Landowners who grant options, or who enter into contracts for sale conditional on the grant of planning permission, may subsequently wish to dispose of the land to a third party subject to options or contracts that bind them.
In Ridgewood Properties Group Ltd v Valero Energy Ltd [2013] EWHC 98 (Ch), the seller had entered into both options and conditional contracts for the grant of building leases over several petrol station sites. On completion of the construction of flats and offices above, and around, the petrol stations, the freeholds were to be transferred to the developer with leases back of the forecourts and shops. The agreements did not prohibit the seller from dealing with the sites, but did restrict the developer’s freedom to do so.
The developer complained that the seller had repudiated the agreements because it had transferred the sites to third parties, who had refused to comply with them. The seller relied on the fact that it sold the sites subject to the agreements and pointed to the indemnity covenants in its favour given by the transferees in the transfers.
The judge decided that there was nothing in the agreements that prohibited the seller from dealing with the sites. However, it was possible to imply a term that the seller would not do anything to prevent performance of the agreements. Consequently, the question was: had the seller prevented itself from performing its positive obligations – in relation to the planning process, to enter into planning agreements, to grant access and to give consents and approvals – by selling the properties in the way that it did?
Were the buyers bound to perform the seller’s obligations as a result of section 3 of the Landlord and Tenant (Covenants) Act 1995? This provides that the benefit and burden of “landlord and tenant covenants of a tenancy” pass on any assignment of the reversion and of the tenancy. Section 28 (1) defines a “tenancy” to include an agreement for a tenancy. However, the judge decided that the provisions do not apply to obligations before the grant of tenancies that cannot fairly be described as landlord and tenant covenants at all. Therefore, the burden of the seller’s obligations in options that had not been exercised and contracts that had not become unconditional had not passed to the buyers.
The seller had intended that the buyers would assume responsibility for complying with the terms of its agreements with the developer, but the judge was unable to interpret the indemnity covenants that it had extracted from the buyers as widely as that. The judge ruled that assignors must extract clear covenants, in unequivocal terms, in order to place assignees under specific obligations to perform, going beyond mere indemnity. The seller had failed to do that here (even though it might have been able to secure performance of the obligations in the agreements in practice, by calling on the indemnities in its favour).
Therefore, the seller had put it out of its power to comply with its obligations to the developer. However, the developer had consciously and deliberately affirmed the agreements. Consequently, it could not rely on the seller’s repudiatory breach of the agreements (although it might still have a claim for damages for non-repudiatory breach of them).
Practitioners can learn much from this decision, which highlights the importance of ensuring that buyers enter into direct obligations with everyone interested to give effect to positive obligations that have yet to be performed.
Allyson Colby, property law consultant
