House builders frequently contract with each other, to maintain and add to their respective land banks of developments and ensure that they have a steady stream of potential development sites in the pipeline, allowing them to deploy their resources and workforce effectively on an ongoing basis. Often builders will sell each other areas of land, and even swap areas of land with each other to maximise development capacity on their land, and to allow for future planning.

The legal mechanisms that house builders use in these circumstances can vary, and in the recent case of Persimmon Homes Limited v Bellway Homes Limited [2011] CSOH 149, the Court of Session was required to consider the terms of a contract for the sale of land between two housebuilders, and the proper interpretation of a number of provisions that might commonly appear in an arrangement of that nature.

The terms of the deal

In a typical arrangement between housebuilders, Persimmon and Bellway agreed a land swap, where Persimmon contracted to sell to Bellway land at Wester Cowden, Dalkeith, and Bellway contracted to sell to Persimmon land at Broomhouse, Glasgow. While the two deals occurred at almost the same time, separate sets of missives were concluded for each property and the contracts were considered by the court to be independent of one another.

At the time the missives were concluded for Broomhouse, it was agreed that these were to be conditional on Bellway completing some "Seller's Works", and implementing certain other obligations, by an agreed longstop date. The parties were aware that there were problems concerning abnormal ground conditions at the site. If Bellway failed to fulfil their obligations by the longstop date, they would be obliged to offer to sell Persimmon another residential site within Central Scotland of "comparable size and value" to the site at Broomhouse.

Bellway did not complete these obligations by the longstop date, and so offered Persimmon an alternative site at Airdrie. Persimmon did not accept (informal) offers made in respect of the Airdrie site, and instead sued Bellway for damages on the grounds of Bellway's alleged breach of the sale contract.

Three points in particular were considered:

  • Whether, in the event of difficulties arising with implementation of obligations under the agreement, a clause requiring an alternative area of land to be provided was the sole remedy;
  • Whether a price had to have been agreed for the replacement land in order for an offer to have been made by the defenders; and
  • Whether, if the land had been offered, it was of comparable size and value to the original subjects for which it was being offered as an alternative.

The remedy of an alternative site

While Persimmon's view was that they were entitled to sue for the usual remedies for a breach of contract, Bellway argued that the clause in the missives providing for an alternative site to be offered was Persimmon's only remedy, in the event that Bellway failed to fulfil its obligations at Broomhouse before the longstop date. The court agreed that the way in which the missives were constructed meant that the obligation on Bellway to provide a suitable alternative area of land was an essential feature of the contract, and that it was only if that obligation was breached that Persimmon's right to rescind the whole contract and claim damages would arise. This view distinguished the finding in the English Court of Appeal decision of Stocznya Gdynia SA v Gearbulk Holdings Ltd, in 2010, in which it was held that the right to claim damages for breach of contract could only be excluded by clear words to that effect.

As to whether Bellway had complied with their obligation to offer an alternative site to Persimmon, despite no price being agreed between the parties, and no formal written offer being received from Bellway by Persimmon, it was decided that Bellway had indeed offered the site at Airdrie to Persimmon, in accordance with the terms of the clause in the missives. The price indicated by Bellway as being acceptable to them was not an unreasonable price for the site at Airdie, as they were willing to accept the price they had paid for it. There was also clear evidence in correspondence between the parties that an informal offer had been made by Bellway.

Whether the site at Airdrie could be deemed a satisfactory alternative site to the one at Broomhouse was, however, more of a problem. The wording in the missives required the sites to be of comparable size and value. While the sites could be said to be close enough in area to be of comparable size, after careful and lengthy consideration of alternative methods of valuation of land, it was determined that the site at Airdrie was worth approximately 17% less than the site at Broomhouse, and was therefore not of equivalent value. On that basis, Bellway had failed to provide a suitable alternative site in terms of the missives and could be said, therefore, to be in breach of the contract.

Practical considerations

This decision highlights areas of potential uncertainty which might affect such deals between developers. Because any two sites are unlikely to be exactly the same, and comparing sites inevitably involves a degree of subjectivity, removing room for uncertainty, in such a broadly expressed provision, is impossible. It seems clear that, had the site at Airdrie been found to be of "comparable" value to the site at Broomhouse, then Persimmon, rather than Bellway, would have been in breach of contract.

So long as economic conditions remain tough, where outcomes are uncertain, but significant sums of money turn on the decision, it is likely that parties are more likely to resort to the courts if the resultant effect of a contractual provision is not to their liking.  Where, in more comfortable economic conditions, a party might have been prepared to allow greater leeway in terms of comparators, a growing theme in disputes that are reaching the courts in the current climate, is that contractual arrangements are being scrutinised with a much greater rigour, with a view to finding a way out of commitments that are no longer attractive or viable.

To read the decision in Persimmon Homes Limited v Bellway Homes Limited click here.