Agreement to carry out property development — Licence granted by freeholder — Developer in financial difficulty — Freeholder terminating agreement — Developer entitled to payment for works already done — Valuation — High Court holding that valuation should be by reference to open-market value — Court of Appeal reversing decision — Valuation should be on “cost-based” approach
The plaintiff was the freehold owner of 25/27 Farringdon Road, London EC1. In 1989 it wished to develop the site. To that end it entered into a development agreement. The development was wholly at the developer’s own risk and expense. The developer was to pay a licence fee to the freeholder and was to be remunerated after the completion and the letting of the properties by being paid a sum calculated by reference to the rental values then achieved. The agreement contemplated completion by July 1991. The developer entered the site and on April 11 1990 made a building contract on the standard JCT form (with quantities) with a building contractor. By March 1991 the developer and the surety had run into financial difficulties. On March 18 1991 the building contractor stopped work. The developer failed to pay the quarterly licence fee due on April 1 1991. The building contractor vacated the site. Clause 6 of the development agreement entitled the freeholder, in those circumstances, to serve a notice terminating the agreement. As a result the freeholder became liable to pay to the developer a sum calculated in accordance with Schedule 4 of the agreement. Schedule 4 provided for the valuation by an independent quantity surveyor and for payment by the freeholder of 85% of that ascertained value nine months after service of the notice of termination. A dispute arose as to the basis on which that calculation was to be made between the freeholder and the bank which held a debenture and was assignee of the developer’s interest in the agreement. The bank sought a declaration that the valuation should be on the basis of assessing the cost to the developer under the building contract of the work which they had done (the “cost-based” approach). The freeholder contended that an open-market value approach should be adopted. The High Court held for the freeholder, but the bank appealed.
Held The appeal was allowed.
1. Schedule 4 of the agreement required the quantity surveyor to value “the works executed on the site prior to the date of termination”. The definition of “works” included a cross reference to the definition of “development”. Thus, the work of demolishing the existing buildings and constructing on the site an office building in accordance with the development specification and planning permissions, so far as it had been carried out by the termination date, was to be valued. It was a calculation of work done and materials supplied. Such a valuation, in the absence of an agreement as to prices was to be arrived at by assessing what was the fair and reasonable remuneration for the person who had done that work and supplied those materials, in this case, the developer.
2. The assessment of such reasonable remuneration was part of the normal function of a quantity surveyor or architect appointed under the JCT or a similar form of building contract. In assessing the reasonable and fair remuneration, the surveyor would be entitled to refer to the prices in the actual building contract between the developer and the building contractor. But he was entitled to act upon his own expertise and form his own judgment and assess the reasonable remuneration as at the date of termination.
Roger Toulson QC and Leslie Kosmin (instructed by Simmonds & Simmonds) appeared for the appellant, Banque Paribas; Patrick Talbot QC and Philip Jones (instructed by Boodle Hatfield, of Southampton) appeared for Venaglass Ltd.
