Valuation — Transfer of land — Provision for additional consideration upon grant of planning permission — Whether value without benefit of grant of planning permission should include hope value
By a transfer
dated February 4 1986 the plaintiff acquired a 20-acre field. Clause 2 of the
transfer provided that in the event of any development permissions being
obtained in respect of the land during the following 20-year period, the
plaintiff would pay to the first and second defendants a sum of 50% of the
amount by which the value of the land in respect of which development
permission has been granted has thereby been increased. On June 20 1989 the
local planning authority resolved to grant planning permission to the plaintiff
to construct a concrete reservoir on the land, and on June 28 notice of the
grant of planning permission was given. The plaintiff contended that, in
arriving at the first valuation, with which the value with the benefit of
planning permission which was granted had to be compared, the valuer should take
into account the prospects of obtaining planning permission, including that
ultimately obtained, ie hope value.
that of sharing development gain — its meaning must be that the value of the
land in question, without the benefit of planning permission, must be
ascertained on the same basis as the contract price appears to have been
ascertained. The inference to be drawn from the inclusion of clause 2 is that
the contract price did not include any expectation of development gain, but
reflected its then existing use. The valuation with which the increased
valuation is to be compared is a valuation performed on the same date as the
increased valuation is performed of the land, but with the use at the time of
the transfer.
The following
case is referred to in this report.
Prenn v Simmonds [1971] 1 WLR 1381; [1971] 3 All ER 237, HL
This was an
action concerning the meaning of a transfer dated February 4 1986 by which the
plaintiff, Mid Kent Water plc, covenanted to pay additional consideration to
the first and second defendants.
Gordon Nurse
(instructed by Gouldens) appeared for the plaintiff; Mark Cunningham
(instructed by Hallett & Co) represented the first and second defendants;
the third defendant did not appear and was not represented.
Giving
judgment, ARDEN J said: This action concerns a dispute which has arisen
over the construction of clause 2 of a transfer dated February 4 1986 made
between Mr and Mrs May, of the first part, the first and second defendants
referred to therein as the ‘nominee’ in the second transfer respectively of the
second part and the plaintiff referred therein as the ‘transferee’ of the third
part.
By the
transfer the plaintiff acquired a field comprising some 20 acres adjoining
Hermitage Lane, Maidstone, Kent, for £76,000. Clause 2 of the transfer provided
in material part as follows:
The
transferee hereby covenants with the second transferor and the nominee that in
the event of any development permission or permissions being obtained in
respect of the land hereby transferred or in part thereof during the period of
20 years from the date hereof, the transferee will on a subsequent sale of the
said land or upon implementing that development permission, but in any event within
two years of the grant of such permission, pay to the second transferor and the
nominee a sum equivalent to 50 per cent of the amount by which the value of the
land in respect of which development permission has been granted has thereby
increased, subject only to an allowance of any tax liability which the
transferee or his successor in title may prove to the satisfaction of the
second transferor and the nominee to be created either as a result of the grant
of the development permission on such subsequent sale or the implementation of
the permission. The amount of such increase in value shall unless agreed
between the relevant parties within one month of the liability arising be
decided by Messrs Cobbs of Sevenoaks, or such other agent as the second transferor
and the nominee may nominate.
On June 28
1989 the plaintiff obtained planning permission to construct a concrete
reservoir on the land in question and a dispute has arisen as to exactly how
the valuer should proceed under clause 2. The dispute does not relate to the
valuation of the land in respect of which planning permission has been granted
with the benefit of planning permission, but rather with the approach which the
valuer should take to the valuation with which that valuation should be compared.
Mr Gordon Nurse, for the plaintiff, has argued that the valuer should, when
doing this valuation, take into account the prospects of obtaining planning
permission including that ultimately granted. Mr Mark Cunningham, for the
defendants, contends that this would defeat the commercial purpose of clause 2.
He invites me to dismiss the plaintiff’s claim for a declaration on this basis.
At the hearing
before me, Mr Nurse has contended in the alternative that the valuer should
disregard any value attributable to the hope of obtaining the development
permission that was in fact obtained. Mr Cunningham has not sought to oppose
this on its merits, but has reserved his position on costs. I should add that
the third defendant is the agent whom the defendants would wish to use for the
purpose of any proposed valuation to clause 2 arising out of the grant of
planning permission on June 28 1989. The third defendant has not, however,
taken any separate part in the hearing before me. None of the parties has
sought to say that the court should leave the question in dispute to the chosen
valuer. I should add that the question has been argued before me purely on the
basis that it is a question of construction, and I have not been concerned with
any question of quantification.
As a matter of
the literal construction of clause 2, the amount which the valuer has to
quantify is the amount by which the market value of the land is increased
simply as a result of the grant of planning permission. But on this basis the
valuer would be entitled to take into account the fact that an application had
been made or, if it had occurred, the fact that the planning authority had
resolved to grant it. In the usual course of events the planning authority will
not change their mind after the passing of the resolution, but some days will
pass before their decision is notified to the applicant. Mr Cunningham has
argued that planning permission is granted when formal notification is given to
the applicant and not before: see vol 46 of Halsbury’s Laws, 4th ed
(reissue 1992), pp 338 to 339, para 448, note 6.
Mr Nurse has
not sought to disagree with this proposition of law, but accepts that the
valuer has to disregard the fact that the planning authority has resolved to
grant permission. This shows that the parties cannot have intended clause 2 to
bear a purely literal construction.
It is indeed
now well established by the highest authority that a contract must be construed
against the factual background known to the parties at or before the date of the
contract: see Prenn v Simmonds [1971] 1 WLR 1381 at p1385H per
Lord Wilberforce, with whom the other members of the House agreed. Accordingly,
I next turn to consider that background.
The plaintiff
called two witnesses, Mr David William Walker, the present company secretary of
the plaintiffs, and Mr John Hoyle [FRICS], a chartered surveyor. The defendants
did not call any witnesses. Mr Walker gave evidence as to the circumstances
surrounding the transfer and some later events, although he himself joined the
plaintiffs only in February 1992 and was relying upon his researches into this
matter. However, no exception was taken to this.
Mr Hoyle gave
evidence as to the valuation practice and as to the plaintiffs’ applications in
1988 and 1989 for planning permission: see below. I now set out the facts
relevant to the question of construction in the events that happened as I find
such facts to be.
1. The
plaintiff is a statutory water undertaker. It was previously a statutory
company, but has since registered under the Companies Act 1985 as a public
limited company. The plaintiff acquired the land in question in this case for
the purposes of its business as a water company.
2. On February
4 1986 the transfer with which these proceedings are concerned was signed. The
first defendant was a nominee for the second defendant, who is the second
transferor for the purposes of clause 2. The land in question was previously
used for a ‘pick your own fruit’ farming enterprise and had no planning
permission. The auction particulars refer to the existence of further medium-
or long-term development potential in the area. The price paid by the plaintiff
amounts to approximately £2,708 per acre, but there is no evidence as to the precise
relationship between this figure and agricultural land values for this type of
land in the area at the time. However, the inclusion of clause 2 suggests to me
that the price paid must have been on the basis of the existing use of the land
and it is difficult to see why if the position were otherwise, the plaintiff
would have agreed to the inclusion of clause 2.
3. The broad
purpose of clause 2 of the transfer was to enable the plaintiff and the first
and second defendants to share development gains after tax if planning
permission were obtained. It appears that it was assumed by the parties to the
transfer that there would be such an increase in value.
4. In June
1988 there was a proposal, which did not in the event proceed, that the
plaintiff would sell the land to Maidstone Football Club for a sum in excess of
£0.5 m on terms that they — that is the club — met the liability to the second
defendant or an offer in excess of £1m with the plaintiff making any payment to
the second defendant. The defendants say that this proposal, while not strictly
relevant to the construction of clause 2, supports the commercial purpose of
clause 2, which I have already outlined and found as fact on the basis of Mr
Walker’s evidence.
5. Later in
1988 the plaintiff made an unsuccessful application for planning permission for
the construction of divisional offices, workshop, district depots and a service
reservoir with a booster pump station. This application was unsuccessful.
6. By an
application dated April 3 1989 the plaintiff applied to Maidstone Borough
Council for planning permission to build a concrete reservoir. The planning
authority approved the application on June 20 1989. Notice of the grant of
planning permission was given on June 28 1989. The permission has now been
implemented.
Mr Hoyle, who,
as I have explained, is a chartered surveyor, gave evidence as an expert. In
the course of his evidence he gave his opinion on a number of matters relevant
to quantification of any increase in value as a result of the grant of
development permission in this case. However, questions of quantification are
for determination by the agent appointed for the purposes of clause 2 and Mr
Hoyle was not cross-examined on these matters. For the record, I would add that
Mr Hoyle was of the opinion that while existing local planning policies
remained in force there was no likelihood of further development being
permitted on the land during the period of the Kent deposit draft plan. He was
further of the opinion that the development which had taken place on the land
was of a very specific nature which could be used only by a public water
authority because any increase in the value of the land would not have to be
taken into account if the plaintiff was to use its compulsory powers, and for the
above reasons in particular there had been no increase in the value of the land
as a result of the grant of planning permission even if hope value were
excluded.
Mr Hoyle also
gave evidence as to the current guidelines of the Royal Institution of Chartered
Surveyors. These guidelines were adopted since the date of the transfer, but
required a chartered surveyor for ascertaining the open market value of the
property without restriction as to its use to take into account any hope value.
In the words of Mr Hoyle:
Such value
includes such element of hope value, if any, as the property may have for uses
other than existing use or for the realisation of such marriage value, if any,
which the property may have for merger with another property or which an
interest in the property may have for merger with another interest in the said
property but limited to the extent that the expectation of realising such hope
value would in practice be reflected in offers that would be made in the open
market by prospective purchasers other than the additional bid of a purchaser
with a special interest.
Mr Hoyle
concludes that, ‘Hope value is thus part of the valuation exercise in this
case’, and it is on the basis of his evidence that the plaintiff asks the court
to declare that the value of the land with which the benefit of development
permission is to be compared includes hope value of both the development
permission in question and any other development permission. Mr Hoyle, however,
accepted that he was not required to follow the RICS guidelines, to which I
have referred, in ascertaining the market value of property if the party’s
contract required him to do otherwise. As a professional matter, however, he
would in that event be bound to point out the differences between his valuation
on the basis agreed by the parties and a valuation in accordance with the RICS
guidelines in his valuation. This point aside, Mr Hoyle confirmed, as one would
expect, that there was nothing in the RICS guidelines which would prevent
effect being given to the party’s contract if it required some other form of
valuation.
The difficulty
in the present case has arisen because clause 2 does not expressly state the
basis on which the value of land, prior to the grant of development permission,
is to be ascertained. I do not myself think that it is a question of the date
at which the land is to be valued. Indeed, I would accept Mr Nurse’s submission
that in order to ascertain the amount of the increase in value owing to the
grant of
between the valuation with the benefit of planning permission and the valuation
without such benefit. But, as I have said in my judgment, the real question is
not the date of such valuation; as I see it, the real question is the basis of
valuation. What the plaintiffs say is that when the valuer ascertains the
market value of the land without the benefit of development permission which
has triggered clause 2 he should, applying the principles of valuation, of
which Mr Hoyle has given evidence, take into account the hope of obtaining
development permission or, alternatively, the hope of obtaining development
permission other than the permission which was in fact granted. If this happens
then, according to the defendants, clause 2 will not achieve the purpose that
any development gain is shared. On the contrary, on the plaintiff’s
construction, the greater the expectation that some permission will be obtained
the less the amount of increasing value to be shared.
At this point
I return to Prenn v Simmonds. In that case Mr Prenn, a purchaser
of a majority shareholding in the capital of a company called RTT, a holding
company, proposed to sell an equity interest in RTT to a valued employee,
called Dr Simmonds, of a trading subsidiary of RTT called Airmec Ltd. Under the
party’s contract, Mr Prenn was to transfer those shares to Dr Simmonds when he
himself had paid deferred instalments of the purchase price for his majority
shareholding out of the proceeds of redemption of certain redeemable preference
shares issued by RTT or, alternatively, when RTT had sufficient profits to
effect this redemption. The alternative was included because Mr Prenn, as the
new controller of RTT, could prevent the redemption of the preference shares.
The difficulty arose because Mr Prenn said that the alternative which used the
words ‘the profits of RTT’, meant the profits of RTT as an entity and not the
consolidated profits of it and its subsidiaries. The House of Lords held that
the profits must be the consolidated profits. As Lord Wilberforce put it at
p1388H:
. . . no
purpose can be discerned why the reference should be to the separate profits of
RTT, which in fact means such part of the group profits as the board of that
company, effectively Mr Prenn, decided to pass up to the parent company.
Thus, the
contract in that case was construed by reference to the objective aim of the
transaction, so in this case I must construe clause 2 by reference to the
objective of the parties in agreeing to it.
Having
considered the contentions on either side, in the light of Prenn v Simmonds,
I am satisfied that the defendants are right. In order that clause 2 may fulfil
what objectively was its aim — that is, the sharing of development gain — its
meaning must, in my judgment, be that the value of the land in question,
without the benefit of planning permission, must be ascertained on the same
basis as the contract price appears to have been ascertained, but such
valuation is to be performed at a later date.
The inference which I have drawn from the inclusion of clause 2 is that
the price did not include any expectation of development gain, but reflected
its then existing use. Thus, in my
judgment, the true construction of clause 2 is that the valuation with which
the increased valuation is to be compared is a valuation performed on the same
date as the increased valuation is performed of the land, but with the use at
the time of the transfer. In argument,
the example was given of successive developments of the same part of the
land. I do not, on reflection, think
that this poses a particular difficulty.
To give effect to the purpose of clause 2 any profits already shared
under clause 2 would have to be deducted from the amount of any subsequent
increase in profit which was also liable to be shared between the parties.
Thus, subject
to any further submissions by counsel as to the detail of the declaration, the
declaration which I propose to grant is a declaration on the terms of clause
1(a) as regards the first paragraph of that proposed declaration, but
continuing in lieu of the alternatives (i), (ii) and (iii) in the draft
provided by Mr Nurse of some such words as ‘being the value which such land
would then have if valued on the basis of its use for agricultural
purposes’. I therefore propose to hear
submissions by counsel as to the declaration which should be made.
Declaration
accordingly.
