Halloween is still over a month away but to get developers into the spirit early, here is a cautionary tale…
This concerns the recent High Court decision in Denton Homes Limited v Cobb & Cobb.
The case concerned an option agreement, which is a common type of estate contract that (for the uninitiated) gives one party the right to buy a property from another at a set price and within a certain period.
This is a way of protecting developers. They won’t incur significant planning costs before the site acquisition is secured (under the option). Equally, they won’t spend the money to buy in the site until they have the planning secured (with a satisfactory planning consent). Win-win… In theory.
In this case, Denton Homes Limited (Denton) had in 2016 been granted an option to purchase a potential development site in Surrey for £1.4m from Cobb & Cobb (Cobb) and paid a £100,000 option fee for the privilege.
The option agreement provided for a fixed option period (until March 2020), but with provision for the period to be extended (subject to a long stop of March 2022).
The option period extension events were the usual suspects: an undetermined application; an outstanding appeal; and the consent still being capable of judicial review.
The option was varied several times (in 2020 and 2021) to extend the option period, but not the longstop, and Denton made further payments to Cobb under these variations.
In the meantime, Denton incurred significant further expense in preparing the site for development (and so enhancing its value). This included successfully having the property removed from the Green Belt, obtaining licences to thin trees, submitting planning applications and making planning appeals, and all the time navigating a “very slow and inefficient”, local planning authority.
Immediately before the long stop expiry, on 15 March 2022, with the planning position still undetermined, Denton decided to absorb the planning risk to secure the site and so served notice to exercise the option.
However, to Denton’s horror, Cobb refused to sell to Denton.
So Denton applied to the court for “specific performance” i.e. to compel Cobb to honour the option and sell.
But unfortunately for Denton, the court here decided that the option period had expired and that Cobb were therefore not obliged to sell.
The option period would have remained alive until the longstop date (i.e. the point where Denton exercised the option) *if* the sub-clauses providing for the extension events were capable of being combined.
However, because of the very particular language used in the relevant clauses and definitions, the court decided that only one of the extension events could apply, and so the option period had expired.
If the parties had intended for the option period to be capable of multiple extensions (e.g. an extension under an appeal, and then a further extension for a new application, and then a further extension, and so on) then the contract should have expressly said so.
Other than a general sense that this is a little harsh, here are two specific takeaways from the Denton Homes case for developers.
First, you need to be very clear and specific in your contracts. Don't leave any room for interpretation where it can be avoided, as the court is unlikely to help you (even with common sense!) In this case, with the benefit of hindsight, the extension events should have been expressed to be capable of operating independently and concurrently.
Second, pay attention to the deadlines and budget more time! Development projects always take longer than you think. Give yourself space. And then if you are in any doubt about whether you can meet a deadline, contact the other party as soon as possible.
The court's decision in this case is a reminder that courts are being very literal in interpreting contracts at this moment in time, even in some cases where this is leading to unjust outcomes. This means that it is more important than ever for contracts to be carefully drafted by a lawyer with real experience and expertise. For development projects, where the stakes are high, this is especially important.
