Legal Briefing

Property transactions – the fertiliser for the development of contract law

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Real Estate | 22 February 2018

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There is a fundamental tension between the desire for contractual certainty and for agreements to be future proof. Property lawyers know only too well the difficulties associated with the fact neither we or our clients have crystal balls or the ability to time travel. We are regularly asked to look at a contract in a context that you can immediately approach the lawyers drafting the document did not anticipate.

In the field of property disputes that tension is augmented by a number of factors. The effect of contractual documents frequently lasts for decades, often coming under the microscope to define third parties’ rights and interests long after many traces of the ‘factual matrix’ have gone. Time, economics, changing planning laws and changing society may significantly affect the way property assets are valued and exploited.

There are of course contracts used to encapsulate many property transactions that grapple directly with the need for clarity, certainty and flexibility. Conditional contracts, options, pre-emption agreements and overage are all contractual tools at our disposal to give clients flexibility when dealing with (or contemplating dealing with) land. The overriding driver behind these transactions is the desire to take advantage of or protect against future contingencies. Often the future contingencies are matters that can have a significant impact on the value of the land and/or its attractiveness to the purchaser or potential purchaser.

Seen in that context it is perhaps unsurprising that the principles affecting the construction of contracts, implied terms and rectification come out of disputes about property: Arnold v Britton [2015], Marks & Spencer v BNP Paribas [2016] and Chartbrook v Persimmon Homes Ltd [2009].

Options and overage are familiar and well-tested contractual devices used for property transactions. Both can be used to share the anticipated future profit of land.

From a legal perspective options are a fairly robust solution: both parties have a proprietary interest in the land and the position of both parties can be properly protected against further transactions, including by registration. In a typical development-related option the contract does not impose any duty on the option holder to purchase rather a duty is imposed on the landowner to sell at the option holder’s election. Options are a form of contract which has two stages if exercised: grant and exercise, unilateral obligations followed by bilateral obligations.

Options are governed by usual contractual principles, as they relate to an interest in land, including additional constraints and requirements applicable to such contracts. However, it is helpful to bear in mind a number of points.

  • Consideration or a deed is needed for standalone options (but not those in leases etc).
  • The grant of options, not their exercise must comply with s2 Law of Property (Miscellaneous Provisions) Act 1989.
  • A variation of an option must also comply with s2.
  • Mortgagee’s powers of sale include a power to grant an option.
  • On exercise the contract for transfer/disposal exists so the grant must contain all the terms required to see the transaction through to completion.
  • An option may be for a fixed time, until an event and/or the grantor may reserve the right to revoke it by notice giving the developer a chance to exercise.
  • In the absence of an express limitation on the duration of an option, the courts are willing to infer a limit from the context at the time of grant.
  • As a proprietary right the benefit of an option is assignable unless expressly provided otherwise.
  • Time for exercise is key and needs very careful drafting.
  • Consisting with an option being one contract with two stages there is no need to re-register after exercise.

The limitations for options in the development context come from practical and financial factors. MP Kemp Ltd v Bullen Development Ltd [2014] is a good demonstration of how even with careful thought this familiar and well-tested form of property deal can create disputes. In that instance the option included a dispute resolution clause providing for determination by a surveyor. MP Kemp Ltd was unhappy with the curious way the surveyor construed the contract. Given the status its terms gave the surveyor, it was unable to appeal short of showing the surveyor’s decision was manifestly erroneous.

Very often the stage at which the landowner is to realise their share, the activity and investment that needs to have happened by that stage and funding arrangements required to facilitate it will rule out an option. It follows although options are generally a relatively clear and secure way of addressing the sharing of enhanced profits and/or added commercial value, for substantial developments, for developers who need capital and landowners wishing to maximise their share of the profits they are generally not a viable tool.

Similarly overage arrangements are common and well tested. However they continue to generate a significant value of litigation. Importantly the promise to pay that future additional sum operates as a simple contract, enforceable against the developer as a debt. Overage agreements do not create any proprietary rights or obligations and therefore confer no entitlements or remedies directly referable to the land. Without more there is no protection against insolvency of the developer, the failure to develop or the disposal of the land to a third party (possibly associated with the developer) free to take all the profits without accounting back to the original landowner. Where overage arrangements are made it is therefore prudent and usual for the landowner to look for both contractual obligations that ensure development proceeds as contemplated and security to ensure payment.

Sparks v Biden [2017] is a good example of how easily these bespoke contracts can go wrong and how they also provide an opportunity to understand contractual principles and how they will be applied
more clearly.

An option agreement contained an overage provision. Overage was payable on the sale of dwellings. There were contractual obligations to progress planning and construction. There was no contractual obligation to sell. The developer choose to let the dwellings rather than sell. The original landowner argued there was an implied term imposing an obligation to market and sell within a reasonable period of time.

The court accepted it should not imply terms lightly, particularly in the face of an entire agreement clause. The Court concluded although evidence of what was said in negotiations was not relevant, it could take account of the fact the contract was negotiated and drafted over a long period of time, both parties made significant changes and all therefore had a chance to revisit the wording. Nevertheless the court concluded imposition of the ‘as soon as practicable’ obligations in relation to planning and construction indicated an intention that the developer be obliged to exploit the property for the benefit of both parties and such obligations were indicative of an obligation to complete that exercise by sale and payment of overage, notwithstanding the failure to provision for its expressly. Further, although imprecision in a proposed implied term weighs against implication, a ‘within a reasonable time’ provision is not imprecise it is simply descriptive rather than definitional and can be implied if it is sufficiently clear in the particular context.

Property transactions will continue to generate disputes and throw light on the proper application of contractual principles. That can be painful for those involved in property transactions, whether as a client or a lawyer. Maybe it is the price for being in a sector where your transactions have very long-term effects and there are so many variables that affect the ability of your project to develop on the ground and generate the hoped for profit.