England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Justice Warren
[2017] EWHC 1773 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		10 July 2018

Lord Justice David Richards :

1. Lincoln & Ilford Limited (L&I) appeals, with permission granted by Gloster LJ, against an order for summary judgment for £750,000 and interest made by Warren J. He held the sum to be due under an overage agreement that formed part of the terms on which L&I purchased a property known as Arodene House, Perth Road, Ilford, London (the Property) from the respondent Sovereign Property Holdings Limited (Sovereign).
2. The Property comprises a total of eight floors. The ground floor is occupied by retail outlets and a restaurant (Kanchans) which also occupies part of the first floor. The rest of the building had prior to the purchase been used as office space, except for one flat on the seventh floor. The intention of L&I in purchasing the Property was to redevelop the office space as residential units. The consideration for the purchase was a payment of £7,350,000 and the obligations undertaken under the overage agreement. A draft overage agreement was annexed to the sale contract dated 16 March 2016, which provided for the parties to enter into an agreement in that form on completion. The overage agreement was duly made by the parties, but subject to amendments contained in a deed of variation executed on the same day.
3. The issue before Warren J, and on this appeal, is purely one of construction of the relevant provisions of the overage agreement (the OA) as amended by the deed of variation (the DoV) (together the Amended OA).
4. Sovereign's claim for the sum of £750,000 arises under clause 3.1 of the OA which provides:

"If a First Trigger Event occurs after the date of this agreement but before the expiry of the Overage Period the Buyer will pay to the Seller the sum of Seven Hundred and Fifty Thousand Pounds (£750,000)."

5. The definition of the First Trigger Event was changed by the DoV and, as amended, reads, so far as relevant:

"the receipt by the Buyer of a Prior Approval in relation to a proposal for the Development relating to a minimum of sixty (60) Residential Units shown on the plans at Annexure 3 or such other similar scheme submitted by the Seller that delivers a minimum of sixty (60) Residential Units at the Property."

6. This definition itself contains important defined terms, the meanings of which are contained in the OA.
7. "Prior Approval" is defined to mean, so far as relevant, "written notice from the Local Planning Authority giving its prior approval in respect of the Development under the Permitted Development Order".
8. "Development" is defined to mean:

"development of the Property comprising of a change of use of any part or parts of the Property or the whole of the Property to a use falling within Class C3 (dwellinghouses) of the Permitted Development Order."

9. "Residential Units" are defined to mean:

"residential dwellings to be comprised in a development at the Property for residential use for sale or lettings and "Residential Unit" shall be construed accordingly but excluding any units which are restricted to be used for Affordable Housing."

10. The plans annexed at Annexure 3 referred to in the amended definition of "First Trigger Event" were new plans substituted by the DoV. The new plans showed a total of 60 Residential Units, in place of 66 Units, by excluding six Units on that part of the first floor falling within the demise to Kanchans and used as a storage area.
11. The Permitted Development Order referred to in the definition of Development is the Town and Country Planning (General Permitted Development) Order 2015, made principally pursuant to the Town and Country Planning Act 1990. So far as relevant, article 3(1) provides that "planning permission is hereby granted for the classes of development described as permitted development in Schedule 2". The relevant part of schedule 2 is Class O headed "Permitted development: Development consisting of a change of use of a building" (emphasis added) from Class B1(a) (offices) to Class C3 (dwellinghouses) (which includes flats, maisonettes and studios). It is important to note that this is concerned only with a change of use, not with external building works.
12. The relevant paragraph under Class O is O.2 which provides:

"(1) Development under Class O is permitted subject to the condition that before beginning the development, the developer must apply to the local planning authority for a determination as to whether the prior approval of the authority will be required as to

(a) transport and highways impacts of the development,

(b) contamination risks on the site,

(c) flooding risks on the site, and

(d) impacts of noise from commercial premises on the intended occupiers of the development,

and the provisions of paragraph W (prior approval) apply in relation to that application.

(2) Development under Class O is permitted subject to the condition that it must be completed within a period of 3 years starting with the prior approval date."

13. The relevant effect of the Permitted Development Order is therefore to grant consent for a change of use from office to residential subject to prior approval (if required) on the four specific subjects listed in para O.2(1). The requirements of paragraph W are, so far as material, to provide with the application to the local planning authority a written description of the proposed development, a plan indicating the site and showing the proposed development, and a statement of the net increase in dwellinghouses proposed by the development: para W(2). Where prior approval is required, the development must be carried out in accordance with the details approved by the local planning authority, unless it and the developer agree otherwise in writing: para W(12).
14. The requirement in para O.2(2) that the development must be completed within a period of three years starting with the prior approval was introduced by an amendment order that was made on 10 March 2016 and laid before Parliament on 11 March 2016, coming into force on 6 April 2016. It was therefore made and laid shortly before the sale agreement for the Property was made and came into force shortly before the date of completion and the date of the OA and DoV. It replaced an earlier requirement that the development be commenced within the same period of three years. As will later appear, L&I relies on this change as a factor relevant to the proper construction of the Amended OA.
15. On 28 April 2016, Sovereign submitted an application for prior approval under para O.2 accompanied by the plans annexed to the DoV, a description of the development and a statement that the net increase in dwellinghouses would be 60. Prior approval was on that basis granted by the local planning authority on 4 July 2016 and received by L&I on or about the same date, well within the Overage Period (as defined in the OA). The conditions imposed by the local planning authority arose in relation to the transport and highways impacts of the change of use.
16. Sovereign's case is that, on that basis, the First Trigger Event occurred within the Overage Period and that therefore under clause 3.1 the sum of £750,000 became payable with payment due to be made on 30 August 2016. L&I ignored three demands for payment made in August and September 2016 and responded, denying liability, only when a statutory demand was served on it in October 2016.
17. L&I's case, shortly stated, is that while the planning requirements were satisfied, the prior approval was given for 60 flats, not all of which could in fact lawfully be built. The construction of the full number of 60 flats would contravene provisions of the Building Regulations. It was integral to the occurrence of the First Trigger Event under the terms of the Amended OA that the 60 flats should be capable of being constructed. This requirement was made express by the inclusion of the words "residential dwellings…for residential use for sale or lettings" in the definition of Residential Units.
18. L&I's case has proceeded purely on the basis of the construction of the express terms of the Amended OA, with no reliance on implied terms or a claim for rectification.
19. The fundamental position taken by L&I was that the purpose of the OA as regards the First Trigger Event was to provide a commercially valuable benefit to L&I in exchange for the payment of £750,000. Prior approval for a change of use to permit the construction of 60 Residential Units was valuable only if those 60 Units could be built. As, it claimed, not all the 60 Units permitted by the Prior Approval granted on 4 July 2016 could be built, by reason of incompatibility with the fire escape provisions of the Building Regulations, the Prior Approval did not confer the intended benefit on L&I. The submissions of Sovereign, and the decision of the judge, was tantamount to saying that utility did not matter.
20. Ground 1 of the grounds of appeal is that the judge gave insufficient weight to the reference in the definition of Residential Units to the words "residential units…for residential use for sale or lettings". Even at the level of a purely textual analysis, Mr Banner QC, appearing for L&I, submitted that the judge had wrongly construed the relevant provisions of the Amended OA. He submitted that the two key elements in the definition of First Trigger Event were the requirement for 60 Residential Units and the requirement for the plans at annexure 3 to the DoV. The judge was therefore in error in focussing on the plans to the exclusion of the 60 Residential Units. The inclusion of the words "for residential use for sale or lettings" in the definition of Residential Units was for the purpose of ensuring that the Units for which Prior Approval was obtained could in fact be built, or at least be built without breach of Building Regulations. If they could not be built, they could not be available for sale or lettings. The fact that the annexed plans were said in the definition of First Trigger Event to show 60 Residential Units did not mean that the Units shown on the plans satisfied the definition of Residential Units. Whether or not they did so had to be separately determined. If the plans were intended to be determinative that the 60 Units shown on them were Residential Units, the definition of First Trigger Event could have excluded "relating to a minimum of sixty (60) Residential Units", replacing them simply with "as".
21. Mr Banner submitted that further support was to be found in the second half of paragraph (i) of the definition of First Trigger Event which provided for a similar scheme that "delivers" a minimum of 60 Residential Units without any agreed plan. The fact that Sovereign did not need to use the annexed plans in order to satisfy the requirement for a First Trigger Event demonstrated that it was the delivery of 60 Residential Units that was the key requirement.
22. The second ground of appeal is that the Judge gave insufficient weight to other provisions of the Amended OA in his construction of the First Trigger Event and Residential Units. I shall refer to those provisions and Mr Banner's submissions when I consider the merits of the appeal.
23. The third ground of appeal is that the judge gave insufficient weight to the factual matrix, or contextual matters, surrounding the Amended OA. In this respect, Mr Banner concentrated on one event. The definition of First Trigger Event in the draft OA annexed to the Sale Agreement referred to 66 Residential Units shown on the annexed plan. By the DoV, the definition was changed to provide for 60 Residential Units shown on a different annexed plan. On the evidence, the parties' reasons for agreeing this change differed. L&I's evidence is that, because six units were shown as within the storage area let to Kanchans, it could not be sure that it would obtain possession of that area in time to complete the six units within three years after the prior approval date. Sovereign's evidence is that it was not sure that the storage area constituted office space for the purpose of an approval of change of use from offices to residential units and so excluded it to avoid any jeopardy to obtaining the Prior Approval required for the First Trigger Event.
24. The significance attached by L&I to its reason for the change is that it underlines that in order to qualify as Residential Units, as defined, the proposed flats had to be capable of being built.
25. For present purposes, the evidence of both parties as to their reasons may be accepted. But a dispute exists as to whether Sovereign was informed of L&I's reason. Sovereign's witnesses denied being informed of it. L&I's case, as stated in a witness statement by Mr Orzel who is associated with L&I, is that Mr Brackenbury on behalf of Sovereign was told by Mr Sidoli who in turn had been informed of L&I's reason by Mr Friedman. Because there was no witness statement from Mr Sidoli and because he did not know the basis on which Mr Orzel gave his evidence, the judge ruled that there was no evidence before the court that Sovereign had been told of L&I's reason. I do not think he was right on this. In his witness statement, Mr Orzel, said that he had spoken to Mr Sidoli on this particular point and that Mr Sidoli told him that he had explained to Mr Brackenbury why L&I wished to exclude the Residential Units shown in the storage area. Mr Orzel further recorded Mr Sidoli as saying that he had been requested by Sovereign to provide a witness statement but that he did not wish to get involved in the dispute and was not therefore willing to give a witness statement for either party.
26. There was therefore before the court admissible hearsay evidence of Mr Sidoli informing Sovereign. This dispute of fact could not be resolved on a summary judgment application. If the matter went to trial, L&I could require Mr Sidoli's attendance to give evidence.
27. The parties' submissions should therefore be considered on the basis that, for the purposes of this appeal, Sovereign was informed of L&I's reason for the reduction from 66 to 60 Residential Units and the change of annexed plans. Whether this makes any difference to the result I shall consider later.
28. The fourth ground of appeal is that the judge gave insufficient weight to the distribution of risk as between the parties. It was Sovereign's obligation to make the application for Prior Approval for the purposes of the First Trigger Event, if it wished to receive the agreed overage payment contingent on such Approval. As owner and seller of the Property, it had the knowledge and access to enable it to draw plans that would ensure its viable development for residential use. The effect of the judge's decision was to shift to L&I the risk that it could not be developed as 60 Residential Units, without any abatement of the benefit to be received by Sovereign.
29. These grounds must, of course, be considered together. It would not be the right approach to reach a conclusion on the first ground and then consider whether it was affected by the points raised by the other grounds.
30. As a preliminary matter, it is right in my view to stress, as the judge did and as Mr Myers did in his submissions on behalf of Sovereign to this court, that the regime for planning and development consent and the regime surrounding building regulations are entirely separate in their purpose, legislation and enforcement.
31. The Trigger Events for overage payments under the Amended OA are clearly and expressly concerned with planning and development consent. Moreover, the First Trigger Event is expressly concerned with change of use. The trigger is the receipt of a Prior Approval, defined by reference solely to prior approval under the Permitted Development Order. As earlier explained, that Order is concerned, so far as relevant to the Amended OA, only with change of use for which the Order itself gives permission, subject to the four matters itemised in paragraph O.2 in Part 3 of Schedule 2 to the Order. Neither those four matters nor any other provisions of the Order are concerned with compliance with Building or any other Regulations.
32. There is no mention in the OA of compliance with Building Regulations or with any other requirements that might need to be satisfied before the Residential Units could be constructed. If it had been intended that the First Trigger Event should require any such compliance, it is in my view almost certain that the parties would have spelt it out. Both parties are experienced developers. (L&I itself is part of a group that by its own account specialises in office to residential conversion under permitted development rights and that in February 2016 owned and managed 1,000 residential units, with a further 500 under construction). Both parties were advised by experienced solicitors. The agreements are complex and professionally drafted.
33. The trigger for the first overage payment seems clear, namely the receipt by L&I of a Prior Approval (as defined, by reference to the Permitted Development Order). Once received, there is no further step to be taken or event to occur before the relevant payment becomes due.
34. Against these considerations, the words "for residential use for sale or letting" in the definition of Residential Units appear to me to be an impossibly weak foundation for L&I's contention that Sovereign must also demonstrate that all 60 Residential Units were capable of being built, not only by reference to planning requirements but also by reference to Building and any other Regulations. Not only are those Regulations not mentioned, or even hinted at, but no mechanism is provided for determining the scope of this unspoken requirement and whether it has been satisfied. Mr Banner was driven to submitting that it would be for L&I to decide whether the requirement was satisfied, although there was no support for this in the express terms of the OA or the DoV.
35. Further, L&I's construction provides no explanation why the First Trigger Event should be defined (in the first part of paragraph (i)) as Prior Approval for a proposal for "60 Residential Units shown on the plans at Annexure 3". If L&I were right, then that provision is wrong, because the plans would not show 60 Residential Units. In my judgment, that would be an extraordinary reading of the provision. It is not, I think, a question of that part of the definition deeming the units shown on the plans to be Residential Units (as defined), but that those units meet the definition, as would 60 units shown on an alternative plan submitted by Sovereign for which Prior Approval was received.
36. By agreeing the First Trigger Event by reference to Prior Approval for the defined proposal, the parties have attached significant value to the receipt of such Prior Approval. L&I submits that such Prior Approval has no utility unless it relates to residential units that are capable of being built. That is not a proposition that can be derived from the terms of the agreements, which on an ordinary reading support the opposite proposition. Nor is it a self-evident proposition on which the court could rely for a different construction of the Amended OA. Sovereign submits that the receipt of Prior Approval is of significant value, because it entails the local planning authority being satisfied as to the four matters in paragraph O.2 in relation to a change of use of the Property to 60 residential units. An application to change the proposal to a different configuration of the units would not call that satisfaction into question, because the local planning authority would be bound by its public law duties to consider the application in a rational and consistent manner. While this submission appears reasonable, it is not necessary for present purposes to accept it as correct, because there is no basis for accepting L&I's submission that the receipt of Prior Approval has no value without also demonstrating compliance with Building Regulations.
37. While Mr Banner emphasised that the focus of the appeal was on the terms of the Amended OA, particularly the definition of the First Trigger Event, he relied also on the matters raised in Grounds 2 to 4 as supporting the construction on which L&I relies.
38. Under Ground 2, reliance is placed on the definition of the Second Trigger Event and on paragraph 4.5 of schedule 5 to the Amended OA.
39. The definition of the Second Trigger Event refers to Residential Units but does not refer to or incorporate a plan. It is submitted that this shows that reliance on Plan PD05 in the construction of the words Residential Units is misplaced. Those words should be construed in the same way in both definitions, which requires that reliance should not be placed, or only very limited reliance should be placed, on the plan referred to in only one of them. I do not follow the logic of this submission. The reference to a plan in the definition of the First Trigger Event cannot, on any normal principle of construction, be ignored when construing that definition. The presence of a plan in one definition suggests the contrary to L&I's submission. It suggests that Residential Units carry a meaning in both definitions that is consistent with the inclusion of a plan in one of them.
40. Paragraph 4.5 of schedule 5 to the Amended OA required Sovereign to use its best endeavours to procure from the architects the grant to L&I of a licence to use the plans annexed to the Amended OA. L&I submits that this shows that it was intended to use the plans in order to construct the 60 Residential Units, so supporting its construction of Residential Units. It would no doubt be helpful if L&I were able to use those plans but it is fanciful to think that the units would be built without a substantial number of detailed plans. In my view, this minor provision contained in a schedule, which committed Sovereign to no more than using its reasonable endeavours to procure the licence, sheds little or no light on the intended effect of the definition of the First Trigger Event.
41. Under Ground 3, L&I submits that the judge gave insufficient weight to the factual matrix. In this context, it relies on the change in the plan to exclude units on that part of the first floor occupied by Kanchans as storage space. For the reasons earlier explained, I will assume that Sovereign knew that L&I wished those units to be excluded because of its concerns about completing them within three years, as required by the change in the Regulations introduced in March/April 2016, although Sovereign had its own reasons for excluding them. I agree with the judge that this argument is faulty for the reason he gave in his judgment at [50]:

"The parties were clearly proceeding on the basis that the proposal could result in a Prior Approval and that the units shown on the plans (whether annexed to the OA or to the DoV) were Residential Units. It was precisely because L&I was proceeding on that basis that it perceived, on its version of events, the need to exclude the Kanchans storage space."

42. As Mr Myers submitted, there is much in the factual matrix that tells against L&I's construction. Relevant to this is Ground 4, under which L&I submits that the judge's decision placed the commercial risk on L&I when it more obviously should rest with Sovereign, as the owner of the Property and as the party, with its knowledge of the Property, best placed to draw the necessary plan. This ignores that L&I was a sophisticated developer with its own keen commercial interest in the successful development of the Property. That it would put itself in the position of being dependent on Sovereign, as the seller, to decide on a viable scheme of development is far-fetched. The plans to be annexed to the agreements were exchanged between the parties before the agreements were made. In answer to pre-contractual enquiries on planning and building regulations, L&I had been told to rely on its own enquiries of relevant authorities. Clause 27.1 of the sale contract provided:

"The Buyer acknowledges that, before the date of this agreement, the Seller has given the Buyer, and others authorised by the Buyer, permission and the opportunity to inspect, survey and carry out investigations as to the condition of the Property. The Buyer has formed its own view as to the condition of the Property and the suitability of the Property for the Buyer's purposes."

43. L&I was well able to satisfy itself on the viability of the scheme for 60 Residential Units shown in the plan before agreeing to it.
44. For all these reasons, I conclude that Warren J was right in the view he reached on the construction issue and I would dismiss the appeal against the order for summary judgment made by him.

Lady Justice Asplin:

45. I agree.