Option agreements: court’s role not to ‘rewrite bad bargain’, says English judge

Out-Law News | 21 Jan 2022 | 5:20 pm | 3 min. read

It is not the role of the courts to “re-write a bad bargain” between commercial parties, an English judge has said, in a dispute over the wording of an option agreement.

In a claim for declaratory relief by developer Retirement Villages Development Ltd (RV) the court rejected a counterclaim for rectification brought by Punch Partnerships PTL Ltd (Punch), the pub chain, which argued that the agreement was no longer in effect. The agreement, since assigned to RV, grants RV an option to acquire land in Elstree adjacent to where Punch’s Plough Public House sits, although not the pub itself, in certain circumstances.

The judge, after hearing evidence from witnesses involved when the agreement was drafted in 2013, disagreed with Punch that there had been a “clear and obvious mistake” in the drafting process. He rejected Punch’s claim that the parties had intended as an absolute obligation that the developer submit a planning application within 18 months of signing the agreement rather than, as drafted, to “use reasonable endeavours having due regard to the planning considerations” to do so.

Property disputes expert Michael Smith of Pinsent Masons, who acted for the successful developer, described the judgment as a “useful” one which “sets out the court’s approach to claims for rectification and the relevant principles of contractual construction”.

Smith Michael

Michael Smith

Partner

The decision gives further reassurance that, in the words of the judge, ‘it is no part of the court’s function to re-write a bad bargain

“It is also a helpful illustration of how the court might well find greater assistance from contemporaneous documents where – as is quite often the case in such litigation – the negotiation of the relevant contract took place many years ago and the recollections of witnesses have inevitably faded,” he said.

“The court was well able to identify the commercial drivers behind Punch’s assertions and that the deal struck by Punch in the option agreement in 2013 – including a fixed purchase price – had ‘turned out badly for it’. The decision gives further reassurance that, in the words of the judge, ‘it is no part of the court’s function to re-write a bad bargain’,” he said.

The option granted the developer, originally Hamlin but later RV, the right to acquire the land from Punch for a sum of £2,610,000 should the developer, at its own cost, secure qualifying planning approval in respect of it. The option was granted for a fee of £1 for a period of 30 months, subject to extensions in certain defined circumstances, including until the land was allocated for development by the local authority.

Punch argued that, without rectification in the form sought, the practical effect was the “commercially absurd” result of the property being subject to the option forever if the local authority never allocated the land for development. Alternatively, it said that other provisions in the option should be interpreted as if they related specifically to the outcome of a review of the Hertsmere 2003 local plan, which was underway at the time that the option was entered into.

The judge heard live evidence from seven witnesses, while an eighth witness provided a witness statement but was not called to give evidence in court. Although he found that each witness gave evidence “honestly and in a genuine attempt to assist the court as far as they could”, he said that, given the length of time that had passed, contemporaneous documents were of more assistance than witness recollections.

Referring to the existing case law, the judge said that the role of the court was “to ascertain the objective meaning of the language which the parties have chosen in which to express their agreement”. He then reviewed the evidence covering the parties’ negotiations, concluding that, when they executed the document, there was no common intention between them that the reference to using “reasonable endeavours having due regard to the planning considerations” should be deleted or, at the very least, no “outward expression of accord” with regards to that intention.

The judge then turned to the wording of the option which, he said, was “a document carefully drafted by lawyers following negotiations over a period of weeks … giving plenty of scope for any issues about the drafting to have been addressed”. There was therefore no reason to depart from the “natural and ordinary meaning of the words used”, under which the option ‘end date’ had not yet occurred.

He said: “Even if [the words lead to a commercially absurd result], which I do not accept, if the language is unambiguous (as I have found), I am bound to apply those words”.

“I do accept that the wording is favourable to the developer, but that does not make it commercially absurd or indeed unworkable. This, in my judgment, is simply the effect of the bargain the parties made. In so far as Punch is unhappy with this outcome, this is because it has agreed something which with hindsight does not serve its interests,” he said.

In addition, none of the terms that Punch, in its alternative argument, said should be implied into the option satisfied the requirements for implication, he said.

“They are not reasonable and equitable in that they run contrary to the background factual matrix … Further, in my judgment these terms are not necessary to give business efficacy to the option, nor are they so obvious as to go without saying,” he said.