Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2015] CSOH 86

CA177/14

OPINION OF LORD WOOLMAN

In the cause

DAVID DOUGLAS ERNEST KENWRIGHT

Pursuer;

against

STUART MILNE GROUP LIMITED

Defender:

Pursuer:  Clark QC;  Ledingham Chalmers LLP

Defender:  McBrearty QC, A Sutherland;  Burness Paull LLP

30 June 2015

The issue
[1]        The pursuer claims that he is entitled to be indemnified by the defender in respect of a loss of £300,637.  The defender accepts it must pay him a sum of about £8,000, but otherwise denies liability.  The dispute turns on the construction of the letter containing the indemnity and its application to the circumstances that have occurred.

The facts
[2]        David Kenwright owns Greystone Farm, Alford. In March 2003, he granted an option to purchase part of the farm to the Stewart Milne Group Limited (“SMG”).  SMG is a house-builder and developer.  The option agreement is set out in missive letters that the parties exchanged between 14 January and 11 March 2003, which were subsequently registered in the Books of Council and Session.

[3]        The principal terms of the option agreement are contained in the first missive letter dated 14 January.

1. In return for payment of £1, Mr Kenwright granted SMG the exclusive option to purchase a maximum of 104 acres of land at the farm (“the available land”).
2. The right to exercise the option was to endure from 23 January 2003 for a period of ten years.
3. SMG could only exercise the option in respect of such parts of the available land that had the benefit of detailed planning permission and all necessary consents.
4. The parties agreed to collaborate in securing planning permission.
5. Mr Kenwright was bound to enter any agreement required by the planning authority in terms of section 75 of the Town and Country Planning (Scotland) Act 1997.
6. SMG agreed to indemnify Mr Kenwright in respect of any obligations or liability that he incurred in respect of such a section 75 agreement.
7. The purchase price would be calculated in accordance with a formula based on (i) a sum of £225,000 per developable acre, and (ii) twice the agricultural value of the land, subject to certain specified deductions.
8. The first exercise of the option had to be in respect of at least nine “developable acres”. SMG could not exercise the option only once, or on more than six occasions. If there remained an area with the benefit of detailed planning permission, SMG was bound to exercise the option in respect of that further area.

[4]        SMG applied for planning permission in 2005.  It then held discussions with Aberdeenshire Council (“the council”) about the application.  The council published the Aberdeenshire Local Plan in 2006.  It indicated the need for new housing in Alford and supported residential development on the available land.  The Local Plan also confirmed the council’s established policy on developers’ contributions.  When granting planning permission it would seek a contribution from the developer to fund public facilities, for example, schools or community centres.

[5]        The discussions between SMG and the council led to agreement in principle.  The council would grant planning permission for the development of two areas at the subjects, known as phases 1 and 2.  They also agreed that Mr Kenwright would convey an area of land to the council that would later be known as the Community/Education Facility Land (“the CEF land”).  It lay between phases 1 and 2.  That transfer would stand in place of a developer’s contribution.  No purchase price would be paid and the council’s legal fees would be met by Mr Kenwright.

[6]        The council undertook to use the CEF land solely for community and educational purposes.  There had been a long standing need for a new school and community centre to be built in Alford.

[7]        Mr Kenwright did not participate in the discussions between SMG and the council. Subsequently, however, he learned and approved of the proposed terms.  Given that he had to grant the disposition of the CEF land, his concurrence was essential.

[8]        The council granted planning permission on 14 July 2010 along the lines previously agreed.  As expected, they made the grant subject to the execution of a section 75 agreement. The parties had anticipated that requirement and executed such an agreement in June.  Paragraph 11 required Mr Kenwright to transfer the CEF land to the council provided certain conditions were met.

[9]        Several other important documents were executed in the summer of 2010.  By missives dated 15 and 16 July, SMG and Mr Kenwright varied the 2003 option agreement.  They dispensed with the original price formula and agreed that the purchase price for phase 1, which amounted to about 36 acres, should be £2,053,519.  They also made arrangements in respect of the CEF land:

“5. Whereas the [section 75 agreement] identifies Community/ Educational Facility Land to be conveyed to Aberdeenshire Council in terms of the s 75 agreement … the parties agree that the following provision shall apply to the Community/Educational Facility Land: –

5.1 The purchase price … shall be the sum equivalent to twice the prevailing open market value of the Community/Educational Facility Land for agricultural use at the date of exercise of the option;

5.2 [SMG] shall only exercise the Option over the Community/ Educational Facility Land for the purposes of implementing the s 75 agreement but may exercise the option at any time to do so.”

[10]      In fulfilment of SMG’s obligation in the option agreement, its solicitors had written to Mr Kenwright on 17 June.  Their letter is headed “Indemnity, section 75 Agreement in respect of Land at Greystone Road, Alford.”  Paragraphs 1 to 4 of the letter narrate the background.  Paragraph 5 is the operative provision.  It refers to Mr Kenwright as “the Proprietor of the Development Site” and to the section 75 agreement as “the Agreement”:

“Now therefore on behalf of and as instructed by Stewart Milne Group we undertake, in the event of Stewart Milne Group … commencing any development so that the obligations in the Agreement take effect against the Proprietor of the Development Site or any part thereof, to implement and perform or procure the implementation and performance of the whole obligations of the Proprietor under the Agreement to the satisfaction of the Council in relation to the Development Site and to free, relieve and indemnify the Proprietor from and against all and any loss, liability, obligations, damage, claims, proceedings, costs or expenses of whatever nature which may result from, or which they may incur, suffer or sustain under the terms of the Agreement as the Proprietor of the Development Site, unless and until such obligation or liability under the Agreement has been satisfied and fulfilled or the Proprietor grants a written waiver to Stewart Milne Group of any such obligation or liability thereunder.”

[11]      On 19 July 2010, SMG exercised its option to purchase phase 1 of the subjects under the 2003 agreement.  It paid the agreed price, took possession and began building the development. It did not serve any further option notice.  The 2003 option agreement (as amended by the 2010 missives) expired on 23 January 2013.

[12]      On 15 August 2013 the council called upon Mr Kenwright to convey the reserved land to it and he did so on 27 September 2013.  The council incurred conveyancing costs of £7,837.20 relative to that transaction.

What is in dispute?

[13]      SMG accepts that it must indemnify Mr Kenwright in respect of the council’s conveyancing costs.  The present dispute relates solely to the CEF land.  It can be crystallised into two questions.  Is SMG bound to indemnify Mr Kenwright?  If so, what loss has he suffered?

Submissions
Mr Kenwright
[14]      The indemnity in the letter of 17 June 2010 is drawn in the widest terms.  It was designed to give Mr Kenwright comfort that he would not suffer any loss in respect of entering into the section 75 agreement.  The letter imposed a unilateral obligation on SMG to convey the CEF land to the council for no consideration.  The 2010 missives provided a mechanism for SMG to do so.  By failing to discharge the obligation, SMG had caused loss to Mr Kenwright.  He is entitled to claim £292,800, being the agreed purchase price in terms of the 2010 missives.  Properly construed, the documents disclose that the parties intended that Mr Kenwright should receive the value of the CEF land.  No part of that value was included in the purchase price for phase 1.

SMG
[15]      SMG had discharged its obligations in terms of the June 2010 letter.  It had procured the implementation of the planning condition by arranging for Mr Kenwright to convey the reserved land direct to the council.  His submission had a fundamental flaw.  It proceeded on the footing that SMG was itself bound to convey the CEF land to the council.  In any event, looking at the transaction as a whole, Mr Kenwright had not suffered a loss.

Decision
[16]      The letter of 17 June 2010 imposes two distinct obligations on SMG.  One relates to performance, the other to indemnity.  In order to perform the section 75 obligation, SMG had a choice.  That is plain from the wording of the letter.  It was itself entitled to “implement and perform” the obligation.  To do so it could have exercised the option contained in the 2010 missives.  

[17]      But there was an alternative.  It was also entitled to “procure the implementation and performance” of the obligation.  That route had the obvious practical advantage of reducing costs.  It only required one disposition, rather than two.  That is the route that was taken. Mr Kenwright did convey the CEF land to the council in 2013.  SMG was entitled to secure performance in this manner.

[18]      Mr Kenwright’s hope that SMG would purchase the CEF land is understandable.  The 2010 missives contained arrangements for a transfer to take place.  Crucially, however, they did not impose a binding obligation on SMG.  It simply had a right to purchase the CEF land and in the event, it chose not to do so.

[19]      I would add this observation.  The transfer of the CEF land was an integral element of the composite transaction.  Suppose Mr Kenwright had not agreed to convey it to the council.  The consequence would have been either (a) that the council refused to grant planning permission;  or (b) it would have levied a developer’s contribution, which would have materially reduced the purchase price that SMG would have been willing to pay.  Looked at in this light, Mr Kenwright has already had the value of the CEF land.  The purchase price for phase 1 reflected the fact that it had the benefit of planning permission. He retains phase 2, which likewise has an enhanced value.

Conclusion
[20]      I conclude that SMG is not bound to indemnify Mr Kenwright, other than in respect of the council’s conveyancing costs.  I shall fix a by order hearing to discuss matters in the light of this opinion and meantime reserve all questions of expenses.