William Cursham demonstrates how easily a contractual dispute can arise when circumstances on the ground change
It is a fact of legal life that however careful lawyers are, they do not have crystal balls, and while the world moves on, the contracts that are drafted stay the same. Sometimes these changes can be anticipated and provision made for them. At other times they either cannot, or are not, and this leads to a mismatch between what the contract says and the reality on the ground.
If the parties cannot resolve this mismatch, a dispute develops, with each party trying to strain the meaning of the contract to suit their own commercial circumstances. Such disputes can be worth millions of pounds, but more often than not they will turn on the meaning of one phrase, or even one word, within a particular provision.
A practical example
Take, for example, a developer who enters into an option agreement with a landowner in 1990 to purchase some agricultural land for residential development. The purchase price includes a deduction for the developer’s costs of building infrastructure on the option land. However, because the parties expect to receive a ransom payment from neighbouring landowners who would have to use this infrastructure, a clawback provision is included in the option, which provides that the bulk of any ransom payment received would go back to the landowner.
The clawback provision is triggered when a payment is made:
“by a neighbouring landowner or by any other person not a party to this Agreement in consideration of the grant to such landowner or person of the right to connect with and to use roads pathways and services constructed or to be constructed on through or under [the option land]”.
Some years later, the parties enter into two further contractual arrangements that directly relate to this clawback. The first is a provision in a section 106 agreement, which provides that any neighbouring landowner who wants access across the option land must pay a charge (“the charge”). The charge is essentially a ransom payment that would trigger the clawback provision under the option. The parties expect it to be in the region of £17m.
The second provision is contained in the eventual transfer of the land, which takes place in 2000. The landowner insists on a covenant being included, providing that the developer cannot grant “third party rights” without payment under the clawback provision and payment of the charge.
The option agreement, the section 106 agreement and the transfer all anticipate that the neighbouring land will be purchased and developed by a third party. Both parties are happy with this because someone else will be paying the charge, which the parties would then split between themselves as per the clawback provision.
The problems come when, a few years later, the developer purchases the neighbouring land. As owner of both the option land and the neighbouring land, it thinks that it will not have to grant “third party rights”, because it would be granting rights to itself. This being so, it would not be caught by the charge or the clawback.
Unfortunately, the drafting of the covenant in the transfer means that the legal situation is not so clear. “Third Party Rights” is actually a defined term, as defined in the original option, and is a right granted to a “neighbouring landowner or any other person not a party to this Agreement”. Since the developer has now become a “neighbouring landowner”, it is potentially caught by the covenant. Inevitably, the landowner takes this view, as it would mean that the developer still has to pay the clawback and the charge.
There is, however, a potential loophole. Under the covenant in the transfer the developer covenanted not to grant any third party rights. The word “grant” assumed that the developer would have to grant private rights over the infrastructure on the option land. However, if that infrastructure was adopted (which it inevitably would), then the public as a whole would have rights over it, and so the developer would not have to make any grant at all.
The developer therefore proceeds to have the roads on the option land adopted, before connecting with the roads on the neighbouring land. The landowner takes the view that the developer is granting “third party rights”, and insists on payment of the clawback and the charge.
Thus a dispute worth millions of pounds develops over the interpretation of one short phrase: the “grant of Third Party Rights”. It is very tempting to look back on this type of dispute and ask whether it could have been avoided. In this case, you might say that the parties could have anticipated that the developer would purchase the neighbouring land, and made specific provision for it in the option agreement. With a little more foresight, perhaps they could, but it is all too easy to say that with the benefit of hindsight.
Top tips
● When negotiating any important provision, and particularly one that might not be triggered for a number of years, think about how circumstances might change, and make specific provision for those changes. Don’t leave any room for doubt.
● Beware of defined terms. If you see a defined term (usually identified by the fact that the first letters are capitalised), make sure you double check what the definition means. It might mean something entirely different to what you think it does.
Will Cursham is an associate at Gateley LLP
