Sale of land – Appellant purchaser to develop land as business park – Initial purchase price to be uplifted by way of profit share in specified events including onward sale – Onward sale to sister company – Whether uplift payable – Whether profit share to be calculated by reference to open market valuation where onward sale not made at arm’s length in open market – Declaration granted in favour of respondent vendor — Appeal dismissed
Pursuant to an agreement dated August 2004, the appellant purchased 11 acres of land from the respondent council with a view to its development as a business park. The initial purchase price of £365,000 was subject to provisions for an uplift by way of a profit share, pursuant to clause 9 of the agreement. The uplift was to be triggered in the event that the appellant either gave notice to the respondents to purchase their part of the profit share or made an onward disposal of the property by way of sale or the grant of a lease for a term of more than 25 years. The uplift was to be calculated as a percentage of the estimated profit, gross sale proceeds or lease value, less certain “allowable costs” as defined in the agreement. Although the “estimated profit” and “lease value” were defined in a schedule by reference to the open market value of the property, the expression “gross sale proceeds” was not; it was defined as the aggregate of the sale proceeds received by the appellant for the property.
The appellant carried out the development contemplated by the agreement and then sold on the property to a sister company for £483,020. They maintained that, since the sale price was less than the allowable costs, no uplift was payable to the respondents under clause 9. The respondents claimed that the open market value of the property was considerably more than the price for which the appellant had sold it and that the commercial purpose of the agreement required the uplift to be calculated by reference to the open market value, regardless of the event that triggered it. In the courts below, they obtained a declaration that the uplift fell to be calculated by reference to the open market value. The appellant appealed.
Held: The appeal was dismissed.
Clause 9 set out three triggers for the payment of an uplift, with the schedule setting out the three ways in which the base figure for the profit share was to be arrived at. Although those three approaches appeared at first to be mutually exclusive, the context indicated that they had one thing in common: the base figure was to be taken as the amount that the property would fetch in a transaction conducted at arm’s length in the open market. Although no mention was made of a valuation exercise in the case of a sale, a sale at arm’s length was usually taken to be the best evidence of the value of the property in the open market and a separate valuation would be a needless formality in such a case. However, it would serve a real purpose where, as in the instant case, the sale was not an open market sale. The definition of the profit share in the schedule did not, in terms, confine the method to be used in the case of a sale to the gross sale proceeds. The three methods were presented as alternatives. There was no difficulty in implying a term that, in the event of a sale that was not at arm’s length in the open market, an open market valuation should be used to arrive at the base figure for the calculation of the profit share. Viewed in context, the parties’ intentions must have been that the based figure for the uplift was to be the open market value of the property at the date of the event that triggered the obligation to pay it. That was what they would have said had they been asked about it at the time the agreement was entered into. The commercial purpose of the various methods was to produce a calculation based on the open market value.
This was not a case where there were two alternative available constructions of the language used and the court should adopt the more commercial construction. It was rather a case in which, notwithstanding the language used, the parties must have intended that the appellants would, in the event of an onward sale, pay the appropriate share of the proceeds to the respondents on the assumption that the sale was at a market price: Rainy Sky SA v Kookmin Bank [2011] UKSC 50; [2011] 1 WLR 2900.
Craig Connal QC and Jim Cormack (instructed by McGrigors LLP) appeared for the appellant; Craig Sanderson QC and David Thomson (instructed by Brodies LLP) appeared for the respondent.
Sally Dobson, barrister
