A recent decision of the Outer House of the Court of Session has reinforced the need for both landowners and developers to have regard to contractual constraints when negotiating planning gain and, where appropriate, to revisit the terms of concluded contracts to ensure that their value is retained. It has potential ramifications for the way in which option contracts are worded, to make sure that landowners cannot frustrate the process when it comes to signing a Section 75 Agreement.

Conditional agreements for the purchase of land

Most conditional deals or option agreements anticipate that the developer will be responsible for pursuing a planning application. It is normally assumed that the contract will not become unconditional, or that the developer will not wish to exercise the option, until an acceptable planning consent has been secured. In most instances, for any form of larger scale development, obtaining a planning consent is likely to be dependent on entering into a Section 75 Agreement with the Local Authority to deal with issues such as planning gain contributions, affordable housing, and so on. It is therefore normal practice for a developer's contract with the landowner to oblige the landowner to sign any necessary Section 75 Agreement, which will facilitate the release of a planning permission.

There has always been the theoretical danger for the landowner that, having signed the Section 75 Agreement, for other reasons the contract does not become unconditional or the developer fails to exercise the option, meaning the landowner is left with potential liabilities under the Section 75 Agreement. In practice this risk can often be minimised by ensuring that the Section 75 Agreement does not trigger any onerous obligations until it is implemented. However, that may not always be possible, particularly where the land is going to be developed in phases.

Cala Management v The Firm of A & E Sorrie

The decision in the case of Cala Management v The Firm of A & E Sorrie examined whether, in the context of an option agreement and purchase missives concluded between the parties, the landowner was obliged to enter into a Section 75 Agreement as a pre-requisite to planning permission for development of the site being granted. While the judgement does not disclose the detailed particulars of the contractual arrangements between Cala and the Sorries (the landowner), it is clear that Cala entered into two separate option agreements and purchase missives with the Sorries in relation to three separate areas of land. The three areas together formed the extent of Cala's outline planning application to Aberdeenshire Council for a mixed use development. The option agreement and purchase missives imposed an obligation on the Sorries to sign any planning or other Agreement required as a pre-requisite to planning permission or other statutory consent being obtained, at the reasonable request of Cala.

In terms of the commercial deal Cala was to pursue the planning application at its sole cost. The option to buy the land could then be exercised in up to four tranches. The purchase price was to be calculated at 87.5% of open market value. These broad heads of terms are not of themselves unusual.

Cala progressed the application and agreed with Aberdeenshire Council the terms of a Section 75 Agreement, which the Sorries had to sign as landowner as a pre-requisite to planning permission being granted. However, the Sorries declined to sign the Section 75 Agreement, with the result that this action was raised, to determine whether, on a proper construction of the bargain between the parties, the Sorries were in fact contractually obliged to enter into the Section 75 Agreement.

The meaning of "reasonable request"

The court found that, in the context of the particular circumstances of the case, the obligation on the landowner to enter into a Section 75 Agreement at the "reasonable request" of the prospective purchaser, created a requirement for the terms of the Section 75 Agreement itself to be reasonable, rather than simply meaning that the request must be reasonable.

The practical effect of this interpretation is that, in certain circumstances, a developer may be effectively constrained in negotiating with the planning authority to ensure that the terms of any planning agreement are reasonable. The risk of a planning authority insisting upon unreasonable terms as a pre-requisite to planning permission being granted rests with the applicant. The question of reasonableness is not determined solely on planning principles enshrined in a case law and Circular 12/1996 (the guidance setting out government policy on the use of planning agreements), but rather considers the allocation of liabilities and risks to parties involved in the land transaction. It is relevant in the determination of the Cala case, that the court took into account that a deduction would be made from the purchase price to reflect the extent of planning gain contribution secured through the Section 75 Agreement. The court effectively identified a risk that the landowner could be hit twice for the planning gain, once by a deduction from the price, and secondly by a direct liability to the local authority, as the landowner would probably remain an owner of the parts of the property affected by the Section 75 after obligations to pay became live.

Other factors that affected the developer's position

Some of the factors which worked to Cala's disadvantage were:

  • The land could be acquired in tranches – this meant the landowner could still be liable for payment of Section 75 contributions, as they would still retain some of the land affected.
  • The landowner was retaining a ransom strip on the boundary which was within the land affected by the Section 75 – again the court considered this left the landowner potentially liable for significant obligations.
  • The price was a percentage of market value – the court took this as indicating that it was not intended that the landowner would be subject to future liabilities. This was reinforced by the fact that specific provision was made for planning gain deductions from the price – as no specific provision was made for other costs, the court effectively held that the parties meant to exclude that possibility.
  • The missives did not contain an indemnity by Cala for any liability that might arise – while protection against liability might more normally be a provision inserted into the contract by a landowner, the court's reasoning suggests that if the landowner had offered such an indemnity when drafting the contract the court might have come to a different decision.

Review options to reduce risk

While this case was determined on the particular circumstances and specific contractual terms in question, it does reinforce the need for all landowners and developers to have careful regard to the terms of their land deals when negotiating planning gain, to avoid a ransom situation arising. In particular, where the intention is that a landowner should bear no liability for costs associated with planning gain obligations, appropriate indemnification provisions should be considered.

On the facts of this case, if a Section 75 contains obligations that do not become enforceable until after the planning permission is implemented (which means after the developer will have acquired title), and the option is over the whole land affected by the Section 75, then it would appear that it would be "reasonable" to expect the landowners to sign a Section 75. In any other circumstances the situation looks less certain.

The court's reasoning also reinforces the commercial imperative of considering the requirements of the local planning authority when concluding option agreements and missives to purchase.

In light of this decision, landowners and developers alike may wish to review concluded land deals to highlight any risk of consent to planning agreements being withheld, or the value of existing option agreements being jeopardised.

Read the decision in the case of Cala Management Ltd v The Firm of A & E Sorrie.