The dispute in Anglo-Continental Educational Group (GB) Ltd v Capital Homes (Southern) Ltd arose because the parties could not agree on the price required to complete a sale contract. The contract, which was conditional on planning permission being obtained, defined the purchase price as:

"£862,000 less the amount (including covenantees' fees and costs) required to obtain a deed of release/variation of the covenants contained in [the title] registers ... to enable the Development to be implemented".

When the contract was entered into, it was known to both parties that the beneficiaries of the covenant would, if planning permission was given, probably require between £8,000 and £10,000 per residential unit to release or vary the covenants, together with about £1,500 for costs. However, it was not the beneficiaries' policy to agree to vary restrictive covenants until planning permission was given. In the event, the buyer exercised its contractual right to waive the condition requiring planning consent. The result was that, at the completion date, the exact sum required to discharge the covenants was undetermined.

The seller argued that, since no payment to release the covenants had been made, no discount should be applied, and the amount payable on completion was the full £862,000. The buyer contended that a term should be implied for the deduction of an estimated amount at completion. On the exact amount being established, one party would then, as appropriate, account to the other party with interest for the under/overpayment made at completion.

The High Court judge rejected both parties' interpretations, but declined to declare what the true meaning of the agreement was, on the grounds that he did not have the jurisdiction to do so. He held that a declaration should only be made on the basis of a submission advanced by one of the parties and contested by adversarial argument. The parties appealed to the Court of Appeal for a declaration on the meaning of the contract.

The Court of Appeal accepted that the judge had jurisdiction to make a declaration. It criticised the agreement as being "not well drafted", and agreed with the trial judge that neither party's interpretation produced a satisfactory solution. However, since the agreement expressly contemplated that the buyer could waive the planning condition at any time, the court thought that the definition of purchase price had to work even if there was no planning permission. The agreement provided in the usual way that at completion the purchase price should be paid by the buyer to the seller. Therefore the purchase price had to be a sum which was capable of being rendered into a finite sum of money at the completion date.

The court stated that if an agreement is susceptible to an interpretation which will make it enforceable, the court will prefer that interpretation to any interpretation which would result in its being void. The court will also prefer an interpretation which produces a result which the parties are likely to have agreed over an improbable result.

The seller focused on the fact that the definition of the purchase price was the amount required to release the covenants "to enable the Development to be implemented". It submitted that unless planning permission had actually been given, no amount was required for the purpose of enabling the development to take place. However, the court thought it improbable that the parties to the agreement would have agreed that there should be no discount for the costs of obtaining the release of the restrictive covenants in circumstances where the planning condition had been waived. All that the agreement stated was that payment was "required". It did not need to actually have been paid before completion.

The court also rejected the buyer's proposed interpretation. The court thought that it was not necessary in order to give business efficacy to the agreement. The seller would have to monitor the buyer's planning decisions. Moreover, it might leave the seller unsecured for the unpaid purchase price.

The court ruled that the discount to be applied was the amount which was reasonably required for the purpose of obtaining a release or variation of the applicable restrictive covenants such as would enable the buyer's proposal for the time being for the development of the properties as residential flats with no more than 14 two-bedroom units to take place.

Things to consider

One may have some sympathy with the trial judge for refusing to give his own view on the interpretation of the contract. Had he done so, one of the parties would undoubtedly have appealed on the basis that they had not been given the opportunity to put forward arguments against that interpretation. The appeal court stated that the parties had had a full opportunity to put forward any interpretation they wished, and the parties were agreed that the court should declare a meaning so that they could proceed to completion. Unfortunately, one doubts whether this will be the end of the matter, since they will still need to agree on the amount which is reasonably required to obtain the release.

This case emphasises the need, when negotiating agreements, to consider all the possible scenarios that may unfold, and ensure that the drafting caters for each. This is especially important where the agreement is dependent upon something which is to be done by a third party.