Failing to notify landowner of application for new wind farm can be material breach of option agreement, court says

Out-Law News | 17 Aug 2012 | 4:15 pm | 3 min. read

Failing to notify the landowner that an application for planning permission for a new wind farm has been filed could be considered a material breach of the underlying agreement, capable of allowing it to be terminated, a court has ruled.

The Scottish Court of Session said that since the option agreement with the developer, Mountwest, provided that the landowner had a right to see and make representations about any planning application before it was filed, the landowner, Backmuir, had a right to terminate the agreement if this was not done. However the actions of the developer, which sent a copy of the application to Backmuir after the fact and offered to make changes to address any concerns, were enough to correct the error and avoid termination, said Lord Woolman.

Backmuir had entered into a 10 year agreement with Mountwest giving it the option to develop a wind farm on its farmland in Aberdeenshire. Under the agreement, Mountwest was authorised to apply for planning permission and other necessary consents while Backmuir had the right to see and comment on the proposed application before it was submitted to the planning authority. Once permissions were granted, Mountwest could exercise the option to take a 25 year lease.

In June 2011, Mountwest lodged a planning application without sending a copy to Backmuir in advance. The landowner purported to terminate the agreement when it learned that this had happened. Mountwest had previously made several unsuccessful applications which it had not sent to Backmuir in advance, however the landowner was aware that these applications had been made and had not complained that the proper procedures were not followed.

Lord Woolman said that Backmuir's change of attitude may have been related to its "frustration with a history of unsuccessful applications". Its lawyers did not respond to the copy of the planning application sent by Mountwest in August 2011 until October, telling the developer that the option agreement was terminated because of the breach.

It was clear from the nature of the agreement that having the opportunity to put forward its views of any planning application was of great importance to the landowner, Lord Woolman said. Installing wind turbines on a working farm was likely to affect many of its day to day operations and the development of the land. It was the "clear intention" of the parties that failing to send a copy of the planning application to the landowner in advance would count as a material breach of the contract, he said.

"My starting point is to look at the whole contract ... there are built in checks drawn in Backmuir's favour," he said. "On a commercial construction, the parties did not intend that right to be illusory. Rather, the provided a mechanism which allowed Backmuir to influence the planning at a critical stage in the procedure ... As Mountwest completely failed to comply with its terms, I hold that it materially failed to perform its duty in terms of [the contract]. It deprived Backmuir of an important right which went to the root of the agreement."

However, by giving the landowner a chance to make its objections "at an early stage" - although after the application had been filed – Mountwest had "cured" its mistake and the agreement stood, the judge said.

Although the developers in the case managed to save the option from being terminated, developers might be surprised to find the fact that failing to send the landlord a copy of a planning application before it had been filed was a 'material' breach of the agreement, said property law expert Gary McGovern of Pinsent Masons, the law firm behind Out-Law.com.

"Usually submitting a planning application for the wind farm is the culmination of an awful lot of time, studies, design and consultation and it's understandable for the developer to want to get it into the planning authority as soon as it is ready," he said. "It's not uncommon for a wind farm option to oblige the developer to run its planning application past the landowner before submitting it, though. "

"What might worry developers is that the Court found the failure to do this to be a material breach of the option," said McGovern. "Whilst the developers' subsequent actions in this case saved the option from being terminated, there could be many cases where subsequent actions would not be enough. In those cases all the developers' costs in preparing the application would be a write-off."

Commercial litigation expert Craig Connal QC of Pinsent Masons said that the case was a "critical reminder" of how "the apparently simplest things can land you in court", given how common the clause was in wind farm option agreements.

"No contract is an island unto itself," he added. "The bones of an agreement must always be read against an understanding of all the general law on breach of contract and commercial document interpretation which supplements it."