The right to release a party from a contractual obligation is itself valuable property which has market value. Where that contractual obligation is breached, even if there is no other loss, so called "negotiation damages" can be awarded.
So held the Court of Appeal on 20 October 2017 in Burrows Investments Ltd v Ward Homes Ltd, a case involving development on land subject to an overage provision.
The land was in East Sussex and had been sold by Burrows Investments to Ward Homes Ltd in 2007. In addition to the initial purchase price of c£12.34 million, the sale agreement provided for Ward Homes to make an overage payment upon completion of the development equivalent to just under 30% of the amount by which the total proceeds of sale received by Ward from disposals of the “Market Units” exceeded a specified sum per square foot of their gross internal area. To protect Burrows' right to receive the overage payment, the sale agreement contained a number of restrictions on the types of disposal of the Property as a whole, or of individual parts of it, which Ward was permitted to make (a Permitted Disposal).
One type of disposal which Ward was permitted to make, was “the transfer … of land … for roads, footpaths, public open spaces or other social/community purposes." (a Community Disposal). Another was defined as: “a disposal by the Buyer … of one or more Individual Market Units … in the open market at arm's length by way of the sale of the freehold or long leasehold estate…" (a Residential Disposal).
Under the terms of a s106 Agreement, Ward Homes was required to sell five units of affordable housing to registered providers of social housing. Ward Homes took the view that this did not come within the definition of a permitted Residential Disposal and so negotiated with Burrows Investments for a variation/release of the obligation. These discussions began in March 2012. Before any agreement had been reached, and without prior notice to Burrows, Ward completed the disposal of five residential units to AmicusHorizon on 19 July 2012 in accordance with the Section 106 Agreement. When Burrows Investments came to learn of this in September 2012, Ward Homes asserted that it was after all a Permitted Disposal under the Sale Agreement. Burrows issued proceedings for a declaration that Ward Homes was in breach of contract and sought damages for the breach.
The Judge at first instance decided in favour of Ward Homes, finding that although the sale of the affordable units was not a Residential Disposal it fell within the definition of a Community Disposal so was a Permitted Disposal. Burrows Investments appealed that decision, and Ward cross appealed against the finding that the sale was not a Residential Disposal.
It had become clear that even had the five units been sold at market value no overage would have fallen to be paid on the development as the price per square foot did not exceed the overage threshold. Burrows Investments therefore could not have claimed damages for the overage it would have received had the affordable units been sold at market value, as there would have been no overage payable and so no loss in any event. It therefore claimed damages on the basis of "negotiation damages" (ie what Ward Homes would have agreed to pay to be released from the restrictions on disposal). The Judge at first instance found that negotiation damages could not be claimed in this case and Burrows Investments appealed against that decision.
The Court of Appeal reversed the Judge's findings and held that, as a matter of construction of the sale agreement, the sale of the affordable units was not a Permitted Disposal and so was in breach of contract. However, was Burrows Investments entitled to damages in circumstances in which, on a conventional analysis, it had suffered no loss?
The Court of Appeal began by quoting from the Privy Council case of Pell Frischmann Engineering -vs- Bow Valley: "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…"
It went on to hold, "The simple fact is that Ward transferred the five properties to AmicusHorizon in breach of an express term of the Sale Agreement, namely clause 4.9. Burrows had a legitimate interest and expectation that Ward would not breach the Sale Agreement, reinforced in the present case by the fact that Ward had negotiated with Burrows for three months 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 is 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……. It would in my judgment be regrettable if Ward could escape scot free, in these circumstances, without having to pay a proper price for obtaining a release from the restriction."
The actual amount of damages are to be assessed by the Court if the parties are unable to agree.
- Housebuilders beware and ensure that they are not prevented by overage provisions from complying with obligations under a s106 agreement, particularly regarding the need for affordable housing.
- Ensure that the drafting of overage provisions is undertaken with particular care, to avoid any uncertainty such as whether affordable housing units came within the definition of a Community Disposal
- This case has reinforced the principles as to when "negotiation damages" may be awarded and has made it clear that this includes those situations in which there would be no conventional "loss" because the contractual rights are property in themselves and to breach them deprives the beneficiary of the rights for the opportunity to charge a fee for their release.