The High Court has returned a judgment in the case of Harworth Estates Investments Limited v Westfield Park Limited [2024]. The judgment offers an intriguing insight into the importance of precise wording when drafting retention clauses in development land sales and how, if disputes arise out of them, the Courts will interpret and apply the provisions of the clause. The case also sheds valuable light on the steps a diligent purchaser’s solicitor should take to protect a client when investigating risks that may affect the client’s ability to develop the land to be acquired in the manner desired by the client.
The Site
The land in question was the former North Selby Mine and is located in Escrick in York (Site). Harworth Estates Investments Ltd. (H) owned the Site and marketed the Site as a potential holiday park set in acres of woodland which would house amongst other things static and touring caravans. Outline planning permission was obtained from York City Council for “redevelopment of the former North Selby Mine site to a leisure development comprising of a range of touring caravan and static caravans with associated facilities”. The permission allowed static caravans to be located in the part of the Site known as “the Bowl” which was directly above the former mine but restricted the number of such caravans to no more than 231.
Subsequently the Site was put on the market by Savills and the successful bidder was a Mr Flannigan (F), who offered to pay £3 million for the Site. F’s solicitors identified some issues with part of the Site as there was a “zone of influence” around the former mineshafts located in the Bowl area.
The zone(s) of influence
A zone of influence is defined by the Coal Authority in a guidance note entitled “Mine Entry Zone of Influence Metadata” (published on 9 October 2014) as “an area of the ground that might be affected if subsidence of the mine entry was to occur.” It is not clear whether F’s solicitor saw the guidance note but he was alerted to the presence of the mineshafts on the Site by the results of an environmental search. He advised F to seek advice from an environmental consultant regarding the mineshafts and any issues flowing from their presence on the Site.
The consultant identified the zone of influence within the Bowl and advised that, despite the Planning Permission consenting to the presence of static caravans in the Bowl area, it is not possible to carry out “development” in a zone of influence. F’s solicitor then sought clarification from the Coal Authority and was informed that the zones would have a radius a radius of 27 meters from the centre point of each mineshaft and “development” within them would be considered high risk.
It is not clear whether F’s solicitor explained what sort of “development” was in fact contemplated nor was it clear whether the Coal Authority had already been consulted about the placing of static caravans on the Site. F’s solicitor was also advised that, normally, any planning permission would be subject to the Coal Authority’s requirements and that the zone of influence may be reduced in specific cases. F’s solicitor proposed to H’s solicitor that there be a £400,000 retention (Retention) from the price and “should the zone of influence prove not to apply and those areas prove developable within 12 months of completion” then for each caravan pitch which can be located within these zones £10,000 would be payable up to a maximum of £400,000. This proposal was accepted by H.
The Retention Clause
The parties entered into the Sale Agreement by which F’s company (W) made an initial payment to H of £2.6 million for the Site and agreed to pay the Retention which was defined as “the price per m2 ‘released’ by the Coal Authority “of up to £400,000 if it was confirmed by the Coal Authority that the zone of influence would be reduced”. Under the Sale Agreement H was entitled (but not obliged) to engage with the Coal Authority in an effort to persuade it to reduce the extent of the zones of influence.
In correspondence with H’s representatives the Coal Authority confirmed a reduction in the zones of influence in the Bowl from 27 meters to 3.66 meters but also made clear that this only applied to the siting of static caravans and that no permanent caravans could be sited in the zones.
However, W had also communicated with the Coal Authority and been advised by the Coal Authority that there was essentially just one zone of influence of 3.66 metres in which no development could take place and that within the 27 meter radius there was the possibility of minor development taking place including the siting of static caravans.
H claimed that the Retention was due based on the correspondence it received from the Coal Authority. W argued instead that the Retention did not become due because the Coal Authority had not reduced the zones of influence for all development purposes rather than just for static caravans.
The Legal Position: Pre-Contract Negotiations
This approach taken by the Court in this case is consistent with the established position on pre-contract negotiations set out in the leading case Chartbrook Homes Ltd v Persimmon Homes Ltd. Evidence of pre-contract negotiations is not admissible to interpret what a concluded written agreement should say but is admissible in cases where it is important to establish the broader commercial intentions and objective background facts behind any formal written agreement.
In this case as the contract was not clear as to what was meant by a “reduction” or “release” of the zones of influence the court was entitled to look at the pre-contract negotiations to discern what the parties intended it to mean.
The Court’s Analysis
The Court looked at the pre-contract communication and negotiations between the parties, their solicitors and environmental experts to find an answer. The Court found that it was clear that W only ever wanted to carry out the siting of static caravans rather than permanent buildings in the Bowl. Equally, the Court concluded that H’s solicitors too would have understood clearly from the correspondence that the key issue in question was whether static caravans could be sited within the Bowl rather than whether any and all development could occur across the whole Site.
Accordingly, the Court was able to infer that there was clear common ground about how the Retention was to be calculated notwithstanding that the contract was not clear on this issue.
In making this assessment the Court looked at important background facts arising out of pre-contract negotiations to establish: (1) that both sides believed that the Bowl area was marketed for static caravans; (2) that the only permitted development in that area was always just for static caravans; and (3) that development in a zone of influence which did not have the consent of Coal Authority was not permissible.
Taking these negotiations into account, when the Coal Authority confirmed in writing to H that limited development could take place in the zones of interest, this was enough for the Court to consider that the Retention was due.
The case gives rise to a number of important issues for developers and their solicitors which we highlight below.
Key takeaways for developers
- Retention clauses in a sale contract for development land can be a valuable way to deal with potential environmental site defects or to advance proceedings while waiting for the full clarification from relevant authorities as to specific site risks but their intended operation needs to be property articulated in the contract;
- Contemporaneous and thorough record keeping of any pre-contract negotiations is key to establishing a party’s intentions and may be admissible where a contract has not been clearly drafted. Accordingly, it will be prudent to ensure that the developer’s objectives are clearly communicated and contemporaneous records are kept in the course of negotiations and correspondence; and
- The Coal Authority designations can have a significant impact on development proposals and developers should obtain expert advice on their effect.
Key takeaways for developer’s solicitors
- Make sure you report on issues raised in environmental reports and recommend further advice is sought on technical issues;
- Take care when engaging with public bodies and external consultants to ensure you have a full understanding of their advice and recommendations; and
- Make sure your contracts are not ambiguous and open to interpretation as to their meaning.