207: Option agreement interpreted using business common sense
Fishbourne Developments Ltd v Stephens  EWCA Civ 1704
This case dealt with an option agreement entered into in 2002 to acquire a farm (comprising of open fields and a number of farm buildings) located in Fishbourne, West Sussex.
The option agreement entitled the purchaser to acquire the site at a reduced rate from its market value. In order for the option to be triggered the purchaser was required to obtain ‘Planning Permission’. This was defined in the option agreement as ‘a planning permission granted by the Local Planning authority permitting any development of the Property’.
In 2016 the purchaser, Fishbourne Developments, obtained planning permission to erect a new pitched roof on one of the farm buildings and they served notice triggering the acquisition of the property pursuant to the option agreement.
A dispute arose as to whether the planning permission obtained came within the definition of Planning Permission under the terms of the option agreement and therefore was sufficient to trigger the exercise of the option.
High Court Decision
The dispute focused on the meaning ‘any development of the Property’. Fishbourne Developments argued that reference to development in the option agreement was intended to be in line with section 55 of the Town and Country Planning Act 1990 and therefore could relate to a development of the whole or ‘part’ of the Property.
The High Court disagreed and stated ‘development’ had more than one possible meaning. The High Court found that in the context of the option agreement reference to ‘development of the Property’ had to relate to the whole or substantially the whole of the Property and involve the erection of new buildings and a change of use. Accordingly, the High Court held that the option had not been triggered.
Court of Appeal Decision
Fishbourne Developments’ appeal of the High Court decision was dismissed by the Court of Appeal. The Court of Appeal agreed with the High Court’s assertion that ‘development’ had more than one potential meaning. Because of this, it was the Court’s role to consider the various potential meanings and conclude which made commercial common sense in light of the terms of the option agreement and the background of the deal.
The Court of Appeal stated that the High Court was permitted to look at prior agreements in relation to the acquisition of the property, as well as the surrounding circumstances of a commercial deal, in order to assist with interpretation of the contract.
Looking at the background of the deal, the Court of Appeal found that it was clear that reference to ‘development of the Property’ in the option agreement meant a development involving the erection of new buildings and a change of use. Commercially, it would make little sense for Fishbourne Developments to be able to rely on what was described as an inconsequential planning permission in order to acquire the property for a value which was 30% less than market price.
The Court of Appeal also agreed with the High Court that the planning permission obtained must relate to the whole or substantially the whole of the property in order to trigger the option. The option agreement did not refer to the property ‘or any part of it’.
Whilst the definition of Planning Application in the option agreement did refer to the property or any part thereof this made commercial sense given that multiple applications could be made which would allow for development of the whole. The drafting had distinguished throughout the agreement between the whole or part of the property.
This case highlights the need to ensure that drafting is sufficiently detailed to reflect the intention of the parties. The drafting in the option agreement was very loose and the developer interpreted the meaning of the option agreement at face value.
Whilst the Court appears to have given effect to the commercial intention of the option agreement, this was following significant legal costs being incurred by both sides.