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27th August 2014

Interpretation of a poorly drafted contract conditional on planning

A recent High Court case, Cohen v Teseo Properties Limited, has yet again highlighted the risks if terms of a contract are not made clear enough.

A recent High Court case, Cohen v Teseo Properties Limited, has yet again highlighted the risks if terms of a contract are not made clear enough. The parties had entered into a contract for the sale of a property, conditional on the buyer securing planning permission to undertake residential development. The contract included a date on which the contract would terminate if satisfactory planning permission had not been obtained, the long stop date. This was defined as: “6th January 2014 subject to an extension or extensions if requested by the Buyer pursuant to Clause 13.5 up to and including 9th June 2014 …”. Clause 13.5 essentially allowed the buyer to give the seller notice that it wanted to extend the contract if planning permission hadn’t been obtained by the long stop date and required the buyer to make an additional payment to the seller for each month of the extension. However the meaning of “up to and including 9th June” wasn’t clear: did it refer to when the buyer could make a request or set a limit on the end date of any extensions? By 6th January no satisfactory planning permission had been obtained and no request for an extension made. The buyer requested an extension some days later. The seller refused to grant an extension and applied to Court for a declaration that the contract had already terminated, leaving him free to deal with the property as he chose. The buyer argued that the terms of the contract meant that it could give notice any time after 6th January up to 9th June and that, as it had done so, the long stop date had been extended so the contract hadn’t terminated on 6th January; it had effectively revived the contract. The seller of course argued the opposite, that a proper interpretation meant that the buyer could not give notice after 6th January: if the buyer hadn’t given notice by 6th January, that date had to be the long stop date and so the date the contract terminated. The Court agreed with the seller’s interpretation and held that the seller was entitled to treat the contract as terminated and keep both the initial deposit and the planning permission that was granted shortly after 6th January. The main reason for the Court’s decision was simply that it followed the interpretation which it considered to make more business common sense. Here are some of the key points which the Judge took into account in coming to his conclusion: 1. In his opinion, the contract drafting was poor and the inter-relationship between important provisions not clearly explained. As is usual the parties’ intentions should be interpreted objectively but the bad drafting made it particularly important for the Court to have regard to business common sense when making inferences from the contract. 2. He highlighted two important features of the contract’s commercial context: a. The buyer was to pay a fee for the privilege of extending the contract. It would go against the commercial logic of the bargain if the buyer could obtain an extension until 9th June without having to pay anything extra just by waiting until then before making a request. b. The parties clearly wanted certainty about when they would remain bound by the contract. This would be undermined if the buyer’s interpretation was correct and the contract could be revived any time after 6th January up to 9th June. 3. The buyer had argued that a literal interpretation of the contract suggested that an extension request must be made after 6th January. The Judge did not consider there was a conflict between the literal interpretation and the business common sense meaning, i.e. that the parties must have meant requests to be made on or before 6th January. He said that, when an agreement was poorly drafted like this, the business common sense interpretation would in any case have prevailed over a contrary literal interpretation. There are two important messages from this case: first, the importance of understanding time limits in your contracts and, second, that the Courts will try to give commercial sense to agreements particularly when the drafting is poor. When drafting is complex, as it often is in conditional contracts, the drafting and interplay of clauses should always be checked to ensure that the clauses have the intended effect in various different scenarios. For more information, please contact Martin Smith on 01223 461155 or click here to email Martin. For more information on our Commercial Property services please click here.

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