England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		29 February 2008

Before: Mr. PHILIP SALES QC (SITTING AS A DEPUTY JUDGE OF THE HIGH COURT) :

1. This is a claim for a declaration of the proper construction of a clause in a contract for the sale of property at Treyarnon Bay Hotel in Padstow, governing the circumstances in which the purchaser of that property would have to make additional payment to the vendor above the basic purchase price in the event that the purchaser obtained planning permission to develop the property in a particular way. The payment due in such circumstances has been referred to by the parties as "overage".
2. In January 2003, the Defendants, Mr and Mrs Kenley, were the owners of the Treyarnon Bay Hotel. They had obtained planning permission from the local planning authority, North Cornwall District Council, to construct five holiday cottages at the rear of the hotel. However, they wished to retire from the hotel business and were looking to sell the hotel. By a conditional sale and purchase agreement dated 23 January 2003 ("the Agreement") Mr and Mrs Kenley (and a company they controlled, which has since been dissolved) agreed to sell their interest in the hotel to Oakleigh Property Developments Ltd ("Oakleigh"), with a view to the development of the property by Oakleigh. Mr and Mrs Kenley were to retain part of the land they owned around the hotel, transferring the remainder to Oakleigh under the Agreement. It is common ground between the parties to this action that, for reasons which I do not need to go into, the Claimant, Mr Walker, now stands in the shoes of Oakleigh for the purposes of enforcement of the Agreement.
3. The price for the property to be sold under the Agreement was £1,010,000. The obligation of Oakleigh to pay that price and buy the property was conditional upon certain matters, including satisfaction of a "Planning Condition" set out in Schedule 2 to the Agreement, namely that Oakleigh was able to obtain planning permission for the "Development", defined in the Agreement as:

"the development of the Property for the construction of not less than 16 three bedroom units of permanent residential occupation throughout the year for sale on the open market without limiting the class of occupiers, and without any requirement to carry out any works (or to pay or contribute to the costs of any works) outside the Property."

4. Under the Agreement, planning permission for the Development had to be obtained by the "Longstop Date", being 22 January 2004 "or such later date as the Sellers shall approve to enable a Planning Appeal or Challenge Appeal to be determined, such approval not to be unreasonably withheld or delayed".
5. Schedule 2 to the Agreement included various terms governing what was to happen in relation to applications for planning permission for the Development. Paragraph 4 of that Schedule addressed what should happen in the event the local planning authority required a planning agreement to be entered into pursuant to s. 106 of the Town and Country Planning Act 1990 or other statutory provisions, as a condition for the grant of planning permission. Paragraph 4.3 provided:

"In the event that

4.3.1 the Seller has applied for planning permission for the development of a second residential unit on the retained part of [the relevant plot of land] and

4.3.2 the Planning Agreement envisaged by this paragraph 4 contains any condition which prohibits that development,

the Seller shall not be obliged to enter into the Planning Agreement and the parties shall each use reasonable endeavours to negotiate and agree a mutually acceptable solution with each other, and as necessary [the planning authority]."

6. I will turn later in this judgment to assess the significance of the language used in these provisions of the Agreement. At this point, however, it is relevant to note that it is clear that the commercial interest of Oakleigh was to acquire the property for development by way of building units for permanent residential occupation throughout the year, rather than by way of building holiday flats. Planning permission already existed for some development of the property by way of building holiday units, but under the Agreement Oakleigh would only become bound to buy the property if it obtained planning permission for permanent residential units. It seems reasonable to infer that Oakleigh's assessment was that permanent residential units could be sold, so as to realise a better return than could be achieved from the hotel with holiday flats.
7. Oakleigh made three applications for planning permission in relation to the property. The first was for a development to build 22 residential units, but after objection from the local Parish Council that this was on too large a scale it was withdrawn. The second application was for a development which involved demolition of the hotel, flats and café on the property, and re-development for 18 flats with access, parking and services. Permission was refused for that development by North Cornwall District Council. The third application was for a development which involved demolition of the hotel and other buildings, and re-development for five residential flats and thirteen flats with holiday restriction, with access, parking and services. Permission was also refused for that development. Oakleigh appealed to a planning inspector against both refusals of planning permission.
8. While those appeals remained pending past 22 January 2004, Mr and Mrs Kenley claimed that the Longstop Date under the Agreement had arrived, and that the Agreement should no longer be treated as binding. Oakleigh contended that the vendors had an obligation, acting reasonably, to extend the period before the Longstop Date was reached. This dispute led to litigation, in which Oakleigh sought a declaration that the Agreement remained on foot until after determination of Oakleigh's planning appeals.
9. Evidence was filed in those proceedings on behalf of Oakleigh, in which the first of Oakleigh's planning applications was described as being for a re-development to build "22 residential units", the second as a scheme for 18 units, and the third as a scheme for 18 units, "but subject to a 'holiday occupation' planning condition in relation to 13 of the flats". At the hearing before me, it was unclear whether Mr and Mrs Kenley had seen the documents setting out Oakleigh's planning applications. However, in light of the evidence filed in the legal proceedings it was accepted on their behalf that they did have notice that Oakleigh's second application related to 18 residential units without restriction as to the nature of the residential use to which they might be put (which would therefore allow for residential occupation on a permanent, year round basis), and that Oakleigh's third application related to a development of 5 potentially permanent residential units and 13 flats restricted to holiday occupation.
10. The legal proceedings were compromised before any substantive hearing took place, under the terms of a consent order dated 21 June 2004 which explicitly extended the Longstop Date under the Agreement. Paragraph 5 of the consent order provided as follows:

"The [Agreement] shall be read and construed for all purposes as if it contained the following additional clause –

'23. Overage.

23.1 If the buyer obtains planning permission to develop the property as residential flats, and carries out that development within a period of five years, then on the first sale of each flat the buyer shall pay to the seller the overage payment in respect of that flat.

23.2 The 'overage payment' means in relation to each flat the sum of one divided by the number of flats in the development multiplied by the sum of £100,000 PROVIDED ALWAYS that the total sum of £5,000 shall be deducted from the overage payment of the last flat to be sold, and if the overage payment on the last flat to be sold would otherwise be less than £5,000, the difference shall be deducted from the overage payment on the penultimate flat to be sold.

23.3 The buyer's obligation to make the overage payment shall be secured by a charge over the property, but on the sale of each flat the charge shall be discharged in relation to that flat, though remain unaffected over any other part of the property where it has not previously been discharged, and upon a sale of each flat the seller shall deliver to the buyer a certificate of discharge in relation to that flat or electronically notify to the Land Registry of the partial discharge of the charge.

23.4 The charge shall contain a proviso in the following terms: "The chargee hereby consents to the creation of any legal charge having priority over this charge, which is created for the purpose of enabling the property to be purchased and developed or to provide funding for that acquisition and development, and in favour of any such chargee covenants and declares that this charge shall stand subordinated to that later charge in all respects, as if a deed of subordination had been delivered to that lender, and further hereby irrevocably appoints the chargor as their attorney for the purpose of creating and delivering any deed of subordination necessary in order to carry this clause into effect".

23.5 The parties on completion shall apply to the Land Registry to enter a note on the charges register of the provisions contained in clause 23.4 above."

11. After the compromise of the proceedings on the terms of the consent order, the planning appeals were dismissed by the inspector. However, Oakleigh decided to waive the planning condition in the Agreement and proceeded then to complete the purchase of the property, with Mr Walker taking the transfer.
12. Oakleigh made a further application for planning permission to North Cornwall District Council, this time for "conversion, part demolition and extension of existing hotel, flats and care to 17 holiday apartments with access, parking, services etc." Planning permission for this development was granted by the District Council on 27 April 2005. The permission was granted subject to certain conditions and reasons, including the following:

"The development hereby permitted shall be used for holiday accommodation only and for no other purpose including any other purpose in Class C3 of the Schedule to the Town and Country Planning (Use Classes) Order 1987, or in any provision equivalent to that class in any statutory instrument revoking and re-enacting that Order. Reason: The site has the benefit of an extant consent for holiday development and it is considered that a mix of residential development and holiday development in such close proximity would be incompatible in planning terms, and due to the density of the proposed development and the lack of separate curtilages it is considered that unrestricted residential use is not appropriate in this instance."

13. The permitted development has been undertaken on the property and is now nearing completion.
14. The issue between the parties is whether Mr and Mrs Kenley, as vendors of the property, are entitled to receive an overage payment under clause 23 of the Agreement, as inserted under the terms of the consent order (see above). This turns upon whether the planning permission obtained by Oakleigh after it acquired the property was permission to develop the property "as residential flats", within the meaning of that expression as used in clause 23.1. Mr Walker, standing in the shoes of Oakleigh, denies that Mr and Mrs Kenley are entitled to any overage payment, for the reason that (he maintains) planning permission to develop the property for holiday apartments does not qualify as permission for its development "as residential flats".
15. In my judgment, on proper construction of clause 23.1 on an objective basis (see in particular Sirius Insurance Co. v FAI General Insurance [2004] 1 WLR 3251, HL, at [18]-[19] per Lord Steyn), the term "residential flats" does not include holiday apartments of the character for which Oakleigh obtained planning permission in April 2005: it was a term limited to flats which could be sold for use as permanent residences.
16. My reasons for taking this view of the meaning of clause 23.1 are as follows:

1) The immediate background to the Agreement in January 2003 was that planning permission had already been obtained for the construction of some holiday apartments on the property, but the definition of the "Development" in the Agreement by reference to "units of permanent residential occupation throughout the year", which was a necessary condition for Oakleigh to become bound to proceed to purchase the property, was a clear indication that Oakleigh's principal commercial interest was to develop the property by building units which were not limited to being used as holiday apartments;

2) The immediate background to the consent order and agreement on the terms of clause 23.1 was that, as all parties were aware, there were two applications for planning permission on foot which were under appeal: one for 18 flats without any indication of limitation of use as between full-time residential occupation and holiday use, and one for five such flats plus 13 flats subject to a "holiday occupation" planning condition. This again confirmed that Oakleigh's principal commercial interest was to develop the property by building units which were not limited to being used as holiday apartments. The form of the second application, in my judgment, also lent itself to a natural division in terminology as used by the parties between residential flats (in the sense that the flats could be used for full-time residential occupation) and holiday flats (in the sense that the flats could not be used for full-time residential occupation, but only for holiday occupation). In my view, therefore, against this background, the term "residential flats" in clause 23.1 falls most naturally to be construed as a reference to the former type of flat, but not the latter type;

3) By describing the flats to be covered by clause 23.1 as "residential flats", rather than simply as "flats", the parties clearly intended to delimit the type of flats which would be covered by the overage clause. The most obvious dividing line, in context, which the parties appear to me to have intended is that between flats available for full-time residential occupation and flats limited to holiday occupation;

4) Mr Bard, for Mr and Mrs Kenley, sought to suggest (in particular by reference to Owen v Elliott (Inspector of Taxes) [1990] Ch 786) that what was intended was a division between flats which could be used for residential accommodation, including for short term holiday use, and flats which might be used for other purposes. However, I consider that, as a matter of the natural use of language, the word "flat" itself connotes a place which can be used for residential accommodation (rather than rooms for use for other purposes, eg as business premises); it follows, therefore, that the use by the parties of the description "residential flats" in clause 23.1 was intended to narrow down that basic category, and to confine the application of that provision to the sub-category of flats which were available for full-time residential occupation. In that regard, it should be noted that the decision in Owen v Elliott arose in a different context from the present, and turned on the construction of the different phrase, "let by [the taxpayer] as residential accommodation". The word "accommodation" is naturally capable of including, for example, "office accommodation" (see p. 791F-G, per Leggatt LJ); so the use of the description, "residential", in that context drew the relevant dividing line between all forms of residential use on the one hand, and other forms of usage of accommodation on the other. But I do not consider that the natural meaning of the word "flat" supports application of the same approach in the present case. Moreover, I consider that Mr Bard's submission does not give proper weight to the commercial background against which the parties negotiated and agreed clause 23;

5) In addition, I consider that the natural meaning of the composite expression "residential flats" is that it refers to flats which the occupier would regard as their residence, which would not be a natural description of a holiday apartment;

6) Finally, in my view there is also force in the further submission made by Mr Wonnacott for Mr Walker, to the effect that the method of calculation of the overage payment set out in clause 23.2 indicates that the parties were concerned to provide for its application in relation to a particular type of flat, and that the type of flat contemplated did not include holiday flats. At the time the Agreement was entered into, planning permission already existed in relation to the property allowing for the building of additional holiday apartments. It seems commercially unlikely that the vendors would have agreed to reduce the ordinary price of the property with such extant planning permission to take account of a risk that the purchaser might not carry that permission into effect, and commercially unlikely that the purchaser would have agreed to pay a full market price for the property with such extant permission and then an overage payment over and above that price related to the implementation of that permission (rather than taking the full benefit of such implementation for itself). These features of the commercial context suggest that the parties were concerned in clause 23 to make provision for payment of overage in relation to a development comprising different types of unit from those for which planning permission already existed. That impression is supported by the fact that the amount of the overage payment under clause 23.2 did not depend on the intensity of the development: it was set at, in effect, £95,000, however many flats were developed and sold. Therefore, if the Defendants were correct in their interpretation of clause 23.1, the full overage payment would have become due even if Oakleigh had eventually only obtained and implemented a planning permission equivalent to that which was already in place in January 2003 when the Agreement was first entered into. It does not appear to me to be plausible to suppose that the parties intended clause 23 to operate in such circumstances.

17. In explaining the reasons for my conclusion as to the proper construction of clause 23.1, I should also make it clear that I have considered and rejected the other arguments presented by Mr Bard for the Defendants. In particular,

1) Mr Bard placed reliance upon the fact that holiday apartments and full-time residential premises are both within the same general use class (namely, C3, "dwellinghouses") in the Schedule to the Town and Country Planning (Use Classes) Order 1987. However, in my judgment, the use of the term "residential flats" in clause 23.1 was not framed by reference to the categories of terms and concepts used in the 1987 Order, and the Order provides no relevant guidance as to the meaning of clause 23.1;

2) Mr Bard drew attention to the fact that the term used in clause 23.1 did not reflect the language used in the definition of "Development" in the Agreement ("units of permanent residential occupation throughout the year"), which he said was the language which the parties rightly chose when they wished to make it clear that they intended to refer only to flats which were available for full-time residential use. However, I do not consider that the definition of "Development" in the Agreement provides any clear indication which out-weighs the reasons I have given above for the construction of clause 23.1 which I think is correct. In clause 23.1, the parties did not use the same language or concepts as are employed in the definition of "Development". In particular, in clause 23.1 the parties use the term "flats" (which has the connotations I have referred to above) rather than the wider concept of "units"; and use the composite term "residential flats", rather than "residential occupation". In my view, the true significance of the definition of "Development" in the Agreement is as part of the commercial context in which clause 23.1 was agreed (indicating that the focus of the Agreement was upon development of residential flats, in the sense of flats available for full-time residential use), rather than as providing any clear textual indicator that clause 23.1 was intended to cover holiday flats within the concept of "residential flats";

3) Mr Bard also drew attention to the use of the term "second residential unit" in paragraph 4.3.1 of Schedule 2 to the Agreement, and submitted that the absence of the qualifying word "permanent" or equivalent indicated that, when the draftsman wished to use an adjective to cover both permanent residential use and holiday use of a property, he simply used the term "residential". He reminded me that by the terms of paragraph 5 of the consent order, clause 23 forms part of the same Agreement as this provision. However, in my judgment, paragraph 4.3.1 also does not provide any direct textual comparison with clause 23.1. Once again, the basic concept used in paragraph 4.3.1 is the comparatively wide notion of a "unit", in relation to which it makes sense to use the adjective "residential" to distinguish other forms of "unit"; but the same reasoning does not apply in relation to the term "residential flats" which is used in clause 23.1. Furthermore, the commercial context and objective of paragraph 4.3.1 of Schedule 2 are not comparable to those in relation to clause 23.1. I do not think that paragraph 4.3.1 provides any indication of the true interpretation of clause 23.1 which out-weighs the reasons I have given above for the construction of clause 23.1.

18. For all these reasons, I consider that the interpretation of clause 23.1 contended for by the Claimant is the correct interpretation, and that the Defendants are not entitled to any overage payment in respect of the development of the property for which Oakleigh obtained planning permission. I invite the parties to seek to agree the appropriate form of order in the light of this judgment.