Sale agreements: are damages on a “negotiating” basis available where no loss is suffered?

Burrows Investments Ltd v Ward Homes Ltd [2017] EWCA Civ 1577.

This article will highlight some of the Court of Appeal’s recent findings on “negotiating” damages in the case of Burrows Investments Ltd v Ward Homes Ltd [2017] EWCA Civ 1577.

It also gives a useful reminder of the operation of the “ejusdem generis” principle.  Ejusdem generis means “of the same kind,” so that where, say, a statute or contract lists specific classes of persons or things and then refers to them in general, the general statements only apply to the same kind of persons or things specifically listed.

Background

Here, Burrows was a property investment company and Ward Homes (part of Barratt Homes Group) was a developer.
They had entered into a sale agreement in 2007 for Ward’s purchase of a site in Camber, East Sussex. Briefly, Ward paid over £12million for the site and was to make an overage payment upon completion of the development by reference to the amount by which total proceeds of sale exceeded a specified sum per square foot. To protect Burrows right to receive the prospective overage, the Sale Agreement contained a number of restrictions on the types of disposal allowed.

Under the Sale Agreement a “Permitted Disposal” meant any of the following:

(a) a Residential Disposal save for a Residential Disposal of one of the last three Market Units on the Residential Development constructed or to be constructed and to be Disposed of; or

(b) the grant of any lease over the whole or any part of the Property at an open market rent without taking a premium; or

(c) the transfer/dedication/lease of land for the site of an electricity sub-station gas governor kiosk sewage pumping station and the like or for roads footpaths public open space or other social/community purposes; or

(d) a Disposal of the common parts of a residential scheme to a management company managing a residential scheme

(e) the grant of Security over the whole or any part of the Property

(f) any disposition of the types referred to in Sections 27(2)(d) or (e) of the Land Registration Act 2002 [which relate to easements and rent charges].”

In developing the property, Ward applied for a new planning permission in relation to the final phases of the development. A new planning permission was granted subject to conditions, which included entry by Ward into an agreement under section 106 of the Town and Country Planning Act 1990 with the Council, (“the Section 106 Agreement”). This revised scheme enabled Ward to build a further 48 units, as opposed to the further 35 units which could have been built under the original scheme. The new units were, however, on average smaller than those for which permission had originally been granted. Sales of the units already constructed had stagnated in the wake of the financial crisis of 2008, and it was hoped that this change would improve the prospects of further sales.

Under the Section 106 Agreement, Ward was obliged to make provision for five units of affordable housing to one of a number of specified registered social landlords. Ward initially took the view that the sale of five units of affordable housing at cost price would not be a permitted disposal under the Sale Agreement, and it began negotiations with Burrows about the terms on which Burrows would be prepared to approve such a transaction. However, before any agreement had been reached, and without prior notice to Burrows, Ward completed the disposal of five residential units to the registered social landlord in accordance with the Section 106 Agreement. When Burrows came to learn about it, Ward asserted that it was in fact a Permitted Disposal under the Sale Agreement.

At first instance, the court had accepted Ward’s proposition that the sale of five units of affordable housing to a registered social landlord was a Permitted Disposal within paragraph (c) of the definition, recognising that the provision of affordable housing achieves an important social purpose of substantial benefit to the community. This was the first issue on appeal.

Application of the ejusdem generis principle

In its submissions, Burrows argued that:

(a) paragraph (c) of Permitted Disposal expressly covered only a disposal of land, either for the site of one of the specified facilities or for use in one of the specified ways, and not a disposal of a completed dwelling house;

(b) the words “and the like”, in the first part of the paragraph, and the words “or other social/community purposes”, in the second part, were to be construed in accordance with the ejusdem generis principle.

The genus (or common category) which applied to the first part of the paragraph was ancillary facilities or services for a residential development, and in the second part, facilities of a residential development intended to be used by the public generally. A private dwelling house was not a facility of either kind;

(c) a built dwelling house was a “Market Unit”, in the terminology of the Sale Agreement, not “land”, and permitted disposals of Market Units were expressly dealt with in paragraph (a) of the definition. Since paragraph (a) only comprised sales of Market Units on the open market, it would be strange if paragraph (c) silently included sales of Market Units that did not fall within paragraph (a);

(d) the commercial purpose of the restriction on disposals in the Sale Agreement was to protect Burrows’ interest in receiving an overage payment, if and when Ward had disposed of all (or nearly all) of the Market Units. A disposal of Market Units at cost (rather than at open market value) to a registered social landlord would inevitably have a depressing effect on the overage calculation. Had such a disposal been contemplated, the parties would have made express provision for it; and

(e) at the date of the Sale Agreement, the Property was serviced land with the benefit of full planning permission, with no requirement for affordable housing on the Property and no contemplation by the parties that affordable housing units would be required.

Despite arguments from Ward to the contrary, the Court of Appeal held that the language of paragraph (c), read as a whole and in its context, was not apt to cover disposals of completed Market Units of affordable housing to a registered social landlord. Land which is transferred for the site of an electricity sub-station, gas governor kiosk or sewage pumping station, or for use as a road or footpath, or as a public open space, is unlikely to have any buildings on it at the date of transfer, and would not have a dwelling house on it.

That was the essential point of the ejusdem generis argument, which rather than being a rigid canon of construction, was instead a flexible aid to construction, reflecting the twin requirements of commercial common sense and the need to construe contractual provisions as a whole and in their context. Put another way, “or other social/community purposes” in the second part of paragraph (c) had to be read in the light of the three specified purposes which preceded them, and with at least a provisional inclination to interpret the social and/or community purposes which the parties had in mind as being purposes akin to the provision of land for roads, footpaths or public open spaces.

The consequence was that Ward needed to negotiate terms with Burrows for release from the restriction if it wished to complete its development of the site in accordance with the new planning permission. That is what Ward had initially understood the position to be.

Accordingly, the Court of Appeal accepted Burrows’ appeal that the disposal was not a Permitted Disposal.

Negotiating basis of damages

The second part of the appeal related to damages.

Burrows had no entitlement to an overage payment under the Sale Agreement because the threshold average price per square foot had not been attained when the development was completed. Accordingly, Burrows would have been unable to recover damages on the conventional basis of an amount equivalent to the overage payment because it had suffered no loss as a result of the breach.

Instead, Burrows claimed damages on a “negotiating basis”, based on the sum of money that Burrows might reasonably have demanded from Ward in return for releasing Ward from the restrictions in the Sale Agreement which prevented the disposal to the registered social landlord.

Damages on a “negotiating basis” had usefully been summarised in an earlier case as follows.

“where a breach of contract could in principle have been restrained by injunction, damages could be awarded which represented such a sum of money as might reasonably have been demanded by the claimant from the defendant as a quid pro quo for permitting the continuation of the breach, even though no injunction had been claimed in the proceedings or there was no prospect, on the facts, of such an injunction being granted; that, since such damages were meant to be compensatory and were normally to be assessed or valued at the date of breach, principle and consistency indicated that post-valuation events were normally irrelevant; but that, given the quasi-equitable nature of such damages, the judge might where there were good reasons for doing so direct a departure from the norm, either by selecting a different valuation date or by directing that a specific post-valuation-date event be taken into account …”

Put another way, the damages represented such a sum of money as might reasonably have been demanded by the claimant from the defendant as a quid pro quo for permitting the continuation of the breach of covenant or other invasion of right.

The key issue therefore was whether Burrows could recover damages on a negotiating basis, even though it had suffered no loss.

The Court of Appeal’s view was that Ward had transferred the five properties to the registered social landlord in breach of an express term of the Sale Agreement. Burrows had a legitimate interest and expectation that Ward would not breach the Sale Agreement, reinforced by the fact that Ward had initially negotiated with Burrows on the footing that the proposed transfer was prohibited by the Sale Agreement, and had then effected the transfer behind Burrows’ back and without Burrows’ consent.

Burrows was not now seeking to extract a ransom from Ward, but merely to be compensated for the loss of the opportunity to negotiate a reasonable price for releasing Ward from its contractual obligations. The benefit of the contractual restriction was a potentially valuable piece of property in its own right, and Burrows was deprived of the opportunity to exploit it, for what it was worth, by Ward’s unilateral action.

The fact that Burrows would suffer no loss and whether or not the case of affordable housing was foreseen at the time of the Sale Agreement, might well be factors in the hypothetical negotiation that would identify the quantum of the damages, as would the urgency and the value of the variation to Ward; but these factors were irrelevant to the question whether damages assessed on a negotiating basis were recoverable in principle.

The upshot was that the appeal was allowed and the case remitted back to the judge for determination of quantum.