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On 12 October 2010, the Supreme Court heard an appeal from the Extra Division, Inner House of the Scottish Court of Session [2009] CSIH 96 in the case of Multi-Link Developments Limited v North Lanarkshire Council.

The case relates to the interpretation and effect of a clause in a lease which granted the tenant an option to purchase the property at ‘full market value’, and specifically the factors that ought to be taken into consideration when it came to valuing the property.

The appeal was heard by a five justice panel of Lords Hope, Rodger, Hale and Clarke and Sir John Dyson SCJ.

The facts

By a lease between the parties dated 18 January and 11 February 2001 (the ‘Lease’), North Lanarkshire Council (the ‘Landlord’) let an area of land in Cumbernauld, North Lanarkshire (the ‘Property’) to Multi-Link Developments Limited (the ‘Tenant’). The date of entry of the Lease was backdated to 1 June 2009, with the term of the tenancy expressed to be 50 years from the date of entry. The Lease provided that the land was to be used for the development of a ‘pay and pay golf course and ancillary activities‘, with the condition that the development was to be completed within the first five years of the term.

Included within the Lease was a clause which gave the Tenant an option to purchase the Property at any time during the term for a price equal to the ‘full market value’ of the Property at the date of the proposed purchase. Pursuant to the Lease, the price was to be determined by the Landlord and was to reflect the value of the Property as ‘agricultural land or open space suitable for development as a golf course‘.

In 2005, negotiations were entered into between the parties for the Tenant to exercise this option and purchase the Property, with the Landlord subsequently proposing a purchase price of £500,000 (subject to other conditions). The Tenant rejected this, and despite negotiations resuming again in 2007, the parties were unable to reach an agreement. On 8 October 2007 the Tenant finally served formal notice on the Landlord exercising the option and specifying a proposed purchase date of 8 October 2008.

Potentially relevant to the issue of valuation, in 2006 the Property had been identified by the local authority as one of three ‘priority growth areas’ for development in residential housing. Consequently, the Property would benefit from a significant increase in value were this potential use to be taken into account.

The issue between the parties is therefore whether in assessing ‘full market value‘ of the Property, regard should be had only to the value of the property as ‘agricultural land or open space suitable for development as a golf course‘ as specified in the Lease, or whether the valuation should also reflect the increased value of the Property in light of its identification as an area for residential development.

Decision of the Lord Ordinary

At first instance, the Lord Ordinary found in favour of the Tenant, deciding that ‘full market value’ must be assessed in accordance with the requirements of the Lease, regardless of any future developments. In a decision based on a restrictive, literal interpretation of the option to purchase clause, the Lord Ordinary interpreted the contents of the clause as being a ‘pointer’ to how the parties wished a valuation to be reached, concluding that such a restriction would not have been included in the Lease had the parties not intended to rely upon it in the future. The ‘full market value’ of the Property could therefore only be assessed by reference to the Property as ‘agricultural land or open space suitable for development as a golf course’, disregarding the potential residential use and resulting in a significantly reduced purchase price for the Tenant.

Decision of the Inner House

The decision of the Lord Ordinary was overturned on appeal to the Inner House. In a judgment delivered by Sir David Edward QC (sitting as a Temporary Judge), the court found the restrictive interpretation applied by the Lord Ordinary to be incorrect. Following a brief review of the relevant authorities on contractual interpretation, it was held that the contents of the option to purchase clause was merely a starting point for determining ‘full market value’, with the court emphasising the importance of the word ‘full’ within that phrase as requiring the consideration of all other factors relevant to market value, whether contained expressly within the Lease or not. Such factors could not be disregarded by omission, but only if there were express words to that effect within the Lease. The ‘full market value’ assessment, as distinct from a valuation based on ‘existing use value’, must then take into account all relevant factors, including development value, i.e. the fact that since the Lease had been entered into the Property had significantly increased in value due to its unforeseen identification as a ‘priority growth area’.

Comment

This case provides another forum for discussion on general principles of contractual interpretation. The Outer and Inner Houses of the Court of Session have differed on how restrictive the court should be in interpreting the intentions of the parties, and the decision of the Supreme Court in this matter is likely to provide valuable guidance on how issues of contractual interpretation are to be approached in future cases.