Scottish Court of Session Decisions

Pursuers: Bartos; MBM Commercial

Defenders: Davies; Archibald Campbell & Harley, WS

26 March 2009

[1] The pursuers carry on industrial activity, manufacturing linoleum, in a factory in Kirkcaldy. In 2003 they decided to sell off surplus land near Victoria Road and Nairn Street ("the subjects") which is separated from their factory by a railway line. In order to protect their prospects of obtaining planning permission for residential development on the land nearby which they retained, the pursuers sought in the missives of sale to restrict the use to which the purchasers could put the land to be sold and also adjoining land which the purchasers might acquire. The questions which have arisen for debate in this case are the meaning and scope of the restriction on use which the pursuers and the defenders agreed in the missives of sale. The context of the debate is that the pursuers seek implement of the missives by requiring the defenders to pay £1 million in exchange for the title to the subjects. But completion of the transaction has been delayed because the parties cannot agree the terms of the real burden which will restrict the use of the subjects. This is because they disagree in their construction of the restriction in the missives.

The Missives of Sale

[2] By letter of offer and letter of acceptance, both dated 24 April 2003, the pursuers agreed to sell the subjects to the defenders in a conditional sale. The defenders, in return for certain option payments, acquired the right to purchase the subjects for £1 million and were protected by a suspensive condition that planning permission be obtained for a supermarket development. The site for the supermarket development included both the subjects and all or part of the adjoining land which Fife Enterprise owned and which parties described in the missives as "the Adjoining Subjects (FE)". The missives defined the development as development for the purposes of a supermarket development and, in that definition, expressly prohibited residential development on the subjects and on the Adjoining Subjects (FE).

[3] This prohibition and clause 9.2.1 were intended to protect the development potential and value of adjoining land which the sellers retained and which was referred to in the missives as "the Adjoining Subjects (Sellers)". Clause 9.2.1 obliged the purchasers to submit a draft planning application to the sellers. If the sellers considered that any element of the draft application was likely to affect materially and adversely the value and development prospects of the adjoining subjects which they retained, both parties were to use reasonable endeavours to agree amendments of the draft application. Failing agreement, they were to refer the matter to an independent expert. Clause 9.7.2 protected the sellers' interest in obtaining the purchase price for the subjects by prohibiting the purchasers from pursuing a planning application in respect of the Adjoining Subjects (FE) either on their own or with any land other than the subjects of sale. It provided that that prohibition would subsist both before and after settlement. The clause also contained an extended definition of "the Purchasers" which I set out in paragraph [6] below.

[4] Clause 9.3 gave the purchasers the right to waive the suspensive condition in clause 9.1 that they obtain planning permission for a supermarket development. The date of entry was defined in clause 1.1 to be twenty eight days after the purification or waiver of the suspensive condition. Clause 9.2.3 empowered either party to resile from the missives if the suspensive condition had not been purified or waived by the long stop date of 1 April 2008. Clause 11.1 prohibited the parties from assigning or otherwise disposing of their respective interests in the missives.

[5] The principal issue between the parties in this action is the construction of the restriction in clause 10 of the missives which had the heading "Title Matters". That clause provided:

"10.1. 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 in terms to be agreed between the parties (acting reasonably) which has the effect of validly inserting this restriction on use into the title of 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), with both parties being obliged to act reasonably in this respect. In the context of this Clause 10.1 the term "the Purchasers" shall have the meaning given it in the context of Clause 9.7.2."

I have emphasised in italics the passages which are central to the parties' submissions on the construction of this clause.

"10.2 The Purchasers shall free, relieve and indemnify the Sellers in respect

of all losses, costs and expenses and others arising out of any breach of the undertakings contained in Clause 10.1 by any party, including any economic losses sustained as a result of any resultant failure to receive any desired planning permission to carry out works on any part of the Adjoining Subjects (Sellers)."

[6] The meaning which clause 9.7.2 gave to the expression "the Purchasers" was as follows:

"Furthermore, in the context of this Clause 9.7.2, the term 'the Purchasers' shall apply not only to the Purchasers as designed herein [i.e. the defenders] but also to their nominees, any subsidiary or holding company of the Purchasers, designed as aforesaid, or any subsidiary or such holding company (as the term[s] 'subsidiary' and 'holding company' are defined within s.736 of the Companies Act 1985), to any company or organisation that James Manclark residing at Monkrigg, Haddington, EH41 4LB has an interest in equating to greater than 5% of the issued share capital and also to the said James Manclark as an individual and his spouse, partner or any child (on whose behalf you shall be deemed to act)..."

I will refer to those persons, other than the defenders, as "the connected persons".

The Waiver of the Suspensive Condition and the Disagreement over the Title Restriction

[7] The defenders waived the suspensive condition in clause 9.1 on 28 March 2008. As a result, the date of entry under clause 1.1 of the missives was 25 April 2008. Nonetheless, the parties have not settled the transaction because they have been unable to agree the terms of the Deed of Conditions envisaged in clause 10.1 of the missives. The pursuers prepared a draft Deed of Conditions in which the real burdens were (a) that the subjects should not in all time coming be developed for residential purposes and (b) that the proprietors of the subjects should not be entitled to acquire any part of the Adjoining Subjects (FE) without executing a further Deed of Conditions in similar terms in respect of that property. The defenders did not accept that this was the obligation which they had undertaken and amended the draft Deed of Conditions to restrict the prohibition to themselves and the connected persons.

[8] In short, the pursuers have argued that the missives created an obligation to restrict the use of the subjects and also any part of the Adjoining Subjects (FE) acquired by the owner of the subjects, whoever he might be. The defenders have contended that only they and the connected persons were to be so restricted, so as to allow them to sell the subjects to a third party, who would not be affected by the prohibition.

The Submissions of the Parties

[9] Mr Davies, for the defenders, invited me to pronounce decree in terms of the declarator in the counterclaim which articulated the defenders' interpretation of the scope of the agreed prohibition. His submission was that the restriction was set out in all of the words of the first sentence of clause 10.1 which I have emphasised in paragraph [5] above. The missives were a commercial contract which had been negotiated by skilled lawyers. The sellers and purchasers had competing interests and had reached a carefully framed compromise in the terms stated. As it was intended that the prohibition against residential development should apply to persons who were not parties to the missives, it was necessary to create a real burden. If the pursuers' interpretation of the restriction were correct, the restriction on "the Purchasers" in first sentence of clause 10.1 was otiose, because the Deed of Conditions would come into effect on settlement. The only purpose of the sentence taken as a whole was to define the restriction to be set out in the Deed of Conditions, including the parties to whom the restriction applied. The court should give effect to the words used and should not re-write the contract, particularly when the parties had acted on it. The pursuers' interpretation involved re-writing the contract as the burden would have to extend not just to the purchasers as defined but also to their successors. The defenders' interpretation was a compromise which had a commercial rationale for both the sellers and the purchasers. For the sellers, the condition had the benefit of discouraging the purchasers from abandoning the application for permission to develop a supermarket and waiving the suspensive condition, as it prevented the defenders and the connected persons from developing the land for residential purposes. It would thus prevent residential development, which might adversely affect the sellers' adjoining subjects, for a period of time. That might have been sufficient protection for the sellers. The purchasers benefited from the condition because, if they were not able to gain planning permission for a supermarket, they could still purchase the land and sell it to a third party for a good price. Mr Davies submitted that the burden which the defenders proposed in the Deed of Conditions was valid. While extrinsic evidence would be required to identify the restricted parties, that was not unusual in such burdens. He cited as an example the burden, which frequently appeared in the titles of tenemented property, allocating liability for common repairs by reference to rateable value.

[10] Mr Bartos, for the pursuers, submitted that the first sentence of clause 10.1 had the purpose of imposing a personal obligation on the defenders in relation to their actings and also the actings of the connected persons. If the defenders or one of the connected persons breached the restriction, the defenders were obliged to indemnify the pursuers under clause 10.2. It was the only restriction on them in relation to the subjects which would have effect after the waiver of the suspensive condition in clause 9.1 and before the Deed of Conditions created a real burden on the subjects. The second sentence was intended to create a prohibition of the development of the subjects for residential use, whoever was their owner. The words in that sentence, "this restriction on use", referred to the prohibition of residential development and not the parties prohibited. That was the natural and ordinary meaning of those words. The third sentence of the clause was designed to bring about a similar restriction in relation to any other part of the adjoining land owned by Fife Enterprise which was acquired at a later date. As clauses 9.2.1 and 10.2 showed, the context of the prohibition was the sellers' wish to protect the development prospects and value of the adjoining subjects which they retained. The prohibition was to be "in all time coming". If the defenders or the connected persons could sell the subjects to a third party who could develop them unrestricted by the prohibition, the sellers would have no significant protection; the defenders could waive the clause 9.1 suspensive condition and, having taken title within a month thereafter, sell on at any time. This was not a commercially sensible result. Mr Bartos also called into question the validity of the real burden which the defenders proposed. It purported to restrict not only the owners of the relevant land but also the connected persons whether or not they were owners. Such a burden was not praedial; it did not regulate the servient tenement: Professor Kenneth Reid, Stair Memorial Encyclopaedia, Volume 18, paragraph 391. It was inherently unlikely that parties had contracted for an invalid burden. Even if the burden were valid, it was highly unusual. By contrast the burden which was to be imposed on the pursuers' construction of the clause was a common one.

[11] Counsel were agreed on the principles which governed the interpretation of contracts. They referred me to Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657, Emcor Drake and Scull Ltd v Edinburgh Royal Joint Venture 2005 SLT 1233 and Credential Bath Street Ltd v Venture Investment Placement Ltd [2007] CSOH 208. Mr Bartos also referred to Callander v Midlothian District Council 1997 SLT 865 as an illustration of the commercial construction of a contract to create a servitude.

Discussion
[12] A summary in a judicial opinion of the legal principles which are applicable to the construction of a contract tends to concentrate on the principles which are relevant to the particular dispute which the judge is seeking to determine. In this case I am content to draw on and repeat parts of Lord Drummond Young's helpful summary in Emcor Drake and Scull (at pp.1237-1238) but to expand it by reference to dicta in the other cases to which I was referred in order to address the disputes in this case.

[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, expanding on Lord Drummond Young's summary, 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, in ascertaining what the parties must have meant 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. For those propositions see Credential Bath Street Ltd, Lord Reed at paragraphs 25-28 and 36-37. Sixthly, returning to Lord Drummond Young's summary, the court 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 in construing a contract 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. But regard may be had only to matters that were known, or ought reasonably to have been known, to both parties. Lord Drummond Young went on in paragraph 14 of his opinion to set out the qualifications and limitations on that seventh rule but, as those matters are not germane to this dispute, I do not record them.

[14] In this case the dispute is properly focused on the meaning of the words in the second sentence of clause 10.1, "this restriction on use". Is the restriction the whole of the first sentence, including the parties to be restricted, or is it only the second part of that sentence, namely the nature of the prohibition?

[15] I am persuaded that the pursuers' construction is to be preferred for the following reasons. First, it is a commercially sensible construction which would appeal to the reasonable man who was aware of the relevant background facts. 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 use of the purchased land, the defenders' construction would give the sellers very little protection. If it were correct, the purchasers could waive the suspensive condition in clause 9.1, settle the transaction twenty eight days later and immediately sell on to an unrestricted third party. While I am alive to the possibility that the sellers made a bad bargain, I am not persuaded that they did so in this case. There was a balancing of interests in the deal. The purchasers' interest was protected by the suspensive condition. If they failed to obtain planning permission for the supermarket, they could resile at the long stop date. If they did so, they would lose only the option payments and the cost of the application. I consider that the reasonable businessman would not be surprised by the commercial result of the bargain on the pursuers' construction of clause 10.1.

[16] Secondly, the language used supports the view that parties had in mind a longer term restriction. The prohibition in the first sentence was expressed as being "in all time coming". I recognize that the Land Tribunal's jurisdiction to vary title conditions under part 9 of the Title Conditions (Scotland) Act 2003 can undermine aspirations to have perpetual restrictions. But the language which the parties used does not point towards an agreement that there should be what might be a short term restriction which would fly off if the purchasers, having failed to obtain planning permission for a supermarket, went ahead with the purchase and sold on the subjects to a third party.

[17] Thirdly, the construction which I favour does not involve re-writing the contract. There is no need to insert the words "and their successors" after the words "the Purchasers" in the first sentence of clause 10.1 if the phrase in the second sentence, "this restriction on use", is construed as a reference to the prohibition itself and not to the parties prohibited. Fourthly, the first sentence is not otiose on the pursuers' construction. It binds the defenders and makes them liable under clause 10.2 for any actings of the connected persons which breach the prohibition. This contractual provision would cover the period between the settlement of the transaction and the registration of the Deed of Conditions. Even if the sentence had been otiose, that would not outweigh the other considerations so as to alter my view of the meaning of the clause. It is not uncommon for lawyers to put words into detailed commercial contracts which are not strictly needed to give effect to the parties' intentions.

[18] Fifthly, the extended definition of "the Purchasers" in clause 10.1, on which the defenders relied in support of their construction, has a commercial rationale on the construction which I favour. The defenders were not able to assign or dispose of their interest in the missives (clause 11.1), but the connected persons could have purchased all or part of the adjoining subjects owned by Fife Enterprise. Clauses 9.7.2 and 10.1 sought to restrict their use of the Adjoining Subjects (FE), whenever they acquired those subjects, and to require that that prohibition against residential use be made a real burden in favour of the adjoining subjects which the sellers retained. I recognize that a real burden would bind the connected persons, who were not parties to the contract, in relation to the development of the subjects but I do not accept the defenders' assertion that that was the only or principal purpose of the proposed Deed of Conditions. Clause 10.2 gave the pursuers a personal remedy against the defenders if the connected persons breached the prohibition. It appears to me that the principal purpose of the proposed Deed of Conditions was to restrict the use of the subjects, whoever owned them.

[19] Finally, the real burden, which the defenders proposed in their revisals of the Deed of Conditions and in their Counterclaim, is a very unusual one. It might be very difficult for the owner of the dominant tenement to ascertain at some date in the future whether the owner of the servient tenement was a connected person. It is not necessary for me to determine whether it is a valid real burden. In Earl of Zetland v Hislop (1882) 9R (HL) 40 (Lord Selborne LC at p.43) and Stewart v Duke of Montrose (1860) 22 D 755 (Lord Deas at pp.803-804) it was stated that the burden must relate to the use of the servient land and have an immediate connection with the estate. The burden, as Professor Reid stated, must be praedial. See sections 1 and 3(1) of the Title Conditions (Scotland) Act 2003. I acknowledge that the prohibition, even if confined to the identified parties, would relate to the use of the land and that I have not heard detailed submissions on this issue. I therefore reserve my opinion on that point. But if it were a valid real burden, it would be a very unusual one in preventing only certain parties in all time coming from using the subjects for residential development while leaving everyone else free to do so.

Conclusion

[20] As I am satisfied that the pursuers' construction of the clause 10.1 is correct, I consider that they are entitled to declarator in terms of their fourth conclusion in the Summons (as amended). I therefore sustain the fifth plea in law for the pursuers in their Summons (as amended) and the first plea in law in their Answers (as amended) to the Counterclaim. I will have the case put out By Order to determine further procedure.