OUTER HOUSE, COURT OF SESSION
[2011] CSOH 149
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OPINION OF LORD DRUMMOND YOUNG
in the cause
PERSIMMON HOMES LIMITED
Pursuers;
against
BELLWAY HOMES LIMITED
Defenders:
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Pursuers: Young, Q.C.; Lindsays
Defenders: Martin, Q.C., McIlvride; Gillespie Macandrew LLP
9 September 2011
[1] The parties are both house builders. Three aspects of the
commercial practice of house builders are of relevance to the present action;
these were a matter of agreement between the parties. First, it is of
commercial importance to house builders that, when they have completed the
development of a site, they have available to them further sites on which their
capital and workforce can be productively employed. Consequently they
typically seek to acquire sites, or options to acquire sites, some time in
advance of the date on which they will be in a position to begin any
development. This permits them to programme the sequential development of
sites, so that they can use their resources effectively. Secondly, when a house
builder acquires a site for development, it is generally recognized that there
is a limit to the number of houses that can be realistically developed on any
one site; at the time of the events that gave rise to the present action that
was thought to be 50 units. Consequently, if a house builder acquired a site
that had a capacity significantly in excess of that figure, it was common
practice to sell the surplus to another house builder or, if appropriate, to
more than one. Thirdly, house builders frequently enter into arrangements
whereby one sells part of a site to the other and the second sells to the first
another site of comparable size and development value. This assists each house
builder to secure a regular supply of development sites of the requisite size.
The exact legal machinery that is used to achieve such an exchange of sites
varies according to the individual case, and the transfers of the two sites may
be dealt with by missives that are independent of each other. The present
action relates to an arrangement of broadly that nature.
[2] In May 2006 the parties concluded missives for the transfer
by the pursuers to the defenders of an area of land at Wester Cowden, Dalkeith,
which formed part of a larger site that the pursuers had acquired. Those
missives were in due course implemented, and the defenders proceeded to develop
the subjects sold. Prior to the conclusion of the Wester Cowden missives,
discussions had taken place between representatives of the parties with a view
to the transfer of a broadly similar area of land by the defenders to the
pursuers. The defenders ultimately proposed that they should transfer an area
of land at Broomhouse, Glasgow. On 18 April 2006 Messrs Haig-Scott
& Co, the solicitors acting on behalf of the defenders, made a formal offer
to sell 6.6 acres of ground at Broomhouse to the pursuers,
and on 26 May 2006 Messrs Macdonalds, the solicitors acting on behalf
of the pursuers, accepted the offer, holding the bargain as concluded.
Although the two sets of missives were concluded almost simultaneously, they
were independent of each other.
[3] The present action is concerned with the Broomhouse missives.
These related to an area of ground extending to 6.6 acres or thereby situated in the north east of Glasgow. Those subjects were sold at a price of £4,160,000,
but that was subject to a deduction of what were known as Abnormal Costs.
Abnormal Costs were the subject of an elaborate definition (in condition 1.1);
the material part of the definition was as follows:
"any costs incurred or to be incurred by the Purchaser [the pursuers] in respect of... all necessary work required to remedy any abnormal ground conditions to allow the Purchaser to construct houses, garages and other structures on the Purchaser's normal unreinforced strip foundations and requiring no further specialised treatment and to install roads and footpaths without specialist treatment for protection (excluding normal capping layers)".
Thus the risk of abnormal ground conditions fell on the defenders rather than the pursuers. Further provision was made (in condition 2) for an increase in price of £80,000 per unit in the event that the pursuers secured planning consent for in excess of 52 residential units. The price was payable at the Date of Entry, defined as the date 28 days after the later of completion of the Seller's Works and implementation in full of the Seller's Obligations. The Seller's Works were defined as the installation of roads, footpaths and other services and the upgrading and realignment of a nearby road, Boghall Road, and the construction of a roundabout at the junction of Boghall Road and Baillieston Road; the upgrading of Boghall Road and the construction of the roundabout were necessary to obtain road access to the subjects that was acceptable to the local authority. The Seller's Obligations comprised obtaining and exhibiting written confirmation from the relevant authorities that there were no constraints or limitations as to the number of houses that could be occupied on the subjects in relation to drainage, planning or roads.
[4] Condition 10 of the missives made specific provision for
the Seller's Works. So far as material, it provided as follows:
"The Seller shall be obliged to Complete the Seller's Works... by the Long Stop Date, and that generally in accordance with the Consents for the Seller's Works and to such standard as will allow the Purchasers to develop the Subjects with the view to completing and selling residential units thereon..."
The Long Stop Date is defined as 15 December 2007. Provision was made for an extension in certain circumstances. Condition 12 of the missive letter of 18 April 2006 is also important. It relates to the Long Stop Date, and is in the following terms:
"In the event that the Seller has failed to Complete all of the Seller's Works or the Seller has not fully implemented the Seller's Obligations by the Long Stop Date as such date may be extended in terms of Condition 10(a) hereof then the Seller will be obliged to offer to sell to the Purchaser another residential development site within Central Scotland of comparable size and value to the Subjects. Upon settlement of the transaction contemplated by the missives in respect of the said other residential development site the missives to follow hereon (of which this offer forms part) shall be terminated".
I will return to the construction of this clause and its relationship to condition 10 at a later stage. The reason for the provision was explained by Mr Gordon Calvert, who at the time was Land Director of the defenders in Scotland: it was known that there were substantial and potentially costly constraints that might inhibit development of the Broomhouse site, and condition 12 was included to give the pursuers an opportunity to develop an alternative site within a reasonable timescale.
[5] The defenders did in fact encounter difficulty in the
completion of the Seller's Works. Roads construction consent was required for
the upgrading of Boghall Road and the completion of the roundabout at
the junction of Boghall Road and Baillieston Road. The cost of the necessary works turned out to be very
substantial, and the defenders accordingly attempted to reach agreement with
the local authority that would allow redesign of the works to reduce costs.
Nevertheless no agreement was reached in time to enable completion of the
Seller's Works by the Long Stop Date, 15 December 2007. The likelihood that agreement would not
be reached with the local authority had been apparent well before that,
however, and from June or July 2007 onwards the parties' representatives had
discussions about the possibility of an alternative site. A number of
alternatives were mentioned, but serious discussions focused on a site at
Airdrie within land that had recently been acquired by the defenders. On 14 September 2007 the defenders' solicitors wrote to the pursuers'
solicitors confirming that it would not be possible to complete the Seller's
Works by the Long Stop Date and asking them to take formal instructions on an
offer of the alternative site in Airdrie. A further letter was sent on sending December
2007 renewing the offer of the Airdrie site in implementation of clause 12 of
the missives. Neither of those offers was accepted, and on 12 June 2009 the pursuers' agents wrote to the defenders' agents
presenting the Broomhouse missives on the ground of the defenders' material
breach of contract.
[6] The pursuers subsequently raised the present action in which
they claim damages of £1,789,948 on account of the defenders' breach of
contract. Following sundry procedure a proof before answer was allowed on the
question of liability, reserving all questions of the quantum of any loss
sustained by the pursuers. At the proof evidence was led relating to the
general background to the contract, which established the general history
narrated above. Apart from that I will consider the evidence at the point where
it becomes material to the arguments advanced by the parties.
[7] The initial contention for the pursuers founded on the
admission by the defenders that they did not complete the Seller's Works by the
Long Stop Date as required by condition 10. That gave rise to the
inference that the defenders were in breach of contract. If the defenders were
to avoid that, they required to establish a number of matters: first, that on a
proper construction of the missives condition 12 provided the sole remedy
for the pursuers in the event that condition 10 were not satisfied;
secondly, that the defenders made an offer to sell an alternative site for
residential development; thirdly, that the alternative offered was of
comparable value to Broomhouse; and fourthly, that the alternative offered was
of comparable size to Broomhouse. The pursuers submitted that the defenders
had failed in all of these matters, and that the defenders were accordingly in
breach of contract.
Construction of condition 12
[8] The first
question is the construction of condition 12, and in particular whether it
provided the pursuers with their sole remedy in the event that condition 10
was not satisfied or was merely an alternative to other remedies for breach of
contract. Parties were agreed that in considering this issue the ordinary
authorities on contractual construction would apply; these are well known and
it is unnecessary to repeat them. In construing a contract the primary task is
to discover the parties' common intention, objectively ascertained. In doing
so it is necessary to have regard to the background knowledge available to the
parties at the time of contracting. In the present case, the parties were
broadly agreed as to the surrounding circumstances, in particular as to how
land swaps operate within the house building industry. For the pursuers it was
submitted that that knowledge was not of great assistance in construing the
present contract. Counsel for the defenders was in broad agreement with that
contention, and I agree. The fundamental point is in my view that the present
transaction was not a "land swap" in the strict sense but rather a
freestanding contract of sale with its own set of missives. It is obviously
possible for house builders to structure a transaction as a true "land
swap", or in other words a form of excambion, with the two parts of the
transaction dependent on each other. That did not happen in the present case,
however; the parties chose to contract using two distinct sets of missives and
did not make them dependent upon each other.
[9] Counsel for the pursuers submitted that assistance could be
obtained from a letter written on 21 September 2005 by Mr James Preston, the Managing
Director of Persimmon Homes East Scotland between 2002 and 2007 to Mr Andrew
Wyles, the managing director of Bellway Homes Ltd Scotland. In that letter,
written at the time when the Wester Cowden and transaction was being discussed,
Mr Preston wrote that entry and vacant possession to the Broomhouse site
should be granted no later than two years from the conclusion of missives for
Wester Cowden. If that could not be fulfilled a suitable housing alternative
would be made available, and acceptance of an alternative and discharge of the
obligation would be at the sole discretion of the pursuers. Mr Preston
gave evidence that Mr Wyles did not indicate at any stage that such an
approach was unacceptable to the defenders, and Mr Wyles agreed in
cross-examination that he had not done so. The problem with that letter is
that it was sent immediately before the parties embarked on the negotiation of
missives, and it is clear law that correspondence forming part of negotiation
is not admissible as background evidence. Counsel for the pursuers accepted
this point, and did not place great weight on the letter. He accepted,
moreover, that matters had moved on in the missives. In these circumstances I
do not think that any significant weight can be placed on the letter; it is the
missives that must be construed.
[10] In construing condition 12, it is clearly essential to
look first at condition 10. This imposes an obligation on the defenders
to complete the Seller's Works by 15 December 2007. Provision was made for extension of that
date in certain defined circumstances, but it was a matter of agreement that
none of those was applicable. Thus the defenders had failed to fulfil the
obligation in condition to 10 by the requisite date. The pursuers argued
that the defenders were accordingly in breach of contract. In this respect, condition 10
did not provide a right to resile without penalty if the condition could
not be satisfied by a particular date. In those circumstances the pursuers
contended that they were entitled to sue for damages for the breach of condition 10.
The existence of condition 12 was irrelevant to this remedy. The right to
damages for breach of contract was a primary contractual right, and could only
be taken away by a clear indication to that effect in the contract. In this
respect the pursuers founded upon the recent decision of the Court of Appeal in
Stocznya Gdynia SA v Gearbulk Holdings Ltd, [2010] QB 27. In that
case Moore-Bick LJ, whose opinion was concurred in by the other judges, stated
(paragraph [22]):
"[A]ny person approaching negotiations with a view to entering into a legally binding contract (and certainly experienced businessmen such as the parties to these contracts) is to be taken to know that the law gives him a right to recover damages for loss of his bargain if the other party commits a breach which deprives him of substantially the whole benefit that it was intended that he should obtain from it. That, of course, is a valuable right...".
He continued (at paragraph [23]):
"The court is unlikely to be satisfied that a party to a contract has abandoned valuable rights arising by operation of law unless the terms of the contract to make it sufficiently clear that that was intended. The more valuable the right, the clearer the language will need to be".
In the present case, it was said, the wording of the missives did not say anything to exclude the pursuers' right to damages for breach of condition 10.
[11] For the defenders it was submitted that an actionable breach of
contract sounding in damages would not result from the mere fact that the
pursuers failed to implement the obligation in condition 10 to complete
the Seller's Works by 15 December
2007. If the defenders failed
to implement the obligation in condition 10 by that date, they became
subject to the obligation in condition 12; that was the remedy expressly
provided by the contract. An actionable breach of contract would exist only if
the defenders failed to fulfil the obligation in condition 12. The
defenders' case was that they had made an offer under condition 12, the
offer of the Airdrie site, which fulfilled the requirements of condition 12.
Consequently there was no actionable breach of contract. In other words, if
the defenders failed to complete the Seller's Works timeously, the pursuers did
not have a choice of remedies, damages or the implementation of condition 12;
the only remedy that was available was that under condition 12, and it was
only if the defenders failed to fulfil their obligations under that condition that
there was an actionable breach of contract.
[12] In my opinion the defenders' contentions on this matter are
correct. I agree entirely with the approach taken by Moore-Bick LJ in
Stocznya Gdynia; the right to damages for breach of contract is an
important right, and it can only be taken away by a clear provision to the
contrary. In that case the application of such an approach seems to me to have
been a very obvious inference from the structure of the parties' contract. The
parties had entered into three contracts under each of which the seller was to
supply a vessel to the purchaser. None was delivered. The purchaser exercised
a contractual right to terminate each contract and to recover under a bank
guarantee the instalment of the price that it had paid on signing the
contract. The question remained as to whether it was also entitled to damages
from the seller for the loss of its bargain in addition to recovering that
instalment of the price. It was held that the purchaser was entitled to
damages of that nature. The argument for the seller was that the only remedy
provided in the contract was repayment of the instalment of the price, which
excluded any right to damages. This argument was rejected (at paragraphs
[40]-[41]):
"I am unable to accept that submission. On discharge of a contract of this kind a buyer who has paid the whole or part of the price in advance is entitled, in the absence of any agreement to the contrary, to recover what he has paid by reason of a total failure of consideration. He therefore has a right to recover in restitution any payments he has made in respect of the price, a right which is quite distinct from any right he may have (if he is the injured party) to recover damages for the loss of his bargain. In the present case the parties made specific provision for the repayment of instalments and [the purchaser] could not, of course, recover both under the contract and in restitution; to do so would result in double recovery....
If this argument is sound, therefore, it can only be because the parties have agreed that the right to recover instalments of the price provided by article 10 is an exclusive alternative to [the purchaser's] right under the general law. In my view that argument must be rejected. I can well see the force of the argument that a right to obtain repayment of instalments under a demand guarantee is of great value to a buyer because it provides certainty and speed, but in the light of the fact that, as is well known, the value of the vessel can rise or fall to a marked degree between the date of the contract and the date of delivery it would be surprising if a buyer entering into a contract for a new vessel were prepared to exchange the whole value of his bargain for the certainty of a speedy recovery of advance payments in the event of the builder's repudiation".
Moore-Bick LJ considered that such an argument did not make good commercial sense; the ability to recover instalments paid quickly and easily did not amount to an adequate counterpart for the loss of the right to damages.
[13] In the present case, by contrast, it is not said by the
defenders that the provisions of condition 12 are an alternative to any
right to damages for non-performance of the contract. Instead, the contention
is that a breach of the defenders' obligation under condition 10 gives
rise to a further obligation under condition 12 to offer an alternative
site. It is only if an adequate alternative site is not offered that there is
a breach of contract that gives rise to a right to damages. For that reason I
am of opinion that Stocznya Gdynia can readily be distinguished.
[14] Perhaps more important, however, is the fact that, if the
contract is construed in the manner suggested by the pursuers, condition 12
amounts in effect to an option exercisable by them. If the defenders fail to
complete the Seller's Works by the Long Stop Date, the pursuers have the choice
of treating that as a breach of contract actionable in damages or insisting
that the defenders provide an alternative site in terms of condition 12.
If an option was intended, it is difficult to understand why it was not
expressed as such. Instead, condition 12 is expressed as an obligation
incumbent on the defenders in the event that they fail to complete all of the
Seller's Works timeously (and only in that event). That obligation is to offer
an alternative site conforming to certain specified criteria, which are clearly
designed to define a site broadly equivalent to the Broomhouse site. That
structure leads in my opinion to a clear inference that, if the defenders fail
to meet their obligation in condition 10 timeously, they are obliged to
offer an alternative, and it is only if they fail to provide an adequate
alternative that there is any right on the pursuers' part to rescind the
contract and claim damages. That construction is further supported by the
commercial background to the contract. What the pursuers wanted was an
alternative site for development, to enable them to deploy their resources
efficiently. That could best be satisfied, if Broomhouse were for any reason
unavailable, by the provision of an equivalent site somewhere else in central Scotland. Thus the obligation to provide an alternative is in
my opinion an essential feature of the structure of the contract, and it is
only if that obligation is breached that the right to rescind and claim damages
arises.
[15] For the pursuers it was argued that defenders' construction of condition 12
would enable them to take advantage of their own failure to complete the
Seller's Works. The pursuers had not sought an extension of time on the basis
that the delays were outwith their control. Thus it was possible that the
defenders' construction would enable them to avoid settlement of a transaction
that was no longer advantageous to them by simply offering a substitute site of
their choosing. In that event the pursuers would receive no damages for wasted
costs in relation to the Broomhouse site, nor for any reduced profits generated
from the new site or the delay in starting its development. I am not persuaded
by this argument. It is true that condition 10 permitted the extension of
the Long Stop Date for matters beyond the Seller's control, but only in cases
where an extension of time was granted under the relevant building or works
contract; that would not help if the problem were a failure to obtain
appropriate planning consent. In any event there was no suggestion in evidence
that the defenders had delayed the Seller's Works in order to back out of a
disadvantageous transaction. Moreover, it had been known that there could be
difficulty in completing the Seller's Works timeously, and that was why condition 12
was inserted. In these circumstances it does not appear to me to be unfair
that the defenders should not be liable for the pursuers' wasted costs or
reduced profits resulting from delay. Condition 12 was designed to deal
with a risk that the parties knew about, and their obvious intention,
objectively considered, was in my opinion that if the risk came to pass the
defenders should be obliged to offer an alternative site meeting certain
criteria. That was clearly designed to provide an adequate remedy for the
pursuers.
[16] I should record that counsel for the defenders argued that the
pursuers' case on record was based exclusively on a breach of condition 12,
not condition 10. I do not read the pursuers' averments in that way;
condescendence 6, dealing with the alleged breach of contract, begins by
referring to the defenders' failure to complete the Seller's Works as required
by condition 10, and it is clear from the initial part of that article of
condescendence that the breach relied on when the pursuers rescinded the
contract was a breach of condition 10. Thereafter the pursuers aver that
throughout the period from 15 December
2007 to 12 June 2009 (the date of decision) the pursuers did not seek to
extend the completion date or make any formal offer in terms of condition 12.
Nevertheless, the primary case on record is in my view based on a breach of condition 10.
I have rejected that case for the reasons discussed above.
Whether condition 12 has been implemented by the
defenders
[17] The foregoing
analysis leads on to the question of whether condition 12 has in fact been
implemented by the defenders. The first issue is the meaning of condition 12.
It obliges the defenders to offer to sell to the pursuers "another
residential development site within Central Scotland of
comparable size and value to the Subjects". The expression "of
comparable size and value" clearly does not require exact equivalence.
That would be impossible, as every parcel of land is unique. What is required,
however, is that the alternative offered under the condition should be
broadly equivalent to the area of land at Broomhouse, both in its size and in
its value as land for residential development. No time limit is specified; nor
is it said that the offer requires to be in any particular form. Nor is it
stated that any price requires to be specified in the offer, and there is no
mechanism for determination of the price. Moreover, all that is required is an
offer; it is not essential that the offer should be accepted.
[18] The pursuers submitted that there was no offer to sell, as
required by condition 12, for two reasons. First, no price was specified
in anything that could be construed as an offer. Secondly, the offer was not
made formally, but only in the course of discussions and in informal
correspondence between the parties (for example the pursuers' letter to the
defenders of 6 December
2007: 6/46 of process). I
will deal with each of these arguments in turn.
[19] On the question of the lack of a price, the pursuers founded on
the lack of any averment by the defenders as to a price, and held to their own
position as stated in the pleadings: the defenders did not offer to sell the
Airdrie site on any specific terms to the pursuers but merely discussed it in
broad terms as they had done with other previous alternatives. Counsel founded
on the evidence of Mr Kenneth Haldane, the Land Director of Persimmon House
West Scotland, and Mr Gordon Calvert in connection with a letter written
by the former to the latter on 25
July 2007 (7/24 of process).
The letter referred to a conversation on 24 July, but Mr Calvert had had
no recollection of it, and the letter did not indicate that any offer had been
made to sell the Airdrie site; it stated that the land in Airdrie "will be
offered" on the basis of the pursuers' matching the defenders' purchase
price of the land. An offer was also referred to in a letter from the defenders'
solicitors to the pursuers' solicitors dated 17 December 2007 (7/3 of process), which stated that the
defenders had already offered an alternative site at Airdrie. On the basis of
that evidence, counsel submitted that the absence of any offer could be seen
from the evidence regarding the price, in particular that of Mr Calvert:
in both examination in chief and cross-examination Mr Calvert was unable
to say that any specific price had been given, although he had stated that the
defenders would not take a profit from the deal. Reference was further made to
the evidence of Mr Law, the Managing Director of Persimmon Homes West
Scotland and Mr Haldane; neither suggested that a price was agreed. On
that basis, counsel submitted that there was never a proper offer to sell in
either form or content. It was an essential feature of any offer to sell
heritable property that the price for the property should be specified, and
that had not happened. Nor have there been any agreement as to a mechanism for
ascertaining the price; any such agreement required to be clear and certain:
NJ & J MacFarlane v MacSween's Trs 1999 SLT 619. In the absence
of any of specifying a price, it could not be said that condition 12 had
been implemented.
[20] I think it is clear on the basis of the evidence of Mr Calvert,
Mr Law and Mr Haldane that the only indication of price was a
statement that the defenders would be willing to sell the land at the price
they had paid, not taking any profit. Mr Law gave evidence that that
price was £850,000 per acre, but Mr Calvert only regarded that as a
negotiating figure. (The pursuers considered that price unacceptable on the
basis that it would produce an unacceptably low gross margin). Certainly no
agreement was reached as to the price.
[21] For the defenders it was submitted that the lack of a price or
any method for fixing the price did not prevent the existence of an enforceable
contractual obligation. Reference was made to R & J Dempster Ltd v Motherwell
Bridge and Engineering Co Ltd, 1964 SC 308. In the present case, the
purpose of condition 12 was to provide the pursuers with an equivalent
alternative site. The issue of price was not critical; the parties, and other
house builders, had a history of land swaps, in which the value of land was
readily assessed. Moreover, it was significant that condition 12 referred
to comparable "value", rather than the determination of a price. Nor
was anything said in condition 12 or elsewhere in the parties' agreement
that a price should be proposed. Thus it was immaterial that nothing was
agreed as to the price of the Airdrie site or how such price should be fixed;
when the site was offered, that gave an opportunity for the pursuers to
consider whether to take the site, if they wished to do so. At that point it
was open to the pursuers to specify a price. If the price they offered was not
acceptable to the defenders, it is possible that the bargain might not go
through. At that point there might be an argument as to the reasonableness of
the parties' conduct. Nevertheless condition 12 did not oblige the
defenders to offer the site at a price acceptable to the pursuers.
[22] I accept that no price was agreed and that condition 12
does not provide any price-fixing mechanism. I am nevertheless of opinion that
this does not mean that no valid offer was ever made by the defenders. The
correct approach to this issue is in my view that found in R & J
Dempster Ltd v Motherwell Bridge and Engineering Co Ltd, supra.
In that case the defenders, who carried on business manufacturing tanks,
principally for oil storage companies, found themselves faced with very heavy
demand at the same time as a steel shortage, which meant that supplies from
steel mills were placed on a quota system. In the circumstances price was a
relatively minor consideration. The parties agreed that during each of three
years the pursuers would set aside 1000 tons of their steel quota to
manufacture tankage for the defenders, with the price being settled at a later
date. It was held that that constituted a valid and binding commercial
contract, capable of enforcement by the pursuers. The absence of agreed prices
was held immaterial. Lord Clyde dealt with this issue as follows (at the 328-329):
"[T]he real fallacy of [the defenders'] construction of the arrangement is that it assumes that the fixing of the price for a fabricated tank was of the essence of the bargain and that no contractual obligation was undertaken until the prices had been adjusted. It overlooks the fact that it was the usual practice of the oil storage companies at this time to place orders and only adjust prices after delivery of a fabricated tank, owing to the fact that tanks and not prices were the material consideration in the then conditions of the market. Moreover, it overlooks the fact that in [earlier years] the pursuers and defenders operated on this open order basis and had without difficulty adjusted prices for fabrication after delivery by the pursuers had taken place".
Lord Guthrie expressed views to similar effect (at 331-232); see also R & D Developments Ltd v Hallam Land Management Ltd, 2011 SC 286.
[23] In the present case, condition 12 requires the alternative
site to be of "comparable value" to the Broomhouse site. That of
itself indicates that some sort of commercial valuation is to be used, whether
using comparable properties or the residual method of valuation; I discuss the
choice between those below. Moreover, the commercial background to the parties'
agreement is important. The parties were both house builders, operating within
broadly the same market, and it was accepted that both of them engaged
regularly in land swap transactions. It was clear on the evidence that land
swap transactions are arranged on the basis of commercial valuations. In
addition, the evidence established that the valuation of sites for development
is a task that is readily carried out within the industry, using either the
residual or the comparative method of valuation. That is very clear from the
evidence of those engaged within the industry (for example Mr Preston, Mr Haldane,
Mr Law and Mr Calvert). In those circumstances I consider that the
determination of a valuation would be a relatively straightforward exercise,
and certainly one that was readily capable of being carried out. I am
accordingly of opinion that the meaning of condition 12 is that the offer
of an alternative site will be at a commercial valuation, and the offer made by
the defenders of the Airdrie site must therefore be construed in that way. It
is no doubt possible that the parties would fail to agree of what was a proper
commercial valuation; in that event, the matter could be subject to the
determination of an expert or arbitration, or if necessary litigation. That is
essentially the same position as was reached in R & J Dempster Ltd v
Motherwell Bridge and Engineering Co Ltd, supra. If the
defenders, after making the offer of an alternative site, held out for an
unreasonable price, that might mean that the offer was ineffective, but that is
not the present situation; there was no evidence that the defenders' price for
the Airdrie site was unreasonable (and indeed it appeared that they were
willing to accept the price that they had paid for the site).
[24] The second argument for the pursuers was that the pursuers had
not implemented condition 12 because no formal written offer had been
made; the wording of the condition indicated that a formal document was
required. The defenders submitted in reply that condition 12 did not
require a formal offer or an offer in any particular form to be made to the
pursuers. In my opinion that is correct. Any offer made under condition 12
does not form part of a freestanding contract for the sale of land; it is
rather an act designed to implement an obligation contained in such a
contract. As such the provisions of section 1 of the Requirements of
Writing (Scotland) Act 1973 as to obligations relating to
land do not apply. Thus an informal offer would suffice, provided that it was
made in good faith.
[25] I thought it quite clear on the evidence that an offer of the
Airdrie site had been made, however informally, prior to 15 December 2007. It was clear from the evidence that the site had
been discussed between the parties well before that date, and in the course of
those discussions it was apparent that it was being offered as an alternative
to the Broomhouse site. The offer was confirmed in writing by a letter from
the defenders' solicitors to the pursuers' solicitors dated 17 December 2007. In that letter the writer stated that the Seller's
Works had not been completed in accordance with condition 10, and were
understood not to be capable of completion for some considerable time.
Consequently the offer of the Airdrie site was repeated in implementation of condition 12
of the missives. The writer repeated the defenders' "strongly held"
view that the Airdrie site complied with the terms of condition 12, being
a site of comparable size and value. Evidence was further led (from Mr Law,
Mr Preston and Mr Haldane) that the pursuers were able to assess the
site, to prepare their own site layout and to consider the value of the site
according to their own version of the residual method. That indicates that
they regarded an offer of the Airdrie site as having been made, and acted on
that understanding.
The nature of the Airdrie site
[26] The next issue
is whether the Airdrie site satisfied the requirements of condition 12. Condition 12
required that any alternative site offered by the defenders should be a
residential development site within central Scotland of comparable size and value to the Broomhouse site. It was not
disputed that the site offered in Airdrie was a residential development site;
indeed it had the grant of planning permission to that effect, and it was
assessed by the pursuers as such. Nor was it disputed that the site was in
central Scotland. The dispute between the parties related
to whether the alternative site was of comparable size and value to
Broomhouse. So far as size is concerned, the Broomhouse site was of 6.42 acres, whereas the Airdrie site was of 6.03 acres, of which 5.56 acres represented the net developable area (the area on
which profitable residential development could be carried out). At Broomhouse,
the gross and net developable areas were the same; Mr Haldane commented
that that was unusual. If the gross areas are compared, the difference
amounted to 6.07%; if the net developable areas are compared, the difference
was 13.4%. For the defenders it was submitted that condition 12 did not
require equivalence of net developable areas, and that the comparison of the
gross areas was accordingly appropriate. I do not think that it is necessary
to go that far; condition 12 refers to "comparable size", and in
assessing that I think that it is permissible to look at both the gross area of
the site and the net developable area, taking a fairly broad view. It is also
relevant to look at the number of units that could be constructed on the site.
On that subject, Mr Kenneth Haldane, under reference to a letter that he
have written to Mr Calvert on 25 July 2007, accepted that it was possible to construct 81 units
on the Airdrie site with a coverage of approximately 74,000 square feet. The comparable figure for Broomhouse was 71,000 square feet. He accepted that those figures were comparable.
When the gross and net developable areas and the possible coverage are taken
into account, I am of opinion that the two sites can be considered of
comparable size. That involves taking a fairly broad view, but I think that
that is necessary given the subject matter.
[27] The critical issue is the final requirement of condition 12,
that the alternative site should be of comparable value to Broomhouse. The
wording used in the condition is fairly stark: the alternative site must
be "of comparable... value" to Broomhouse. The word
"value" is used, rather than any alternative such as
"price", and it is not qualified by reference to such concepts as
market value or value determined in any other particular manner. Nothing is
said as to matters that must be regarded or disregarded in assessing the
value. Finally, the valuation exercise must be made at a date some time after
the date of the missives, probably in about December 2007. That indicates
in my opinion that comparative values at that time must be used. When a
comparative valuation exercise is carried out, unless provision is made to the
contrary values used must normally be current values. In the present case
there is nothing to the contrary.
[28] In their submissions the parties disagreed as to the manner in
which the valuation exercise should be carried out. Two main areas of dispute
emerged: whether the valuation exercise should be carried out on an objective
basis or by reference to the value of each site to the pursuers, and whether it
was appropriate to use a comparison method of valuation, using market values as
disclosed by comparable properties, or to use a measure of valuation based on
the profits which could be generated from the two sites, generally referred to
as the residual method. The residual method involves a calculation based on
expected sales revenue as compared with standard build costs; those costs
include site preliminaries, abnormal build costs, sales and marketing costs and
any planning gain (costs imposed for planning reasons). Build costs are
deducted from the expected sales revenue, and an appropriate percentage gross
margin is applied to the resulting amount. That gives a residual land value,
and evidence was led that the residual land value represents the price that a
house builder will typically be prepared to pay for an area of land. The
pursuers argued in favour of the value that they, subjectively, would arrive at
using the residual method; the defenders, by contrast, argued in favour of an
objective basis of valuation, using market value as disclosed by comparable
properties. Although the parties linked the two questions together in this
way, I do not think, for reasons discussed at paragraphs [31]-[34] below,
that the residual method of valuation is entirely subjective; consequently I do
not think that the defenders' contention that objective valuation requires the
comparable method holds good.
[29] In addition to the two foregoing matters, a third area of
dispute emerged in the course of submissions, and it is one that is in my view
of considerable importance. This is the significance of the price that is payable
for Broomhouse under the parties' missives. This was £4,160,000, under
deduction of Abnormal Costs. That represented the market value of the subjects
in the spring of 2006, when missives were concluded. By late 2007, however,
the market value of land had increased significantly; that was a matter of
agreement between the two surveyors who gave evidence, Mr Colin Whyte for
the pursuers and Mr Stephen Robertson for the defenders. Thus the
pursuers were entitled to acquire Broomhouse at a price well below current
value. If an alternative site is offered, the question obviously arises as to
whether its value should be comparable to the current (late 2007) value of
Broomhouse or the price placed on Broomhouse in the missives. In my opinion it
is clear that condition 12 contemplated that any alternative offered must
be assessed at current value and that Broomhouse should likewise be assessed at
current value. That is the only sensible way in which the comparative exercise
can be carried out. This has significant implications for the residual method
of valuation, because land cost is used as one of the elements in the
calculation. If the historic price is used (as in the pursuers' appraisal no
6/57 of process, carried out in December 2007), the result is a large
increase in the percentage gross margin that is available to the builder.
Indeed, in the pursuers' December 2007 appraisal, the gross margin is
35%. By contrast, in the appraisal by the pursuers carried out in March 2006
the gross margin was only 24%. Because current value must be used, the
pursuers' appraisal carried out in December 2007 is not in my opinion an
appropriate exercise. Instead, current value must be used in the land cost
element in the residual calculation.
[30] The primary submission for the pursuers was that the missives
envisaged a comparative exercise being carried out in relation to two
residential development sites. The offer of an alternative site was to be made
to the pursuers, who must determine whether to accept the offer of that site.
On that basis, it was submitted, the "value" represented the value to
the pursuers rather than the value to the defenders, as the pursuers were the
party that had to take the crucial decision as to whether to acquire one or
other area of land. For the defenders it was submitted that the standard of
valuation was an objective one, which was not personal to the pursuers in the
manner for which they contended. Condition 12 did not refer to the value
to the pursuers, but rather signified open market value. On that basis, it was
said, the residual method of valuation could not be used, because that was
personal to each builder; in particular, the residual method was dependent on
each builder's individual estimate of profitability.
[31] In my opinion condition 12 must be construed as requiring
an objective estimate of value. I reach this view for two reasons. First, the
law of contract normally proceeds on an objective basis, and in a case where
the value of two sites must be compared at a particular time I can see no
reason to depart from the general rule; indeed the very notion of an
intelligible process of valuation would easily be subverted if one party were
entitled to introduce wholly subjective factors that had little or no bearing
on the objective value. Secondly, had either party wished to ensure that the
comparison of the two sites should be carried out according to its own
particular criteria, it could have specified that in condition 12. It
might, for example, have been specified that the pursuers could refuse an
alternative site if they at their sole discretion decided that it was not of
comparable value. Such a provision is not meaningless; the pursuers would have
to act in good faith, but the formulation would permit subjective factors to be
taken into account. There is no such provision, however; the condition refers
only to "comparable... value", without any reference to any specific
method according to which the value is to be ascertained, and certainly without
any reference to either party's own method of valuation as the criterion.
[32] Nevertheless, the fact that an objective basis must be adopted
leaves open the critical question of the method that should be used to value
the two sites. As I have already mentioned, two methods were discussed in
evidence, the residual method and the comparison method. The pursuers'
witnesses, for example Mr Preston, stated that the residual method is
regarded as a fairly accurate indicative figure for the price that should be
paid for the land in question. Mr Preston further indicated that standard
build costs and sales and marketing costs should be broadly similar for each
house builder. I did not understand that statement to be challenged, at least
directly. I do not find it surprising, because the cost of labour and
materials must clearly be broadly the same for every house builder operating in
the same area. It follows that there is a considerable element of objectivity
in the residual method.
[33] The defenders criticized the use of the residual method on a
number of grounds. First, they referred to a paper issued by the Royal
Institute of Chartered Surveyors, Valuation Information Paper No 12, on the
Valuation of development land. The two methods are referred to in paragraph 1.5
of that document, which continues by indicating that in practice it is likely
that of valuation would utilize both approaches; the degree to which either or
both might be relevant depended upon the nature of the development being
considered and the complexity of the issues. Paragraph 1.6 states that
valuation by comparison is essentially objective, in that it is based on an
analysis of the price achieved for sites with broadly similar development
characteristics. The residual method, by contrast, relies on an approach that
involves a combination of comparison and cost, and it requires the valuer to
make a number of assumptions, any of which may affect the outcome in varying
degrees. This point is taken further in paragraph 5.2, which states that the
residual method requires the input of a large amount of data, which is rarely
absolute or precise, coupled with making a large number of assumptions. Small
changes in any of the inputs can cumulatively lead to a large change in the
land value. In particular, some inputs, notably the profit margin, can present
great difficulty. Secondly, the defenders referred to the sensitivity of the
residual method to changes in input; this is a matter touched on in the RICS
document, and was illustrated by cross-examination on certain of the residual
calculations had been made. Thirdly, the defenders submitted that the only way
that a residual appraisal can give a final result is when the purchase price is
known; Mr Haldane had accepted that in cross-examination.
[34] I accept that there is some force in those criticisms. In
particular, the RICS paper indicates that there are significant limitations and
uncertainties in the residual method. Nevertheless, when the terms of the RICS
paper are looked at as a whole, I am of opinion that both the residual and the
comparison methods must be used, and indeed that in the circumstances of the
present case primacy must be given to the residual method; I will return to
this point when I discuss the evidence of Mr Robertson, the surveyor who
favoured the comparison method. The material passages of the RICS paper are as
follows. At paragraph 1.5 it is stated that in practice it is likely that
evaluation will utilize both approaches, and paragraphs 4.1 and 5.18 indicate
that the two methods can be used to cross check each other. Limitations in the
comparison method are pointed out at paragraph 4.1, where it is stated that
valuation by comparison is only reliable if evidence of sales can be found and
analyzed on a common unit basis. At paragraph 4.3 it is indicated that a
number of further factors may be relevant; these include the fact that values
may differ considerably within a small geographical area and that, in a rapidly
changing market, the date of the sale of the comparable is relevant. In
relation to the latter point, both of the surveyors who gave evidence accepted
that during 2007 land values had risen to a significant degree. These are
obvious limitations that may apply to use of the comparison method. In
paragraph 4.4 it is stated that, generally, certain types of developments,
including urban sites, do not easily lend themselves to valuation by
comparison; the differences from site to site may be sufficient to make the
analysis of transactions problematical. Moreover, at paragraph 5.1, dealing
with valuation by the residual method, it is stated that where the nature of
the development is such that there are no (or limited) transactions to use for
the comparative method, the residual method provides an alternative valuation
approach. In such cases, however, it is pointed out that even limited analysis
of comparable sites can provide a useful check as to the reasonableness of a
residual valuation. The foregoing statements are in my opinion a clear
indication that in a case such as the present, involving an urban site with
relatively limited direct comparators in a rising market, the residual method
may be preferable to the comparison method. Such an approach is supported by
the evidence that it is the method regularly used in the house building sector,
and that it is regarded as providing a good indication of price because
builders' costs tend to be broadly the same. Mr Preston gave evidence to
that effect, as did Mr Kenneth Haldane. I did not understand that evidence
to be seriously challenged.
[35] The valuation evidence came from two sources: the parties' own
representatives, who spoke to valuations that they had carried out based on the
residual method, and two experts, both surveyors, Mr Colin Whyte of
Montagu Evans for the pursuers and Mr Stephen Robertson of James Barr for
the defenders. Both surveyors had great experience in the valuation of land
for residential development, and I consider that both were well qualified to
give evidence. Mr Robertson made use of the comparison method of
valuation, although he also commented on the residual method. Mr Whyte's
initial report was designed principally to comment on Mr Robertson's use
of the comparative method, but he also produced his own valuations based on the
residual method. I will first consider Mr Robertson's reports and
evidence; then the pursuers' criticism of that evidence. Thereafter I will
consider Mr Whyte's report and evidence in relation to the method of
valuation, and then the evidence relating to valuation by the residual method,
both by Mr Whyte and by the parties' employees. Finally I will attempt to
reach a conclusion on the question of valuation.
[36] Mr Robertson's initial report (no 7/1) comprised a
valuation of the two sites as at 17 December 2007, using the comparison method. It also
contained an overview of market conditions at the time. After summarizing the
main features of Broomhouse, he described it as "a reasonable mid-market
family housing location". The planning consent included design guidance
which specified detached houses, minimum plot sizes and other criteria which
limited the density of the development. At Airdrie, there were no such
limitations, and the housing mix could be substantially varied. Mr Robertson
considered a range of comparison evidence in relation to both sites. At
Airdrie he referred to five comparison sites, which disclosed land prices of
between £456,520 and £666,666 per acre. The dates of valuation range
from 1 February 2006 to 20 June 2007. At Broomhouse he expressed the view that there were
no directly comparable transactions relevant to the site, but there existed a
number of comparisons which could be used to form a judgment as to the value
per acre for Broomhouse. In evidence he explained that expertise was necessary
to make the necessary adjustments. Mr Robertson accepted evidence that
four of the sites mentioned in relation to Broomhouse, for example one at 1316
Gallowgate which was being developed for high-density flats, were not of great
assistance. He thought, however, that three sites, at Robroyston, Newton Farm,
Cambuslang and Castle Avenue, Uddingston, provided better comparisons.
The first and third of these, he thought, were in better locations than
Broomhouse, but the second was comparable. The price for the Robroyston site, £1,243,000
per acre, was described as a full price paid at the top of the market (in May
2008). The price at Cambuslang was £719,793 per acre (in July 2006) and
at Uddingston £641,025 per acre (in April 2007). On the basis of the
various comparisons, Mr Robertson concluded that the market value of each
site could be fairly stated at £4.2 million for Broomhouse and £3.85
million for Airdrie. He did not set out detailed reasons for this amount,
beyond the indication that judgment was involved. He then considered the
application of abnormal costs, which applied at Broomhouse but not at Airdrie.
When abnormal costs were taken into account, however, the market value of the
Broomhouse site would be adjusted to £3,775,552. Mr Robertson
understood that no abnormal costs would be incurred at Airdrie.
[37] By way of comparison of the two sites, Mr Robertson stated
that both could be categorized as popular mid-market residential locations
which would make attractive purchases to house builders in 2007. Although
Broomhouse had a larger acreage, the density was limited by Glasgow City
Council; at Airdrie, by contrast, a greater density could be achieved. On that
basis he considered that Airdrie had the potential to produce a scheme of
comparable size to Broomhouse. On that basis Mr Robertson concluded that
as at 17 December 2007 the site at Airdrie was of comparable
market value to Broomhouse once adjustments were made for density of
development and abnormal costs.
[38] Counsel for the pursuers criticized Mr Robertson's
evidence. He submitted that, where there were differences of opinion between Mr Whyte
and Mr Robertson, the former's evidence should be preferred; the
submission was made on the basis of Mr Whyte's long experience of
residential development, which was an area in which very few chartered
surveyors specialized. It is true that Mr Whyte specialized to a great
extent in residential property, but Mr Robertson also carried out work in
that area, and accordingly I think that I must weigh the evidence of each
expert on its own merits. Nevertheless, Mr Whyte gave evidence that
builders approached the valuation of a potential site using the residual
appraisal methods of valuation, and that evidence was supported by the
builders' representatives who gave evidence. I have already indicated the
approach taken in the RICS Valuation Information Paper to the residual method;
it is regarded as an appropriate method of valuation, especially in cases where
there are no or few transactions on which the comparative method can be based.
At the same time the residual method must be approached with caution owing to
its sensitivity to changes in inputs. Mr Robertson relied on a relatively
small number of comparators, in each case spread over a considerable period.
For that reason I am of opinion that the residual method may be used as
the primary method of valuation, although subject to a cross-check using the
comparative method. Counsel for the pursuers further submitted that Mr Robertson's
lack of experience in the specific residential market was apparent from his
use, in carrying out a residual appraisal for Airdrie (no 7/20), of a gross
margin percentage to the build and other costs rather than the gross revenue. Mr Whyte
stated that such an approach was common in the field of commercial development
but was never taken in relation to residential development, and that was
confirmed by the witnesses from the parties. I accept that that is
correct, but I do not think that it is a particularly important criticism of Mr Robertson;
his method is used in other forms of development.
[39] Counsel for the pursuers made a number of other specific
criticisms of Mr Robertson's approach. First, it is said that Mr Robertson
made an error in calculating the costs per acre of the Airdrie site to the
pursuers in that he failed to add abnormal costs for calculating the cost per
acre; he had done the opposite in relation to Broomhouse. That criticism is
correct, but I do not think that it had any effect on the ultimate outcome.
Secondly, it was said that Mr Robertson's report did not discuss how
comparator sites for Airdrie and Broomhouse should be weighted to arrive at the
final valuation figure. In my opinion there is some force of this criticism. Mr Robertson's
discussion of comparators does specifically address the question of how
relevant they are to the valuation of the two sites that are in issue, but
ultimately there is no detailed weighting of the various sites. Mr Robertson
was cross-examined on this matter, and it is fair to say that his answers were
frank. He conceded that individual comparators might not be relevant, and
explained that that was why a "basket" of other sites was used; using
a basket of comparisons builds a picture. I am satisfied that he used his
judgment in coming to an ultimate valuation. Nevertheless, I think that his
opinion does suffer from a lack of comparators, especially contemporaneous
comparators in a rising land market, and that the explanation of how those
comparators relate to his final figure is not very clear.
[40] Thirdly, it was submitted that Mr Robertson lacked the
specific information required to draw useful comparisons between the Airdrie
and Broomhouse sites and the comparator sites; this is related in particular to
acreage which could not be developed and the precise type of developments carried
out. That is correct so far as it goes, but it seems to me that this is an
inevitable problem in any comparison exercise. It is one reason for using, as Mr Robertson
said, a basket of comparators. Fourthly, it was submitted that the comparator
sites for Broomhouse were not directly comparable, and Mr Robertson
himself accepted that four of the seven sites listed were in much poorer areas
of east Glasgow. Mr Robertson indicated that he did
not attach great significance to those sites (for example, the Gallowgate
site). Nevertheless, as I indicated, I think that the relative lack of
comparators is a significant criticism. Fifthly, it was said that Mr Robertson's
treatment of abnormal costs at paragraph 12.0 of his report was flawed, as he
accepted in cross-examination. In his report Mr Robertson treated
abnormal costs as a straightforward deduction from the purchase price. This
ignored the fact that these would be borne by the purchasing house builder, and
would not affect the market value. Mr Robertson accepted this point, and
stated that his references in paragraph 12.0 to market value should be
corrected to "adjusted net price". Counsel for the pursuers
submitted that the practice of house builders is to bid on a greenfield basis, because the missives will commonly permit the
bid price to be reduced to take account of abnormal costs. The answer to this
point, which was made by counsel for the defenders, is that abnormal costs are
still an element that must be borne by the purchaser. They do not impact on the
market price in the strict sense. Nevertheless, they affect the amount that
the purchaser must pay in order to develop the site. For this reason I
consider that Mr Robertson was correct in deducting abnormal costs at
paragraph 12.0 of his report. The fact that he described what was happening
incorrectly does not, I think, vitiate the fundamental accuracy of the point
that he makes: the amount that a house builder must pay to have the Broomhouse
site ready for construction must be reduced to take account of the abnormal
costs.
[41] Sixthly, counsel for the pursuers submitted that Mr Robertson
had drafted his original report on the basis that the higher density of housing
on the Airdrie site would have a positive effect on market value. Mr Robertson
had subsequently, however, taken the view that a lower density might be
appropriate, as Mr Whyte had suggested. I think that there is force in
this criticism; ultimately it was accepted that a lower density would be
appropriate. Seventhly, it was submitted that Mr Robertson had not
produced a residual valuation appraisal for Broomhouse. Once again, I think
that there is some force in this criticism; the RICS paper mentions the
importance of the residual method when the there are limited transactions for
use in the comparative method, and also indicates the benefit of cross-checking
one method with the other.
[42] Mr Whyte's original report (no 6/53) took the form
essentially of a commentary on Mr Robertson's initial report. He
commented on the various comparables used by Mr Robertson. It is not
necessary to go into that part of his report in detail; as would be expected,
he pointed out that some of the comparators were of greater relevance than
others. He agreed with Mr Robertson's description of both sites as
"popular mid-market residential locations", but indicated that he
regarded Broomhouse as a good middle market site and Airdrie as a lower
middle/middle market site. Mr Whyte further expressed the view that the
Airdrie site was smaller in terms of both gross and developable site area and
saleable floor area. He thought that in the state of the market in December
2007 a purchasing house builder would have remixed the
development and sought to replace flats by further two-storey housing. This
would reduce total saleable floor area further. He also regarded the location
of the Airdrie site as inferior to the Broomhouse site. Mr Whyte
undertook a residual site valuation of the two sites; he regarded this as a
preferable method because of the difficulty of using historic land prices to
produce a comparative valuation. He estimated the value of Broomhouse in December
2007 to be £5,200,000, which he reduced to £5,000,000 in his
examination in chief. The reduction was based on actual sales figures that he
obtained from the defenders in relation to Broomhouse; this caused him to drop
his sales rate from £185 per square foot to £180-182.50 per square
foot. He estimated the value of the Airdrie site to be £3,900,000. This
was based on the construction of 55 detached or semi-detached units with no
flats; this reflected his view that the market for flats in December 2007
was poor. His appraisal was less detailed than those carried out by the
parties' representatives. That is perhaps unsurprising because house builders
have a database with all their costs, which immediately provides detailed
figures for most inputs.
[43] In addition to the expert witnesses, both parties led
evidence from their present or former employees as to the application of the residual
method. The pursuers' evidence of valuation using the residual method is found
primarily in three contemporaneous appraisals (Nos 6/54, 6/56 and 6/57 of
process). These were based on information available to the pursuers' employees
in 2006 and 2007. The first appraisal (No 6/54) was an assessment of
Broomhouse in March 2006. Three of those involved in its preparation, Mr Law,
Mr Haldane and Mr King, the pursuers' Chief Quantity Surveyor, gave
evidence. This appraisal disclosed a gross margin of 24%, which Mr Law
indicated was the norm in 2006. The gross margin varies according to the state
of the housing market, and tends to increase when times are more difficult.
The March 2006 appraisal was updated in December 2007 (No 6/57). At this
point the gross margin was 35%. The difference reflected the fact that the
price in the 2006 missives, which was carried through into the December
2007 appraisal, was at historic levels. Thus the development of the land was
likely to be particularly profitable for the pursuers. As I have indicated at
paragraph [29] above, I consider that it is not appropriate to use the historic
price in comparing the Broomhouse and Airdrie sites. For that reason I
discount the December 2007 appraisal.
[44] The Airdrie site was assessed by the pursuers in November 2007
(No 6/56). The gross margin in this appraisal was 25%, and the land cost was
assessed at £3,823,694. This appraisal was based on a layout of 73 units
on the site; those consisted of 46 houses and 27 flats. That layout was
essentially based on the defenders' original plan for the area, although the
latter did not list the number of units or the number of flats in areas shown
on the plan as blocks of flats. Mr Calvert gave evidence on the layout of
the site, and indicated (under reference to the assessment found at no 7/2 of
process) that it should be possible to construct 86 units on the site (using
the defenders' house types; I did not understand anything to turn on this
matter). Mr Calvert's assessment included 40 flats. Thus the main
difference between the two appraisals was that Mr Calvert included an
extra 13 flats. As I have mentioned, Mr Whyte thought that the developer
would remix the Airdrie development because of the weak market in flats at that
time. In addition, evidence indicated that flats are more expensive to build
because the build costs for several properties must be incurred before sales
can be carried through. Counsel for the defenders submitted that there was no
obligation on the purchaser of land to maximize its value, and that accordingly
it was appropriate to take the maximum development that the site could
accommodate. The problem with this approach is, I think, the evidence that
flats were becoming unpopular. I accept Mr Whyte's evidence on this point
that a remix would almost certainly occur. I therefore consider that it is
appropriate to assess the value of the site, as Mr Whyte and the pursuers
did, on the basis of the mix used by the pursuers in their appraisal in
November 2007 (no 6/56).
[45] Mr Calvert appraised both the Airdrie and Broomhouse sites
using a version of the residual method (no 7/2). To do this, he assumed a
mixture of the defenders' house types (86 at Airdrie and 50 at Broomhouse),
calculated the revenue that would be obtained from sales, deducted build cost
per square foot and calculated the profit. That enabled him to assess the
value of each site. He estimated the land value of the Airdrie site at £4,899,288
and the land value of the Broomhouse site at £4,162,471. That assessment
of Airdrie assumed that 46 houses and 40 flats were constructed, while the
defenders' appraisal assumed 46 houses and 27 flats. As I have indicated, I
accept the evidence of Mr Whyte on this matter and consider that a
developer would in all probability have remixed the development to produce
something along the lines of the pursuers' mix of houses and flats. To some
extent Mr Calvert conceded this point. It was suggested to him in
cross-examination that having 40 flats among the 86 units was unrealistic, and he
replied that builders were still constructing flats; that included the
pursuers. He accepted, however, that it might be possible to remix the site in
the manner that the defenders had originally intended when they prepared a plan
for its development. That would reduce the percentage gross margin but would
still produce a higher land value than in the pursuers' appraisal of Airdrie.
[46] Mr Calvert carried out a further comparison of the various
appraisals of the sites that had been made by the pursuers (no 7/14). This
concentrated on percentage gross margins, and did not expressly address the
question of land values. It illustrated very clearly that the assessment of
Broomhouse carried out by the pursuers in December 2007 (no 6/57) was
plainly out of line with the other assessments; it disclosed a gross margin of
35%, which should be contrasted with a gross margin of 24% for the appraisal of
Broomhouse carried out in April 2006 (no 6/54) and with a gross margin of
25% for the pursuers' appraisal of Airdrie carried out in November 2007 (no
6/56). This comparison also dealt with the pursuers' appraisal of Airdrie if
the defenders' layout there had been utilized; in that case the gross margin
would have been 29.97%. The gross margin is clearly a measure of the
profitability of the development, and the evidence established that it is so
regarded within the house building industry. The majority of appraisals, as Mr Calvert's
comparison makes clear, were in the region of 21% to 25%, and only the two that
I have mentioned (Broomhouse in December 2007; Airdrie with defenders'
layout) were out of that range. That is perhaps a pointer that these are not
realistic, the appraisal of Broomhouse because it relied on historic cost that
no longer represented market value and the appraisal of Airdrie because it
represented an unrealistic mix of housing. It might be said that the figure
for Airdrie using the defenders' layout showed how sensitive the residual
method is to changes in inputs; that is no doubt true to some extent, but in my
view the somewhat unrealistic nature of the defenders' mix of housing is the
main reason for this discrepancy. Indeed, when Mr Whyte's evidence on the
mix of housing is taken along with that of the pursuers' witnesses, it seems to
me that Mr Calvert was trying to devise a formula that would maximize the
possible return. In my opinion the realistic mix is that proposed by the
pursuers; this accords with the evidence of Mr Whyte and corresponds in
large measure to the housing layout that was originally proposed by the
defenders (compare nos 6/55 and 6/59).
[47] There are accordingly a number of different appraisals of the
value of the Broomhouse and Airdrie sites. Mr Robertson assessed
Broomhouse at £4.2 million, falling to £3.775 million when abnormal
costs were deducted. He assessed Airdrie at £3.85 million. Mr Whyte's
assessments were £5 million for Broomhouse and £3.9 million for
Airdrie. The pursuers' internal appraisals produced figures of £4.16 million
for Broomhouse and £3.823 million for Airdrie. The figure of £4.16
million was, of course, the historic cost of the property. Mr Calvert's
assessments were £4.16 million for Broomhouse (the historic cost), and £4.9
million for Airdrie. For the reasons discussed above at paragraph [29], I am
of opinion that the historic cost of Broomhouse is irrelevant. In a rising
market, a price agreed in April 2006 will not be a reliable pointer to the
value in December 2007, and it is the latter value that is critical for
present purposes. It can be inferred from the price agreed in 2006, however,
that the value by the end of 2007 was substantially higher; that is inevitable
in a rising market. That tends to suggest that Mr Robertson's figure of £4.2
million, falling to £3.775 million after allowing for abnormals, is too
low. In any event, I think that Mr Robertson's appraisal suffered significantly
from the lack of direct comparators. That leaves Mr Whyte's appraisal of
Broomhouse at £5 million. His appraisal can be criticized on the basis
that he lacked the detailed information that house builders would typically
have been carrying out a residual valuation. It may be that it is somewhat on
the high side. Nevertheless, in a rising market, I am of opinion that that
figure, or something slightly below it, is more likely to be the value of
Broomhouse than either the historic cost or Mr Robertson's figure. I
accordingly assess the value of the Broomhouse site in December 2007 at
somewhere between £4.75 million and £5 million; for the purposes of
the necessary comparison I am content to take the former figure.
[48] So far as Airdrie is concerned, apart from Mr Calvert's
figure of £4.9 million, all of those who gave evidence agreed that the
value was in the region of £3.8 million to £3.9 million. For the
reasons explained above, I am of opinion that Mr Calvert's figure was
based on an unrealistic mix of housing, and in any event I am inclined to think
that he was trying to increase the figure so far as he could. I think that a
figure of £3.85 million can be taken as realistic.
[49] When these figures are compared, it can be seen that Broomhouse
is to be taken at £4.5 million and Airdrie at £3.85 million. That
means that the value of Broomhouse is nearly 17% higher than the value of
Airdrie. In my opinion that is a significant difference. It is particularly
significant in view of the fact that I have taken, I think, particularly
conservative figure for the value of Broomhouse. If the value of Broomhouse is
taken at £5 million, as Mr Whyte contended, the corresponding figure
is 23%. Apart from the percentage figures themselves, I formed the distinct
impression during the evidence of Mr Whyte, in particular, that Broomhouse
was quite simply a more desirable site than Airdrie. It catered for a higher
level of the market, involving detached houses on plots of a larger size than
Airdrie; moreover, because of the planning conditions, houses had to conform to
a better specification. Moreover, the Broomhouse site was better located.
Quite simply, Broomhouse was the better site. To move the value of Airdrie up
to anything like the value of Broomhouse it was necessary to assume a mix of
housing that was, I thought, unrealistic in market conditions at the end of
2007. I rely on the evidence of Mr Whyte in reaching that conclusion.
[50] I accordingly conclude that the two sites were not of
"comparable value" within the meaning of condition 12. The
pursuers are accordingly in breach of contract on that account. This is a
preliminary proof, however, and I am conscious that my findings are not fully
in accordance with the position taken by the pursuers in their submissions. I
accordingly propose to have the case put out by order in order that parties may
address me on the consequences of my findings.
[51] I should add that I was addressed by both parties on the
question of burden of proof. The defenders contended that the burden of proof
rested on the pursuers, in accordance with the normal rule; the pursuers, by
contrast, contended that the burden of proof rested on the defenders, as they
were the party seeking to establish that an offer had been duly made in terms
of condition 12. It has frequently been observed that in the end of the day
the question of burden of proof is rarely material. In my opinion this is such
a case. I have reached the foregoing conclusion without finding it necessary
to decide where the burden lies.