Can he have the security to the Bank (or the conveyance to the other developer) “cancelled” by the court?

In this case, Mr and Mrs Gibson are relying on what is known as the “offside goals rule”, which is a principle by which a transaction can be invalidated if the beneficiary of the transaction has acted in bad faith. If the Gibsons can prove that the Bank was aware of the option agreement but took security anyway, they have every chance of having the security struck down. Lord Emslie’s opinion suggests that that might well have applied even if, by the point at which the security was granted, the Gibsons had not intimated that they were going to exercise the option. Just the very fact that a bank which is going to be granted a security is aware that there is some sort of right over the property in favour of someone else, can imply that it is acting in bad faith if it takes security without investigating the extent of the existing right.

Of course, the clear implication of that is that, if a bank taking security has no inkling of the existence of an option agreement, it can obtain a security which is unchallengeable. That is indeed the law. Similarly, a third party purchaser who has no reason to believe a landowner has already granted an option to someone else, can obtain good title despite someone else having an option over the property.

What, then, can the developer entering into an option agreement for the purchase of land do to protect himself from the unscrupulous seller who grants security or sells the land to another party in breach of the option agreement?

The advice which we provide in these circumstances is that the developer should not rely upon the option agreement alone but should seek a security over the land from the seller to back it up. The security will then appear on the public register and, therefore, any prospective third party security holder or purchaser will not be able to argue that they are unaware of the existence of some sort of right in favour of the developer.

Perhaps the moral of the tale is that taking security from the seller when entering into an option agreement should not be considered an optional extra but, rather, a vital protection of your interest.

Case referred to: Robert Mark Gibson & Another v The Royal Bank of Scotland plc & Others [2009] CSOH 14

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

Planning appeals

Timing is everything

This case concerns the not unusual problem faced by planning applicants whereby a planning authority has failed to determine an application within either the two month time limit prescribed by Article 14 (2) of the Town and Country Planning (General Development Procedure) (Scotland) Order 1992 or the four month time limit in the Environmental Impact Assessment (Scotland) Regulations 1999.

If the authority has failed to meet whichever of the time limits is applicable then it is open to the applicant to appeal to the Scottish Ministers (through the Scottish Directorate for Planning and Environmental Appeals: SDPEA) on the basis of what is generally referred to as 'non determination'. This course of action is not always pursued by applicants as there may be circumstances which have held up the determination which are perfectly reasonable and it may be hoped that although two months might not have been enough, then perhaps four or five might see them with the (often hard won) planning permission in their hands. It is common for applicants to take the view that there is no point in risking antagonising the authority and perhaps provoking a refusal if the planners feel pressured into giving a response and recommend refusal on the basis that they do not have enough information to come to a positive view – “the precautionary principle”.

However, the reasonableness of the applicant does not mean that the clock stops ticking on the time to appeal - there is only a six month window from the date upon which the determination should have been made within which an applicant can lodge a valid objection.

What, then, happens in the situation where an application is made, the authority fails to determine the application within the statutory time limit, six months elapse from the 'relevant' date during which time no appeal is lodged by the applicant, sometime later the planning authority and applicant agree to a formal timeframe for consideration of the matter, the planning authority again fails to determine the application, this time within the context of the agreement, and the applicant finally decides to appeal on the basis of non determination?

This is precisely what happened in Vattenfall Wind Power Limited. They submitted a planning application to Scottish Borders Council, for the erection of twelve wind turbines, on 10th April 2003. The planning authority did not determine the application by 10 August 2003 and so the countdown on Vattenfall's time for appeal began and then expired on 10 February 2004 without any appeal having been lodged. In August 2007 the applicant and Scottish Borders Council agreed to an extension of time for determination to 31 December 2007. This new deadline came and went and still no determination was forthcoming. On 6 June 2008 Vattenfall submitted an appeal to the SDPEA on the basis of non determination.

The SDPEA refused to consider the appeal on the basis that it was out of time and Vattenfall subsequently sought Judicial Review.

In a judgement that is perhaps best described as brief and to the point, the Court of Session found in favour of the Ministers who contended, in effect, that an appeal had to be made either within the context of the initial six month period following non determination or within a six month period following on from a failure to determine an application which has been subject to an agreed extension of time arrived at within the original statutory period.

Jamie Hunter, Solicitor, comments:

This decision will cause considerable concern amongst developers. It is quite common to have applications which run on beyond the two or four month limits. It is also common for applicants to be reluctant to appeal or, in some cases, the time simply runs away from them. The view had earlier been expressed in some quarters that, if the planning authority and applicant agree to an extension of time, even if they do so after the statutory six month period has elapsed, this effectively revives the right of appeal to the Ministers if there is a failure to meet with the revised deadline. This position has generally been founded upon the apparent inequity which the contrary (and in this case successful) argument results in.

This decision does re-state the statutory provisions in a clear and unambiguous manner and does at least provide some clarity. On the other hand it leaves an odd tension in the system. If, for perfectly sound reasons, an applicant does not appeal within the statutory timeframe, then there is in fact no sanction that can be taken in relation to the planning authority and the Ministers are not empowered to step in to issue a decision. The Lord Justice Clerk makes it quite clear that the Planning Authority retains an obligation to make a determination but concedes that there is nothing beyond the one chance to appeal open to an aggrieved applicant. The Court obviously did not feel sufficiently empowered to address this rather concerning gap in the legislative provisions.

What, then, can be done to avoid the problems encountered by Vattenfall? Quite simply, if it looks as if determination of an application is going to run beyond the relevant time limit but an appeal is not desirable, an applicant should seek a formal extension of time for consideration at the earliest possible opportunity and certainly before the six month time limit expires. Applicants should keep an extremely close eye on the timeframes and all of the relevant dates should be diarised so that action can be taken when necessary. Of course, it is always possible for a new application to be made which, although there is potentially a cost consideration, would undoubtedly allow for an appeal if the authority again fails to comply with its statutory obligations.

Finally, it is worth mentioning that this decision will not help with the implementation of the new planning legislation (which generally aims to encourage greater co-operation and consultation) as it obviously puts some applicants into an 'appeal or be damned' situation.

Case referred to Vattenfall Wind Power Limited v a decision of The Scottish Ministers [2009] CSIH 27

The full text of the decision is available on the Scottish Court’s website accessible here

News

Pre-application consultation with communities (PACC)

The new Development Management Regulations covering pre-application consultation with communities came into force on 6 April. The requirements on PACC apply only in relation to applications made on or after 3 August 2009.

From 6 April, prospective applicants will be able to carry out PACC in relevant cases (major and national developments) in anticipation of making a planning application in that regard on or after 3 August. There is no statutory requirement to carry out such consultation in relation to planning applications made before 3 August.

Details of the new regulatory requirements are available on the Scottish Government’s website accessible here

NPF2 Newsletter 10

Following parliamentary consideration of the proposed National Planning Framework, the latest Newsletter is available on the Scottish Government website accessible here. The final NPF is due to be published in late spring.

Scottish Planning Policy (SPP) Consultative Draft

This consultative draft sets out the Scottish Government’s planning policy on different types of development and on environmental issues. The new, shorter SPP will replace seventeen existing policy documents, making policy easier to understand and interpret.

The SPP is available on the Scottish Government’s website accessible here. The consultation period ends on 24 June.

Planning Circular 3 2009: Notification of Planning Applications

A new circular explains the Scottish Government's role on the limited occasions that it becomes involved in the planning application process.

The circular is available on the Scottish Government’s website accessible here

Permitted development

The Town and Country Planning (General Permitted Development) (Domestic Microgeneration) (Scotland) Amendment Order 2009 came into force on March 12, 2009.

The Order can be accessed here

Community infrastructure levy

The UK Government announced in the 2009 Budget that the introduction of the community infrastructure levy (CIL) will be delayed until 6 April 2010.

The CIL is a new charge that local planning authorities in England and Wales will be able to levy on development in their areas. The overall aim of CIL is to ensure that owners and developers of land will fund (in whole or in part) the costs incurred in providing infrastructure to support the development of an area.

Our overview of the Budget as it affects the property industry can be accessed here