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A tale of unacceptable planning conditions 21 October 2014

Contracts for sale and purchase subject to the grant of a satisfactory planning consent are relatively common.  Developers are prepared to pay a higher price when they know that a site comes with planning consent.  Obviously the seller needs to make a decision – accept a lower price today, or the hope of a higher price tomorrow, in the event that planning consent is forthcoming.

And there is a fundamental difficulty with such contracts, which is that it is difficult to predict with certainty the conditions that the local authority will attach to any planning consent that is granted.  A large supermarket would not be happy with a planning condition restricting deliveries to the period between, for example, 11 am and 4 pm.  So it is conventional in such contracts to include a definition of “Unacceptable Planning Condition”.  If there is one of these, then the buyer is entitled to pull out of the deal and the seller is left with the property (but also a planning permission obtained at the buyer’s cost).

The contract will normally provide that if the parties cannot agree whether a condition is an Unacceptable Planning Condition, the decision is made by an independent third party.  All very standard stuff.

As is what typically happens in practice, as demonstrated by the recent case of Rentokil Initial 1927 Ltd v Goodman Derrick LLP [2014] EWHC 2994 (Ch).  It seems to be not uncommon (to put it mildly), in the case of contracts subject to the grant of planning consent, for the buyer/developer to claim that there are Unacceptable Planning Conditions, whatever conditions are imposed, in an attempt to force the seller to drop the price.  In this case a developer (whom we shall call “TW”) agreed terms with Rentokil to acquire the property for residential development, subject to planning.  Rentokil’s solicitor, Mr Kendrick of Goodman Derrick, was well aware of the propensity of developers to claim to see Unacceptable Planning Conditions around every corner, and agreed with TW provisions that gave Rentokil the best protection it could practically expect.  In particular, he refused to allow the definition to be so one-sided as to give TW effectively merely an option to acquire the site.

Planning consent was eventually granted (after several attempts) in December 2008.  By then the financial crisis had started and property prices had dropped (the judge said “the property market had by that stage entered into a period of historic decline”).  It appears that TW then recalculated its figures and decided it did not want the site after all.  It claimed to see Unacceptable Planning Conditions.

Once TW had claimed that the planning consent contained Unacceptable Planning Conditions, the question of whether the conditions were unacceptable in the terms of the contract had to be decided by a third party.  Mr Brown, Rentokil’s group legal director, became concerned that TW would not have the funds to complete the purchase, given the financial crisis, and negotiated a new deal under which TW were to acquire the property unconditionally for a price reduced by £1.8 million.  Then he claimed that Goodman Derrick, his retained solicitors, had been negligent when settling the form of the contract, making it too easy for TW to claim there were Unacceptable Planning Conditions.  He sought compensation in the form of the £1.8 million that Rentokil had forgone.

Based on the evidence that the judge heard from Mr Brown, Mr Kendrick, Mr Steele of Rapleys (Rentokil’s planning consultant) and others, Rentokil’s claim against Goodman Derrick failed.

Judges at first instance set great store by the evidence given by the parties in this sort of case, and by contempory documentation.  This was particularly relevant in this case for two reasons.  First, Mr Brown claimed that he had relied entirely on Goodman Derrick for advice on the structure of the deal, and he had not appreciated the risks of entering into a conditional contract.  In a 50 page decision, the judge decided that this was not the case.  The contemporary evidence showed that Mr Brown had been involved in the minutiae of the negotiations throughout the transaction and had a clear understanding of the risks.

Secondly, the judge held that if the arbitration concerning whether or not there were Unacceptable Planning Conditions had been completed, the third party would have found that the conditions were not unacceptable ones.  Rentokil would have won and TW would have been forced to complete the purchase.  The reason for Mr Brown’s agreement of a reduced price with TW was because he was afraid that TW would not have the funds to complete at the full price.

For both reasons, therefore, the action against Goodman Derrick failed.

In passing

The case reminds us of two age-old rules.

First, remember when writing any letter (or, in this modern era, e-mail), it might possibly end up being read out in court.  Mr Steele’s e-mail to Mr Brown, anticipating the possibility that TW might be looking for an exit, arguably fails that test.  Mr Brown wrote:

“In view of the softening of the market generally and recent difficulties that [TW] appear to be in, please be particularly alive to the possibility of some slowing of their activity. Please let me know if this is, or becomes apparent. At the moment it seems as if they are still proceeding but I’m always waiting for the call from them wishing to renegotiate.”

Mr Steele wrote back:

“Your thoughts are well founded and we are of course alive to the possibility that they will try and f*ck up the planning appeal …”

(Disappointingly, the transcript gives no clue whether the asterisk was in the original e-mail or was inserted by the judge in his transcript.  My guess is that it was in the original e-mail, but I’m still not convinced that it was an appropriate comment to write.)

Secondly, double-check the drafting of the contract.  An unfortunate formatting error crept into one of the already-complex provisions.  One of the Unacceptable Planning Conditions, number 11, started off as this:

“11 Imposing an obligation: —

11.1 which cannot be complied with without the agreement of a Competent Authority or third party (including without limitation one requiring the construction of highway or drainage works) or

11.2 which prevents the commencement of the carrying out of and/or the use or occupation of the whole or any part of the Development unless and until a condition has been complied with which cannot be satisfied without the agreement of the Competent Authority or third-party

and which cannot in the reasonable opinion of the Buyer be obtained on terms or at a cost or within a timescale acceptable to the Buyer.”

but after the contract had been revised, it accidentally became:

“10. Imposing an obligation: —

10.1 which cannot be complied with without the agreement of a Competent Authority or third party (including without limitation one requiring the construction of highway or drainage works) or

10.2 which prevents the commencement of the carrying out of and/or the use or occupation of the whole or any part of the Development unless and until a condition has been complied with which cannot be satisfied without the agreement of the Competent Authority or third-party and which cannot in the reasonable opinion of the Buyer be obtained on terms or at a cost or within a timescale acceptable to the Buyer.”

In other words, the independent wording at the end, governing both parts of the clause, became joined to the second part of the clause.

TW then claimed that the wording starting “and which cannot …” applied only to the second limb and not the first, whereas as originally drafted the wording had applied to both limbs.  This led to the point having to be discussed in court, and the judge had to decide on the point.  He decided on Rentokil’s analysis (ie the wording as originally drafted).  No harm done, you might think – but the error gave TW one more reason to try to argue that the planning conditions were unacceptable, and wasted a lot of the court’s time.

Ending a sentence with a hanging clause is a classic piece of lousy drafting, because of the potential ambiguity that it can create.  The example I use in my drafting course is:

“Any solicitor is entitled to time off in lieu when attending a conference or a seminar arranged by the Law Society.”

So – I am attending a conference but it has not been arranged by the Law Society.  Am I entitled to time off in lieu ?  No-one knows.  The court is unlikely to need to interpret that sentence but in a similar situation – such as the provision above – it needs to work out what it thinks the parties must have intended.  Which, of course, might not be what they had actually intended.

The solution is to rephrase the sentence, depending on what is meant:

Either

“Any solicitor is entitled to time off in lieu when attending a conference or a seminar, in either case arranged by the Law Society.”

Or

“Any solicitor is entitled to time off in lieu when attending a seminar arranged by the Law Society or a conference.”

End of lecture.

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