Option Agreements: The Importance of Context and Commercial Common Sense

Option Agreements: The Importance of Context and Commercial Common Sense

Author: Abby Stephens

Key Contact: Jennifer Butcher

The recent case of Fishbourne Developments Ltd v Stephens [2020] EWCA Civ 1704 has highlighted the importance of considering factual context and using commercial common sense when interpreting trigger events in option agreements over development land.

Background

A written option agreement, made in 2002 (“the Option Agreement”), related to the purchase of a 117-acre farm in Fishbourne, West Sussex (“the Farm”). The option, due to expire on 31 December 2020, entitled the option holder (“the Claimant”) to acquire the Farm at a 30% discount on its open market value.

Under the Option Agreement, the trigger for the option was the obtaining of ‘Planning Permission’, defined as, “a planning permission granted by the Local Planning Authority permitting any development of the Property“. In 2016, the Claimant had obtained planning permission for a new roof on one of the Farm’s agricultural buildings. In 2018, the Claimant gave notice to trigger the option, on the basis that the planning permission previously obtained amounted to a ‘Planning Permission’ as defined in the Option Agreement.

The Court was therefore required to interpret the Option Agreement and to decide whether the option had become exercisable as a result of the planning permission obtained by the Claimant.

High Court (“HC”)

The Claimant argued that ‘development’ had the meaning given to it by section 55 of the Town and Country Planning Act 1990 (“the TCPA 1990”) and therefore could relate to a development of the whole or part of the Farm.

The HC Judge disagreed and held that ‘development’ had to relate to the whole or substantially the whole of the Farm and involve the erection of new building(s) and a change of use. Therefore, the planning permission obtained by the Claimant in 2016 did not trigger the option to purchase. The Claimant appealed this decision.

Court of Appeal (“CA”)

The CA dismissed the Claimant’s appeal and held that the HC Judge was correct in their finding that ‘development’ had more than one possible meaning. When considering the whole of the Option Agreement, the Claimant’s interpretation of ‘development’ made little commercial sense, as this would allow the Claimant to rely on an inconsequential planning permission to trigger an option to purchase the Farm at a 30% discount. The CA interpreted ‘development’ in the context of the Farm and the Option Agreement as a whole, and held that its meaning did not encompass all of the wide range of activities within the scope of section 55 of the TCPA 1990.

The CA held that the term ‘Planning Permission’ meant a planning permission to develop the whole, or substantially the whole, of the Farm, including new building(s) and a change of use from agricultural. Therefore, the planning permission previously obtained by the Claimant did not trigger the option.

Comment

This decision underlines the significance of factual context and commercial common sense, as well as highlighting the potential risks that run with informal and poorly drafted agreements. Where there is any uncertainty, Judges are likely to adopt a ‘common sense’ interpretation, which can in turn be precarious for all parties involved.     

If you require any advice in relation to the above issues, please contact Jennifer Butcher in our Dispute Resolution team.

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