Act: Bartos; MBM Commercial

Alt: P. G. Davies; Archibald Campbell & Harley WS

15 December 2009

1. Facts

[1] By missives dated 24 April 2003, the pursuers agreed to sell to the defenders four acres of land described as the "Subjects", which were surplus to the requirements of their linoleum factory in Kirkcaldy. The Subjects were hatched in blue on a plan attached to the missives and lie to the south of the main railway line which runs broadly east to west through the town. The price of £1,000,000 was payable upon the date of entry. That date was specified as occurring 28 days after the purification of a suspensive condition that the defenders obtain outline, and then detailed, planning permission for the development of a supermarket over the Subjects and "Adjoining Subjects (FE)", owned by Fife Enterprise. The Adjoining Subjects (FE) were outlined in red on the plan and lie immediately to the south of the Subjects.

[2] The pursuers retained land on the north side of the Subjects, across the railway line, termed "Adjoining Subjects (Sellers)". They wished to retain flexibility in relation to the potential commercial development of that land. That wish was expressed in the missives. They therefore provided in the missives that they could exercise a veto over any application for planning permission made by the "purchasers" in respect of the Subjects and the Adjoining Land (FE), which might adversely affect the value and/or the development prospects of the Adjoining Land (Sellers). Although "purchasers" was defined for general purposes as meaning only the defenders, in respect of this particular clause it extended to their "nominees, any subsidiary or holding company", and to a Mr Manclark and any company in which he, or certain of his close relatives, had more than a five per cent shareholding.

[3] The missives provided that the condition of obtaining planning permission might be waived by the defenders. This was done on 28 March 2008, thereby creating an entry date of 25 April. The dispute between the parties has arisen because of a failure to agree the nature of the title to be given by the pursuers to the defenders standing the terms of clause 10 of the missives. This stipulated:

"The purchasers shall be prohibited in all time coming from developing the Subjects and/or the Adjoining Subjects (FE) for residential purposes. At settlement, the Purchasers and the Sellers shall execute and register or procure that there is executed and registered a Deed of Conditions...which has the effect of validly inserting this restriction on use into the title to the Subjects and such part of the Adjoining Subjects (FE) as shall have been acquired by the Purchasers on or prior to such date and which shall include the Adjoining Subjects (Sellers) within its scope as the dominant tenement. Thereafter the Purchasers shall be prohibited from acquiring any part of the Adjoining Subjects (FE) as have not been acquired by such date without first agreeing and effecting an extension of such Deed of Conditions so as to validly insert the aforesaid restriction on use within the title to such part of the adjoining Subjects (FE) as is then to be acquired in a manner as is enforceable by the proprietors from time to time of the Adjoining Subjects (Sellers)..."

"Purchasers" under this clause extended to include the same persons as had been specified in relation to the planning permission. Clause 10.2 provided that the defenders would indemnify the pursuers in respect of any breach of the undertakings in clause 10.1 by "any party".

2. The Lord Ordinary's Determination

[4] Before the Lord Ordinary, the pursuers had maintained that clause 10.1 required the insertion of real burdens into the titles: (a) prohibiting the use of the Subjects for residential purposes; and (b) prohibiting the proprietors from acquiring the Adjoining Subjects (FE) without inserting a similar condition into their titles. The defenders countered with the argument that the obligation was personal to themselves and the specified "connected" persons and did not apply to successors in title.

[5] Under reference to the Opinion of Lord Drummond Young in Emcor Drake and Scull v Edinburgh Royal Joint Venture 2005 SLT 1233, the Lord Ordinary first set out seven canons of construction as follows:

"[13] First, a contractual provision must be construed in the context of the contract in which it is found. The contract is construed as a whole and, if possible, all the provisions of the contract should be given effect. Secondly, a contract must be construed objectively, according to the standards of a reasonable third party who is aware of the commercial context in which the contract occurs. Thirdly, a commercial contract must be given a commercially sensible construction; a construction which produces a sensible result should be preferred over one which does not. This means that when a court is faced with competing constructions, it should consider which meaning is more likely to have been intended by reasonable businessmen. Fourthly, ...in construing a formal commercial contract, which lawyers have drafted on behalf of each of the parties, the court would normally expect the parties to have chosen their words with care and to have intended to convey the meaning which the words they chose would convey to a reasonable person. Fifthly, ...the Court must be alive to the position of both parties and to the possibilities (a) that the provision may represent a compromise and (b) that one party may have made a bad bargain. ...Sixthly...the parties must give effect to the parties bargain and must not substitute a different bargain from that which the parties have made. Seventhly, it is permissible... to have regard to the circumstances in which the contract came to be concluded for the purpose of discovering the facts to which the contract refers and its commercial purposes, objectively considered...".

[6] The Lord Ordinary thereafter preferred the pursuers' construction for six reasons. First, he held (para [15]) that it was the commercially sensible construction. In particular, he reasoned:

"The context was the sale of land in which the seller sought to protect the development value of the retained land. While the purchaser had a clear interest in limiting the scope of the restriction on the use of the purchased land, the defenders' construction would give the sellers very little protection".

Secondly, the Lord Ordinary considered (para [16]) that the language used in the clause supported the view that the parties had in mind a longer term restriction. Thirdly, his construction did not involve re-writing the contract. The phrase "this restriction on use" was a reference to the prohibition itself and not to the parties prohibited. Fourthly, the first sentence was not otiose, given the indemnity provision in clause 10.2. Fifthly, the extended definition of "purchasers" in the clause had a commercial rationale in that clause 10.2 provided the pursuers with a remedy against the defenders should any of the connected persons breach the prohibition. Finally, the real burden, which was proposed by the defenders, was a very unusual one.

[7] Accordingly, the Lord Ordinary, in his interlocutor of 26 March 2009 "declared and decerned in terms of the fourth conclusion"; the terms of that conclusion being that:

"...the Defenders, acting reasonably, are obliged to agree that the terms of the Deed of Conditions...shall impose a real burden on the subjects...that the subjects...shall not in all time coming be developed for residential purposes".

3. Submissions

[8] The defenders lodged a written argument, which was expanded upon in oral submission. The essence of their position remained that all that clause 10.1 required the defenders to do was to agree to a prohibition applicable only to the defenders and the connected persons. Thus the first sentence set out the prohibition, which was restricted to the "purchasers" in the extended sense. The second sentence provided that it was this prohibition, so restricted, that was to be inserted in the Deed of Conditions. This was the plain meaning of the words used in the context of the missives as a whole (Bank of Scotland v Dunedin Property Investment Co 1998 SC 657). This prohibition required to go into the Deed, rather than rest upon the missives, because the missives were not binding on the connected persons. The clause had been negotiated between the parties and it contained a careful definition of the nature of the obligation, restricting it to "purchasers" as specifically extended. Both parties' constructions made commercial sense and neither result was absurd. The Court had to bear in mind that the clause might be a compromise or that one party may have made a bad bargain (Credential Bath Street v Venture Investment Placement 2007 CSOH 208, Lord Reed at para [24]). If the clause had been intended to apply to successors in title then it would have said so. It was accepted that the defenders' version of the real burden was unusual but the pursuers were now content that the subsidiary burden, which prohibited the "purchasers" from acquiring the Adjoining Subjects (FE) without entering into a similar Deed of Conditions, should apply only to the defenders and the connected persons.

[9] The pursuers had also lodged a written argument, but this was understandably short, adopting, as it did, the Lord Ordinary's reasoning as argument. However, it was submitted, at least initially, that the guiding principle was to ascertain what the words in the clause would mean to a "reasonable person" who was aware of the background to the transaction and the input of the lawyers (Investors Compensation Scheme v West Bromwich Building Society 1998 1 WLR 896, Lord Hoffman at 912; Bank of Credit and Commerce International v Ali [2002] 1 AC 251, Lord Hoffman at 269 ; Bank of Scotland v Dunedin Property Investment Co (supra), Lord President (Rodger) at 661). If there were two competing constructions, the test was which would be likely to be intended by reasonable businessmen (Emcor Drake and Scull v Edinburgh Royal Joint Venture (supra), Lord Drummond Young at para [13]) The Lord Ordinary had adopted the correct canons of construction. Giving the words their ordinary meaning, the "restriction on use" to be inserted into the title in terms of the second sentence in clause 10.1 was that referred to in the first sentence, i.e. a prohibition "in all time coming" from developing for residential purposes. If it had been intended to restrict the prohibition to the purchasers, that too would have appeared in the second sentence. Even if the defenders' construction was one available on the plain meaning of the words, it was not commercially sensible once the background was looked at. It could easily be avoided by a sale to a third party. The pursuers' construction was consistent with their aim of preserving the development value of their retained land. This would be lost on the defenders' construction. Finally, it was of some consequence that the burden proposed by the defenders was an unusual one, even if its validity did not arise for determination in this process.

4. Decision

[10] The context of clause 10.1 is that it appears in a formal, that is to say attested, Missive of Sale of heritable property. The Missive was drafted by experienced law agents for commercial clients. That context is important and the contract must be construed against that background. But a search for a meaning which might be attached to the clause by the fictitious "reasonable person" (Investors Compensation Scheme v West Bromwich Building Society (supra), Lord Hoffman at 912) or "reasonable businessman" (Emcor Drake and Scull v Edinburgh Royal Joint Venture (supra), Lord Drummond Young at para [13]) may prove elusive, given that neither may be able to make much of the clause, as a matter of plain English, since it uses at least some technical legal language.

[11] In searching for the meaning of words in a contract, it is difficult to find a better starting place than that advocated by the Lord President (Rodger) in Bank of Scotland v Dunedin Property Investment Co (supra) (at 661), quoting Lord Mustill in Charter Reinsurance Co v Fagan [1997] AC 313 (cf Credential Bath Street v Venture Investment Placement (supra) Lord Reed at para 19 et seq). Lord Mustill said (at 384):

"...most expressions do have a natural meaning, in the sense of their primary meaning in ordinary speech. Certainly, there are occasions where direct recourse to such a meaning is inappropriate. Thus, the word may come from a specialist vocabulary and have no significance in ordinary speech. Or it may have one meaning in common speech and another in a specialist vocabulary; and the content may show that the author of the document in which it appears intended it to be understood in the latter sense. Subject to this, however, the inquiry will start, and usually finish, by asking what is the ordinary meaning of the words used".

[12] The context in which an expression is found will, almost inevitably, colour its meaning. So it is in this case. The words in clause 10.1 must be given their ordinary meaning, except where it is apparent that they are being used in a sense which is appropriate to the sale of heritage for development purposes. In the latter event, the court should assume that the parties intended to use that particular sense. If the meaning of the whole clause is plain from this exercise, then there the matter finishes without the need to address the many other canons of construction, which can be brought into play in the event of ambiguity in, or uncertainty of, the meaning of the language selected by the parties or where a mistake in expression is readily identifiable.

[13] The Court has no difficulty in interpreting clause 10.1 in this manner. Seen in the context of formal missives, the second sentence provides that the parties are to execute and register a "Deed of Conditions" containing "this restriction on use into the title". These expressions can be regarded as terms of art in the context of conveyancing and planning law. The search then is simply to identify what the meaning of "restriction on use" is in this context. It is contained in the first sentence and is a prohibition "in all time coming" on development "for residential purposes". In conveyancing and planning, "restriction on use" and "use restriction" do not normally, without further elaboration, focus on the persons on whom the restrictions are imposed but on the use restricted; restrictions run with the land and not the person. For this reason alone, the pursuers' construction must be seen as the correct one and this reclaiming motion must fail.

[14] Were it necessary to go on to consider the canons of construction enumerated by the Lord Ordinary, support for this conclusion can be found. The construction advanced by the pursuers is "commercially sensible". That of the defenders is not. It is plain, from a reading of the missives, that the pursuers had set out to protect the development value of their retained land across the railway line; currently operated as a linoleum factory. Were a residential development to be permitted on the other side of the railway, it is not unreasonable to suppose that the prospects for developing the manufacturing capacity of the factory might be limited. It is clear that the pursuers saw matters in that light and attempted to protect themselves accordingly. The language employed had just that effect. If the defenders' construction of clause 10.1 were correct, whereby it resulted solely in an obligation (whether real or personal) enforceable against a very limited class of persons, the obligation would be easily defeated by the disposition of the Subjects to someone not within the category of connected persons. Seen in this light, clause 10.1 would serve little practical purpose. [15] In addition, the pursuers' contention about the nature of the real burden proposed by the defenders is not without force. A condition prohibiting a particular type of use, including the building of houses, and running with a parcel of land next to a dominant tenement, is a well recognised type of real burden. It is the type of burden which parties might be expected to create. A real burden which applies only to certain persons (including relatives of an individual) is, putting it no higher for present purposes, unusual. It is one which might be expected to provoke hesitation in the minds of a conveyancer were it to be inserted without great precision in a missive for the sale of heritage.

[16] The Court will refuse the reclaiming motion and adhere to the Lord Ordinary's interlocutor of 26 March 2009. It was agreed that the expenses of the reclaiming motion would follow success and these must be awarded in favour of the pursuers.