Interpretation of a badly drafted clause

In Multi-Link Leisure Developments Ltd v North Lanarkshire Council ([2010] UKSC 47) a fifty year lease of a golf course included an option for the tenants to purchase the reversion. The valuation formula was in the following terms:

‘The option price, if the option to purchase is exercised subsequent to the first year of let, shall be equal to the full market value of the subjects hereby let as at the date of entry for the proposed purchase (as determined by the landlords) of agricultural land or open space suitable for development as a golf course but, for the avoidance of doubt, shall be not less than the sum of ONE HUNDRED AND THIRTY THOUSAND POUNDS (£130,000) STERLING. In determining the full market value (i) the landlords shall assume (a) that the subjects hereby let are in good and substantial order and repair and that all obligations of the landlords and the tenants under this lease have been complied with, and (b) that the subjects hereby let are ready for occupation, and (ii) the landlords shall disregard (a) any improvements carried out by the tenants during the period of this lease otherwise than in pursuance of an obligation [to] the landlords, and (b) any damage to or destruction of the subjects hereby let.’

The question was whether the valuation was to be of the land as ‘agricultural land or open space suitable for development as a golf course’ or was to be the open market value without any such restriction. It was very likely that it would be possible to get planning permission for housing development on the site so the question was whether the price to be paid should reflect this hope value. The problem arose from the poor drafting of the clause. The Supreme Court held unanimously that the valuer was to determine the open market value and should take the hope value into account.

The majority of the Supreme Court aligned itself with the reasoning of Lord Rodger. It was clear that something had gone wrong with the drafting ([27]). The starting point in the task of interpreting the clause was the assumptions and disregards at the end since these were clear ([28]). The valuer was valuing land that was in good repair and condition and ready for development as a golf course ([33]). There was, however, no direction to the valuer to disregard hope value ([34] and [36]).

Lord Hope reached the same conclusion but steered a different route through the clause (although he had no quibble with Lord Rodger’s approach ([18]). He provided general guidance as to the task of interpretation. The assumptions and disregards were incompatible with the earlier parts of the clause:

‘In this situation the solution must be found by recognising the poor quality of the drafting and trying to give a sensible meaning to the clause as a whole which takes account of the factual background known to the parties at the time when the lease was entered into.’ ([19])

It is legitimate to ask what the parties’ commercial purpose was but this must be discovered from an examination of the objective contextual background ([21]).

The local authority had a duty to get the full market price for the land; the option could have been exercised at any time during the lease term and much could happen during that time; the parties could have contemplated that planning permission for housing development might be granted; and disregarding hope value would give the tenants a windfall at the expense of the landlords ([22] – [23]). These features outweighed the argument in favour of a construction requiring hope value to be left out of account.

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