Sale of land - Contract - Construction - Contractual term

Aberdeen City Council v Stewart Milne Group Ltd: Supreme Court (Lords Hope, Mance, Kerr and Clarke, Lady Hale): 7 December 2011

The defendant, Stewart Milne Group Ltd (the company), entered into a contract with the claimant (the council) for the purchase of land (the property) with a view to its development to form a business park or for industrial development. The purchase price was £365,000, but it was subject to a possible uplift in the events described in clause 9 of the missives, in general terms, to be payable if the company issued a notice indicating their wish to buy out the council's share of the open market value of the property with the benefit of all necessary consents and agreements for its development, or if the company wished to dispose of the whole or part of the subjects by sale or by a lease for a term of more than 25 years.

In particular, clause 9 of the missive letter provided: 'In addition to the purchase price detailed in clause 2 hereof, the purchasers and the sellers have agreed that the sellers shall be entitled to a further payment (‘the profit share’) upon the purchasers purifying the suspensive conditions contained in clause 4 hereof and issuing a notice to the sellers intimating to the sellers that the purchasers wish to purchase the relevant part of the profit-share as defined in the schedule to which the sellers are entitled.

The sellers’ entitlement to the relevant part of the profit-share will also be triggered by the purchasers disposing either by selling or by granting a lease of the whole or part of the subjects.' The company took title to the property as heritable proprietors. A development of the kind contemplated by the missives was then carried out. On 4 October 2006, the company transferred its title to the developed property to another company within its group (W) and it notified the council of that sale.

The company contended that the effect of that transaction was to trigger the obligation to pay the uplift to the purchase price that the missives provided for and that the gross sale proceeds for the purposes of the calculation of the uplift that the missives provided for had to be taken to be that part of the total consideration paid by W for the whole of the property, that was attributable to the subjects, which was £483,020. As that was less than the allowable costs which were to be deducted from the sale price in terms of the missives, the result was that no uplift was payable to the council.

The council refused to accept that contention and argued that the open market value of the property was greatly in excess of the consideration paid by W. The council raised an action in the Court of Session seeking a declarator that any further sum due to them in terms of the missives fell to be calculated by reference to the open market value of the subjects referred to in the contract as at the date of their sale by the company to W, less the allowable costs as defined in the schedule to the missive letter. The company's defence to the action was that the contract between the parties, on its true construction, did not provide that any additional payment under clause 9 of the missives should, in the case of a sale of the property, be calculated on the basis of its open market value.

Following debate, a decree of declarator was made by the Lord Ordinary in favour of the council. A reclaiming motion by the company was refused by the Extra Division of the Court of Session. The company appealed to the Supreme Court. The issue for consideration was whether, on its true construction, clause 9 of the missives letter provided that an additional payment had to be made by the company in the case of a sale of the property, to be calculated on the basis of its open market value. The appeal would be dismissed.

(1) In the context of the instant case, the intention of the parties had to be taken to have been that the base figure for the calculation of the uplift was to be the open market value of the subjects at the date of the event that triggered the obligation. It could be assumed that that was what the parties would have said if they had been asked about it at the time when the missives had been entered into. The fact that that made good commercial sense was simply a make weight.

The words of the contract itself show that that had to be taken to have been what they had had in mind when they entered into it. In all the circumstances, effect could be given to that unspoken intention without undue violence to the words actually used in the agreement. It followed that the Extra Division of the Court of Session had not been wrong to uphold the decision of the Lord Ordinary (see [22], [26]-[27], [32] of the judgment). Rainy Sky SA v Kookmin Bank [2011] All ER (D) 19 (Nov) considered.

(2) Three events, as set out in the opening words of clause 9 and in the schedule where the expression 'the profit share' was defined, were identified as triggers to bring the company's obligation into effect. The schedule then set out three ways in which the base figure for the profit share was to be arrived at. At first sight, they appeared to be mutually exclusive. In the case of a buy out, the base figure was the estimated profit.

That was to be arrived at by means of an open market valuation of the subjects, or the relevant part of it as specified in the notice, as at the date when the notice was served in accordance with clause 9.5: In the case of a sale it was the gross sale proceeds. In the case of a lease it was to be arrived at by means of a capital valuation of the subjects in the open market. A sale at arms length was usually taken to be the best evidence of the value of the subjects in the open market.

As the choice between these three methods lay entirely in the hands of the company and clause 9.7 precluded the council's entitlement to any further profit share in the future, it was a reasonable assumption that those methods were expected to produce the same base figure, albeit by different routes or methods of calculation (see [15]-[17] of the judgment). Decision of Court of Session [2010] CSIH 8 affirmed.

Craig Sandison QC and David Thomson (instructed by Brodies LLP) for the council; R Craig Connal QC and Jim Cormack (instructed by McGrigors LLP) for the company.