Bell & Scott's Strategic Land Update

Our Strategic Land Team 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:

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

If you would rather not receive Strategic Land Update in future, please email us and ask to be removed from the Strategic Land Update mailing list.

Arthur Simmers was a pig farmer in Aberdeenshire. He ran into financial difficulties and entered an agreement with James Innes and Scotpigs Limited under which Mr Innes invested £2.5m in the pig business and the business was transferred to Scotpigs. Most of that money was attributable to the land on which the business was carried out. The business continued and the property was transferred to Mr Innes to lease back to a partnership consisting of Scotpigs and Mr Innes himself. Mr Simmers was employed by Scotpigs and was granted an option to buy out the property and shares in the company. The Agreement stated that Mr Simmers would be entitled to buy the property and shares on 31 March 2004 in exchange for payment of the price provided for in the Agreement. In another clause it stated the option was to expire on 31 March 2004 if Mr Simmers had not served notice on Mr Innes by then intimating his intention to exercise the option.

In February 2004, Mr Simmers’ solicitors wrote to Mr Innes giving notice that Mr Simmers intended to exercise his option.

The Agreement included a formula for the price payable by Mr Simmers if he exercised the option. As part of the formula, it was necessary for a valuation to be carried out by a valuer to be agreed between Mr Innes and Mr Simmers. They did agree on a valuer but, despite the terms of the Agreement providing for the valuation to be on a vacant possession basis, they did not agree on the basis of valuation. Mr Innes argued the property should be valued with vacant possession but Mr Simmers contended it should be valued subject to the tenancy created under the Agreement. In the end, the valuer was informed how each of them thought the property should be valued.

The valuer’s report provided three valuations: one was on the basis of vacant possession, the second provided for a deduction for improvements and other items and the third applied a 45% reduction because of the lease.

The parties could not agree how to proceed from there and, as a result, Mr Simmers began legal proceedings seeking an order for the sale of the property to be completed at a price of £2.5m, while Mr Innes argued that the sale should not be ordered at all or, alternatively, that it be at a price of £3.415m.

The first court decision went against Mr Simmers who then appealed to the Inner House of the Court of Session. By then, Mr Simmers had conceded that a value based on vacant possession was, after all, acceptable for calculating the price.

Mr Innes argued that time was of the essence for completion of the sale of the property and, as it had not been completed by 31 March 2004, the court should not order it to happen at all. He put forward the view that the Agreement meant that, to exercise the option, Mr Simmers had to tender the price to him on 31 March 2004. He also argued that the valuation which had been obtained was not valid for the purposes of the Agreement, as it put forward more than one valuation.

The Court of Session rejected Mr Innes’ arguments. He appealed to the House of Lords. The House of Lords also rejected his arguments. The option had been validly exercised by Mr Simmers as time was of the essence only with regard to the date of service of the notice of intention to exercise the option. That was clear from reading the Agreement as a whole. The valuation was perfectly satisfactory for the requirements of the Agreement.

Many strategic land deals include an option to acquire land at a later date on the basis of a formula. It is common for a valuation provided by an independent surveyor to be an element in such a formula.

This case did not involve strategic land, but it is highly relevant to Scottish strategic land deals, as it is a Scottish case decided by the House of Lords, the highest civil court in the land, addressing both (1) the exercise of an option and (2) the use of an independent valuation in assessing the price to be paid.

In order to make the time of completion (i.e. settlement) of a purchase under an option so important that the seller can walk away if it does not happen on the stated date, that has to be spelt out very clearly in the contract.
In this case, it was clear from the Agreement that the timing of service of the notice by Mr Simmers intimating that he intended to exercise the option was “of the essence” (i.e. of essential importance). However, it was not clear that the date of completion of the purchase (following service of that notice) was intended to be “of the essence”. Accordingly, Mr Simmers could exercise the option even though the purchase was not completed by 31 March 2004. That confirms the current legal position and reflects the position in any contract for purchase and sale. Except in exceptional circumstances, it has to be made crystal clear in the contract that completion at a particular time is essential if you want to be able to walk away immediately in the event that the agreed timing is not met by the other party.
If, in an Agreement, there is provision for an independent valuation on a particular basis (in this case vacant possession) and the independent valuer provides a valuation on that basis, it does not matter whether or not he also includes in his valuation report his assessment of the value on any other basis. In this case, the House of Lords went so far as to say that the valuer proceeded “in an eminently sensible way” by providing a report including values based on more than one valuation basis, given that he knew that, at that stage, there was a dispute about the correct basis of valuation. The Lords pointed out that, where there is a dispute, it may make it easier for parties to compromise if they know the actual difference between the values brought out by different valuation bases. It may be appropriate for the valuer to give the valuation on alternative bases and leave it to the parties to decide how best to proceed. If alternative bases are given, however, the valuation report should indicate which basis the valuer prefers, as otherwise there may be no definitive valuation without a subsequent agreement or court ruling.

Judges are normally measured in their use of language. The five judges in the House of Lords, who were unanimous in their view, did not go as far as to refer to Mr Innes’ arguments as hogwash but, from reading the judgment (in which the words “absurd” and “without merit” appear) I suspect that they may have been tempted to observe that the failure of Mr Innes’ case illustrates the difficulty of attempting to make a silk purse out of a sow’s ear.

A full text of the decision is available on the House of Lords website accessible here.

This case concerned the development of a 40 acre site in Castleford for housing. Not unusually nowadays, given the shortage of greenfield land for development, this involved the redevelopment of an industrial site, which had previously been used as a chemical factory since the 1860s.

Lambson, the selling company, gave Merlion, the house-builder, the only environmental audits it had commissioned during its ownership, both of which pointed to the existence of “Blue Billy”, a form of cyanide used to make sulphuric acid by a previous owner of the site. The environmental reports made it clear that Lambson’s building works for its plant would only involve the excavation of the top layer of contaminated soil and that the site would remain heavily contaminated after those building works.

Another environmental report was commissioned in the context of the sale of the site to Merlion. The authors of the report referred to the previous two reports, but did not specifically draw attention to the fact that the site would remain contaminated with Blue Billy.

Merlion asked a director of Lambson to confirm whether he was aware of any contamination not mentioned in the later report and he signed a letter confirming that he did not know of any.

When the extent of the Blue Billy contamination became apparent once works were underway on site, Merlion argued that the director had fraudulently mis-represented the state of his knowledge. It was unsuccessful in this argument, primarily due to the fact that the previous reports had been shown to it, had been referred to in the later report and were, therefore, within the ambit of the director’s letter. Additionally, however, it appeared from the evidence that the high levels of contamination and potential remediation costs of £8-£10m did not affect the value of the site and Merlion’s willingness to buy it. Even when these high costs became apparent during negotiation, no attempt to chip at the price was made and there was evidence to suggest that Lambson would not have accepted such a price chip.

Stephanie MacKenzie, Associate in our Strategic Land Team and Environmental Law specialist comments:

Whilst the outcome of this case turned on various points, it is useful to look for lessons and patterns in the way that courts apportion liability for contamination.

It sounds obvious, but the most important thing for a purchaser to do when buying a site is arm itself with knowledge: find out what is under the ground before you are committed to the purchase.

In this case, Merlion cannot be criticised for not doing that: it instructed its own report and passed Lambson’s previous reports to its consultants. Crucially, no-one at Merlion appears to have read the previous reports and, when the consultants only made a passing reference to them in the more recent report, Merlion (wrongly) assumed that the previous reports did not disclose anything to worry about. This proved to be a very expensive assumption.

It will save arguments later if the parties agree (preferably in layman’s terms before the lawyers get involved) who is to bear responsibility for any existing contamination on the site and the costs of any remediation required. The contract in this case appears to have been fairly clear that the parties accepted that Merlion was taking the site as it stood, but it clearly felt (or certainly felt it was in its interests to argue) that the director’s letter gave it additional protection. Unfortunately for Merlion, it did not. It is common for one or other side to argue that “standard” provisions should be used in relation to environmental matters in the contract. While this may well be appropriate in certain circumstances, agreeing to include provisions to the effect that you have had the opportunity to investigate levels of contamination of the site, have satisfied yourself in relation to it and that the price reflects the actual condition of the land (often the “standard” conditions argued for by sellers) will make it very hard to argue that you aren’t responsible for remediation if it later transpires that you were not aware of the full level of contamination.

Case referred to: Lambson Fine Chemicals Limited v Merlion Capital Housing Ltd [2008] EWHC 168 (TCC) (07 February 2008).

The Scottish Government has published its findings from responses received to its consultation on the future of housing in Scotland, “Firm Foundations”.

One of the most notable findings is that respondents agree that mechanisms are needed to facilitate an increase in the new build sector. Those who replied found that the main blockage to delivering new build was a lack of co-ordination between the allocation of sites and planning of infrastructure for those sites. To this, a number of solutions were suggested including an infrastructure fund and a body to deliver serviced land. Some respondents believed that new build delivery could be speeded up if measures were put in place to address land-banking by developers. To address this issue, respondents suggested reducing the planning consent periods, increasing the costs of undeveloped land and greater use of compulsory purchase powers. It was also argued that simplifying Section 75 negotiations would be helpful.

The Scottish Government, as part of its programme of introducing the changes to Scotland’s planning system, has conducted a series of public seminars on planning modernisation with a wide range of key stakeholders.

Six seminars, three open to a range of planning interests with a further three focused on matters of interest to planning authority officers, took place between January and March 2008.

The Government’s planning officials agreed to record the key questions raised at these events and have now set out the answers in a summary report for attendees and the wider public.

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

The Scottish Government has issued an updated timetable for bringing into force the provisions of the Act.