There’s only one option: use your (commercial) common sense!

The Court of Appeal’s recent judgment in Fishbourne Developments Ltd v Stephens [2020] EWCA Civ 1704 has provided yet more guidance on the correct approach to interpreting contracts – this time in the context of an option agreement.

Background

In November 2020, the owner of Bethwines Farm (“the Farm”) – a 117-acre area of West Sussex farmland -entered into an option agreement (“the Option”). The Option entitled the grantee to purchase the Farm at 30% of its open market value once planning permission for a development on the Farm had been obtained.

The Option defined the following key terms:

“Planning Application”: any planning application made by the Purchaser in respect of land which includes the [Farm] or any part thereof to obtain the Planning Permission;

“Planning Permission”: means a planning permission granted by the Local Planning authority permitting any development of the [Farm].

In 2013, the Option was transferred by the grantee to Fishbourne Developments Limited (“FDL”). In July 2016, FDL obtained planning permission to erect a “new pitched roof” on an existing farm building. FDL argued that the erection of a roof constituted a “development” as defined by the Option and entitled it purchase the Farm at the discounted price. The owner of the farm disagreed, arguing that the “development” stipulated by the Option meant a (substantive) redevelopment of the Farm requiring a change of use.

Decision

The Court of Appeal began its analysis by construing the “objective meaning of the words used” in the Option, which involved a consideration of “the relevant factual background which would have been available to the parties”. The relevant factual background included “commercial context”. Commercial context is particularly relevant where the words of a contract are ambiguous; here, “the court can give weight to the implications of the rival constructions by reaching a view as to which is more consistent with business common sense”.

Importantly, the Court of Appeal did not consider the “subjective evidence of the parties’ intentions” when interpreting the Option’s meaning. The Court of Appeal sought to understand what a reasonable person would have understood the Option to mean, rather than what either party actually believed the Option meant.

The Court of Appeal concluded that the terms “development” and “planning permission” (as defined in the Option) were capable of multiple meanings, but that the Farm owner’s interpretation made greater commercial sense. Although “development” was a broad term, the objective intention of the parties when entering the contract must have been that the future development would enhance the Farm’s value and thereby justify a reduced purchase price. Plainly, the erection of a new roof on an agricultural building did not significantly enhance the Farm’s value and, therefore, could not constitute a “development” as defined in the Option. Similarly, the commercial context lent more credence to the Farm owner’s interpretation of “planning permission”, which argued that “any development of the [Farm]” meant that the planning permission obtained had to relate to a development of the whole (or substantially the whole) of the Farm (ie. and not merely a part of the Farm).

Conclusions

As this case highlights, option agreements can be the cause of any number of disputes, particularly where the option is triggered many years after the initial agreement is reached and the commercial landscape has changed. However, careful drafting can mitigate much of the risk. The important thing to remember is that the courts will look to the objective meaning of the contractual wording used and that, in many circumstances, commercial context will be an important guide.

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