Fighting a losing battle

Fighting a losing battle - drafting and interpretation of complex legal documentation

This article was included in the summer 2011 issue of Informer - the real estate newsletter.

The recent case of Woodford Land Limited v. Persimmon Homes Limited is a reminder of the care that needs to be taken in both the drafting and interpretation of complex legal documentation.

Woodford had granted Persimmon an option to buy various brownfield sites. The price to be paid by Persimmon was specified in the option agreement, but with deductions being allowed for various "development costs". The option appears to have been well drafted and went into a great deal of detail as to what the "development costs" were to include. The issue that arose in this case was whether or not a £4.5 million charge relating to affordable housing (as required by a section 106 planning agreement) could be counted as a "development cost", and therefore be deducted from the purchase price. If not, then Persimmon would have to bear this charge.

The potential for an affordable housing levy was clearly identified by the parties during the negotiation and drafting of the option, with the parties agreeing that Persimmon would  bear the cost. Despite this clear wording, Persimmon argued that the affordable housing levy should be counted as part of the "development costs", as there was other sweeper wording within the option relating to general section 106  costs. Persimmon's view was that the general wording should take priority over the specific wording.

A first attempt at settling the issue took place before an expert. During those proceedings, Woodford conceded that Persimmon’s construction of the option, that the housing levy was a deductible development cost, was correct. This was a concession that would come back to haunt them later. As a result of the proceedings before the expert, Persimmon secured a £4.5 million reduction in the purchase price. This was something Woodford were not happy with, so they then took the matter to court.

Because the expert determination under the option was stated to be binding, except in the case of manifest error, Woodford had to pursue a new legal argument in the courts by making a claim for rectification of the option, rather than asking for the court to determine its proper construction. 

Construction and rectification claims are often brought together by a party who is seeking to have an agreement construed in its favour.

• Construction is a request for the court to interpret the meaning of the actual words of the documentation. In this instance, a court will usually be limited to a review of the documentation and will not able to review other evidence.
• Rectification is a wider claim and is based on proving that the words in the document are not what the parties intended. In this instance, the courts can look at the wider context of the transaction, such as the negotiation of the documents and the drafts which preceded the final document.

The judgment is an oddity in which Woodford appeared to win, only to lose at the last hurdle. Henderson J, in reviewing the rectification claim, also looked at the option wording. He held that the wording of the option was clear, and that the specific provisions relating to affordable housing squarely placed the burden on Persimmon. As is usual, the general wording would be superseded by such specific terms. At this point you would have thought Woodford had won, however, this is where the earlier expert proceedings came back to haunt them. Because the earlier expert decision on construction was binding upon the parties, Henderson J held that this overruled the express and clear meaning of the option and, effectively, was an agreed variation of the terms of the option. Further, because the wording of the option clearly reflected what the parties had agreed, there was no question of rectification being appropriate.

As we are living in uncertain economic times, it is highly likely that option agreements with variable purchase prices and sale contracts with later, contingent payments (usually termed overage) will become more common. These contracts have clear benefits: they provide a way of preventing a valuation deadlock where it might be very difficult to come up with a market value for a piece of land; and may save the seller from later embarrassment if the land proves more valuable than it expected. Because such arrangements have very real financial consequences resting on their construction, an argument on their interpretation is always a possibility. It is therefore essential to:

• Make sure the drafting is very clear.
• If there are to be any deductible expenses/costs, make sure the wording is reviewed by the accounting team to ensure there are no missing heads of expenditure that are anticipated. Are you able to specify these at the outset?
• Have a second pair of eyes review the paperwork to test for clarity and loopholes.
• If there are any contentious issues arising from negotiations deal with them specifically rather than hoping that general wording will suffice. Specific provisions should prevail over the general.
• If you do need to enforce the agreement, make sure you have a consistent strategy for doing so and be very careful as to conceding any interpretation points.