Scottish Court of Session Decisions

Pursuers: Currie QC, McIlvryde; Anderson Fyfe

Defenders: Martin QC, Mure; Dundas & Wilson CS

31 July 2009

[1] By a Lease dated 18 January and 11 February 1999, as varied by a Minute of Amendment dated 24 and 29 November 2001, the defenders (as landlords) let to the pursuers (as tenants) some 34.32 hectares of land ("the subjects") at East Waterside Farm, Cumbernauld, for a period of 50 years from the date of entry. The date of entry was 1 June 1999. In terms of clause 9 of the Lease, the pursuers were required to occupy and use the subjects for the development of a pay and play golf course and ancillary activities incidental thereto and for no other purpose whatsoever without the written consent of the defenders. The clause went on to provide that if the golf course was not developed within five years of the date of entry, or if the subjects ceased to be used for such purposes, the Lease would terminate with immediate effect. The Lease also contained a number of provisions placing obligations on the pursuers inter alia to install and maintain in good order a drainage system and to keep the subjects clean and tidy and free of materials injurious to the amenity thereof.

[2] By clause 18 of the Lease the pursuers were given an option to purchase the subjects during the currency of the Lease. That clause provided as follows:

"18.1 Subject to Clause 18.3 hereof at any time during the currency of this Lease [the pursuers] while they are tenants hereunder shall be entitled to purchase the subjects hereby let upon giving to the Landlords, if such option to purchase be exercised subsequent to the first year of let, not less than twelve months notice in writing prior to the proposed date of entry for the purchase ("the Option Date") of their intention to do so. ...

18.2 The price to be paid by [the pursuers] in terms of this Clause ("the Option Price") shall, if the Option to purchase is exercised within the first year of the period of let, be the sum of ONE HUNDRED AND THIRTY THOUSAND POUNDS (£130,000) STERLING. The Option Price, if the Option to Purchase is exercised subsequent to the first year of let, shall be equal to the full market value of the subjects hereby let as at the date of entry for the proposed purchase (as determined by the Landlords) of agricultural land or open space suitable for development as a golf course but, for the avoidance of doubt, shall be not less than the sum of 130k. In determining the full market value (i) the Landlords shall assume (a) that the subjects hereby let are in good and substantial order and repair and that all obligations of the Landlords and the Tenants under this Lease have been complied with, and (b) that the subjects hereby let are ready for occupation, and (ii) the Landlords shall disregard (a) any improvements carried out by the Tenants during the period of this Lease otherwise than in pursuance of an obligation [to] the Landlords, and (b) any damage to or destruction of the subjects hereby let."

Clause 18.6 makes it clear that the option is personal to the pursuers and not to any successors or assignees; and it is only exercisable by them so long as they are Tenants under the Lease.

[3] On 8 October 2007, the pursuers gave notice in terms of clause 18 of the Lease exercising their option to purchase the subjects. On 4 November 2008, the defenders accepted that that was a valid exercise of the option by the pursuers (subject to a small qualification which is of no present significance) and, having taken advice concerning the correct method of valuing the subjects in light of the terms of the lease and the surrounding circumstances, determined the full market value of the subjects as £5.3 million. That figure took into account the scope for residential development on the subjects, the area within which they lay having recently been designated in the draft Local Plan as suitable for housing development. The pursuers dispute the basis upon which that valuation was made.

[4] The matter came before the court for debate. The issue between the parties is a narrow one of construction, namely: whether, in determining the Option Price to be paid by the pursuers in terms of clause 18.2, the defenders were entitled to take into account inter alia the development potential of the land; or whether the terms of that clause required them to assess the market value of the land for use only as a golf course. If the defenders were entitled to take the development potential into account, their valuation of £5.3 million is not challenged. If, on the other hand, they were not so entitled, it is agreed that that valuation is flawed and that the defenders are required to determine the price afresh in accordance with the clause. Parties are agreed as to the appropriate disposal in terms of the conclusions of the summons and the Counterclaim, depending upon how the clause is to be construed.

[5] Where, as here, the option to purchase was exercised after the first year of the Lease, the mechanism for fixing the Option Price is that set out in the second and third sentences of clause 18.2. In considering that part of the clause for the purpose of this dispute, certain parts of the wording within it can safely be disregarded. Thus, in setting out, below, the relevant parts of the clause, I omit the provision that the Option Price shall be not less than £130,000. I also omit, as irrelevant to the question of construction, the reference to the date of entry. Further, it is agreed that the words in parenthesis - "(as determined by the Landlords)" - are misplaced (they ought to be in close proximity to "the full market value"); and I shall also leave them out, though it is important to note that they indicate that it is the landlords themselves who fulfil the role of valuer for the purpose of the clause. The mechanism, in its essentials, as applicable to the present circumstances, is therefore as follows:

"The Option Price ... shall be equal to the full market value of the subjects hereby let ... for the proposed purchase ... of agricultural land or open space suitable for development as a golf course ... . In determining the full market value (i) the Landlords shall assume (a) that the subjects hereby let are in good and substantial order and repair and that all obligations of the Landlords and the Tenants under this Lease have been complied with, and (b) that the subjects hereby let are ready for occupation, and (ii) the Landlords shall disregard (a) any improvements carried out by the Tenants during the period of this Lease otherwise than in pursuance of an obligation [to] the Landlords, and (b) any damage to or destruction of the subjects hereby let."

[6] In construing this part of the clause, attention was focused on four particular matters: (1) that the Option Price is to be equal to "the full market value of the subjects"; (2) that the proposed purchase is of agricultural land or open space "suitable for development as a golf course"; (3) that the determination of the full market value requires certain assumptions to be made concerning the condition of the subjects and the tenants' compliance with their obligations under the Lease; and (4) that the determination of the full market value also required certain matters to be disregarded, in particular any improvements carried out by the tenants otherwise than in pursuance of their obligations under the Lease. It is convenient to refer to the matters in (3) and (4) as "assumptions" and "disregards".

[7] Mr Martin QC, who appeared for the defenders, placed emphasis on the words "the full market value" which appeared twice in the clause. This meant what it said, and was unrestricted. Subject to taking into account the assumptions and disregards, the valuer had to determine the full market value of the subjects. That obviously meant that, where appropriate, he had to take into account the possibility of planning permission for residential development. The words "for the proposed purchase ... of agricultural land or open space suitable for development as a golf course" did not mean that he was required to value the subjects for use only as a golf course. Had that been the intention of the clause, appropriate wording could have been used to make that clear. In this context he referred me to the decision of the Court of Appeal in Griffiths v W.E. and D. T. Cave Ltd. (1998) 78 P&CR 8. He also referred to McCall's Entertainments (Ayr) Ltd. v South Ayrshire Council (No.1) 1998 SLT 1403. The words used here simply described the physical state of the land which the landlords had to value in accordance with the clause. It was to be assumed to be undeveloped land. Further, under reference to s.74 of the Local Government (Scotland) Act 1973, Mr Martin submitted that a local authority was not entitled, without the consent of the Scottish Ministers, to dispose of land for a consideration less than the best that could reasonably be obtained. In that connection, he referred to John Findlay v West Lothian Council [2007] RVR 263. A relevant factor to take into account in construing the clause, therefore, was that the defenders would require to keep open the possibility of obtaining a price for the land which took account of all possibilities, including the possibility of commercial or residential development in the future.

[8] For the pursuers, Mr Currie QC pointed out that the word "disposal", in s.74 of the 1973 Act, referred not only to a sale but also to the grant of the lease and the option to purchase: c.f. East Lothian District Council v National Coal Board 1982 SLT 460 and Trustees of the Chippenham Golf Club v North Wiltshire District Council (1992) 64 P&CR 527. There were, he submitted, no averments in the Defences to the effect that the grant of the option in 1999 contravened the 1973 Act. The onus was on the party seeking to impugn the disposal to show that in the particular case it contravened the Act: see Standard Commercial Property Securities Ltd v Glasgow City Council 2007 SC (HL) 33 at paras.42, 62 and 74, and Stannifer Developments Ltd v Glasgow Development Agency 1999 SC 156, at 162-3. The defenders' submission that clause 18.2 should be construed so as always to produce the highest value should be rejected. There was little assistance to be derived from the case of Griffiths. The court was there concerned with a very different clause which required the valuer to take all the circumstances into account; and, further, the words sought to be relied upon in that case to restrict the scope of the valuation could be given some content short of that. In the present case the valuer was being asked to assume that the purchase was for development as a golf course. The physical state of the site was dealt with in the assumptions and disregards in the following sentence. The words "for the proposed purchase ... of agricultural land or open space suitable for development as a golf course" directed the valuer to assume that the land must be used in that way. There were no averments that at any time either party contemplated the possibility that the land might have some development value other than that of the proposed golf course. On a plain reading of the clause, the obvious meaning was that the valuer had to assess the full market value of the subjects on the basis that they were to be used as a golf course.

[9] I accept, of course, Mr Martin's main point, that the Option Price is to be equal to the "full market value". But that is not the end of the argument. In every case, one has to ask: the full market value of what? In the present case, the answer provided by clause 18.2 is that it is the full market value of the subjects for the proposed purchase of land suitable for development as a golf course. Suitability for development as a golf course does not, in itself, necessarily mean that that is the only purpose for which the land may be developed and used, or the only future use to be taken into account by the valuer. But in the present case, it seems to me that it is a clear pointer that this is the sole use to which the valuer (in the present case, the defenders) must have regard when assessing the full market value of the subjects. I say that for these reasons. The option to purchase is contained in the Lease. In terms of the Lease, the subjects were let to the pursuers for the purpose of development of a pay and play golf course and ancillary activities incidental thereto "and for no other purpose whatsoever without the prior express written consent of the Landlords"; under penalty, in clause 9, that, if the golf course was not so developed within five years from the date of entry or if the subjects were used for some other purpose, then the Lease would terminate with immediate effect. That, of course, was an obligation which persisted only for the duration of the Lease and did not apply once the Lease had come to an end by reason of the pursuers exercising their option to purchase. Nonetheless, it suggests that the parties contemplated that that would be the use to which the subjects would be put for the foreseeable future. It does not suggest that the parties had in mind the possibility of residential or other development on the site. That being so, one is driven to ask: what was the purpose in inserting, in clause 18.2, the fact that the proposed purchase was for development of the land as a golf course, if it were not to restrict the assumed use by reference to which the subjects were to be valued. Mr Martin argued that the words were inserted as a physical description of the subjects upon which the valuer was required to proceed. In other words, it was telling him that he should proceed upon the basis that the land had not, as yet, been developed as a golf course. I do not accept this argument. It seems to me no make no sense. If the valuer was required to take into account other uses for the land than its use as a golf course, for example the possibility of residential development there, it would be of little interest to him whether or not the golf course had yet been created on the land. And in any event, the meaning suggested by Mr Martin, namely that the valuer should treat the land as undeveloped, is directly contrary to one of the assumptions in the following sentence, i.e. the assumption that the tenants have complied with all of their obligations under the Lease. On this construction, if the option to purchase is exercised after five years or more, these words require the valuer to assume, for the purpose of his valuation, that the land has not yet been developed as a golf course; whereas the assumption that the tenants have fulfilled their obligations under the Lease requires the valuer to assume that the land has indeed been developed as such. The court will try to avoid giving a meaning to one part of a clause which is inconsistent with another part.

[10] In those circumstances, it seems to me that the obvious meaning of the words is that the full market value is to be assessed by reference to the use of the subjects as a golf course.

[11] I was not persuaded that the case of Griffiths was capable of bearing the weight which Mr Martin sought to place upon it. The circumstances of that case were somewhat singular. The option to purchase arose as part of a compromise of differences between Mr Griffiths, a director and shareholder in the company ("Cave"), and the other directors. Cave was given an option to purchase Mr Griffiths' interest in the land; and, as part of the option agreement, Cave was required to use all reasonable endeavours to obtain planning permission for building or other development on all or part of the land in question. In terms of clause 2.2, there were two ways in which the purchase option could be exercised. The first was that the option could be exercised at any time after the grant of planning permission. The second was contingent upon certain events unrelated to the question of planning permission. The price payable was governed by a formula in clause 2.4. In the case of the first option, the price was to be 16% of the net profit of the company, net profit being defined as the open market value of the land less various sums. In the case of the second option, the price was to be 16% of the open market value of the land "by reference to the existing agricultural use subject to the agricultural tenancy". Clause 3 required the price to be determined (failing agreement) by a chartered surveyor who was to "have regard to all the circumstances of the situation, including the specific terms of this agreement ...". It was argued for the company that the words in clause 2 ("by reference to the existing agricultural use subject to the agricultural tenancy") required the value to be assessed as agricultural land subject to the tenancy and not by reference to the possible value derived from potential development. That argument failed. As I read the judgements in the Court of Appeal, the court was persuaded that those words in clause 2 had some meaning other than one which limited the scope of the assessment of the open market value of the property. They were not necessarily otiose. It might also be said, as Mr Currie emphasised, that the wording of clause 3 required the surveyor to have regard to "all the circumstances of the situation", including (and therefore, by implication, not limited to) the reference to agricultural use. Mr Martin argued that if those words in that clause did not limit the scope of the assessment of open market value, then neither should the wording in clause 18.2 in the present case. I do not accept this argument. Quite apart from the general point that expressions used in a contract must be construed in the context of the particular contract as a whole, it seems to me that there is an important distinction between the two cases. In Griffiths, the court was satisfied that a meaning could be given to the words in question which did not impact upon the basis of assessment of the open market value. In the present case, by contrast, the only meaning suggested by Mr Martin is one which, at best, contradicts one of the assumptions in the next sentence in clause 18.2. For those reasons, I do not think that in this case assists the defenders.

[12] Nor do I think that the defenders get any assistance from s.74 of the 1973 Act. I am prepared to assume for the purpose of this argument that the parties had in mind that the defenders were obliged in terms of the Act not to dispose of the land for a consideration less than the best that could reasonably be obtained. I must, therefore, assume that in agreeing the terms of the option to purchase, the defenders would have sought to achieve the best consideration that they could. It does not, however, follow that they must have intended to frame the terms of the option in such a way that it always allowed development value to be taken into account. Nor does it follow that the tenants, in agreeing the terms, must in some way be taken to have assumed that the defenders had this in mind. The defenders make no averments of any circumstances existing in 1999 or 2000 which would point to the construction for which they now contend. For all that is said in the pleadings, the defenders might reasonably have thought, in 1999 or 2000, that granting an option to purchase at a price referable to the use of the subjects as a golf course provided the best opportunity of procuring the Lease on the terms and at the rent on which it was procured. Absent any averments in the Defences, I must assume that they considered the matter properly and acted in accordance with their statutory obligations; but I cannot assume that granting an option to purchase the subjects at a price fixed by reference to use as a golf course would necessarily have put them in breach of that duty.

[13] For these reasons, I am satisfied that the arguments for the pursuers are to be preferred. In those circumstances, parties were agreed that I should sustain the first, second, third, fourth and sixth pleas in law for the pursuers and grant decree de plano in terms of the first, second, third, fourth and sixth conclusions of the summons. I shall also sustain the pursuers' plea to the relevancy of the averments in the counterclaim and dismiss the counterclaim. I was not addressed on the question of expenses. Further, I raised during the hearing the question whether, if I came to this conclusion, I should continue the cause to allow parties to seek the assistance of the court in the mechanism for ascertaining the full market value of the subjects. I therefore propose to put the case out By Order so that these two matters can be discussed; but if parties consider that it is not necessary to have any further hearing they can make the appropriate application informally to the clerk of court.