Chartbrook Case And Strategies.

Disclosure for the annual report:

Risk/Uncertainty:

Risk/Uncertainty: We are using overage contracts or adding overage clauses in our development agreements. Such clauses or agreements allow us to increase the purchase price of the developments in the event that the value of the land or development has appreciated due to some happenings. In the recent issue with Chartbrook, our overage agreement with Chartbrook, allowed the purchase price to be increased as an ‘Additional Residential Payment’ under Schedule 6 of the agreement with Chartbrook. This price was to be paid by us if we increased the value of the land by obtaining planning commission. Relying on this clause in the agreement, Chartbrook estimated purchase price, which was more than 5 times of what we estimated. This is indicative of the problems of construction that are associated with overage contracts. The ‘Balancing payment’ that we were to pay as per the agreement with Chartbrook, became a major source of problem, which we have laid successfully to construction of contract. Despite the success in this case, we should be mindful of the problems associated with such overage contracts for our future dealings and agreements. The risk that we should be mindful of is the financial risk due to the computation of such overage prices by two different parties as we have seen in the current case. In this event, the negotiations of the contract provided the backdrop to our understanding of the contract, but it could have easily gone the other way as the High Court and Court of Appeal judgments have shown. This is also succinctly put by Lord Hoffman in para 15 of the House of Lords judgment, where he writes that “it is not unusual that an interpretation which does not strike one person as sufficiently irrational to justify a conclusion that there has been a linguistic mistake will seem commercially absurd to another.”

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Potential Impact: The potential impact of overage contracts or clauses for us are that these clauses may lead to a construction that allows a computation of purchase price to be of a value that is not acceptable to us, or is not feasible for us. If such differences on computation leads to litigation with sellers, the there is always a financial and reputational impact of such litigation. Financial impact comes not only from legal fees but also possible loss in litigation and the requirement to pay to the seller the overage price.

Triggers in the overage contracts can be clearly and thoughtfully drafted into the contract. These triggers can be the sale of the last unit or some other triggers that are agreed to as between the parties. In the agreement with Chartbrook, the agreement to pay specified percentages of the Total Land Value about two and a half years after the grant of planning permission and ending about two years late whether the properties had been sold or not, should have been avoided as this is not an appropriate trigger point for the payment of overages.

We rely on the negotiation stage understandings between ourselves and the other parties for the purpose of giving construction to the contracts that are drafted at a later stage. What we are thinking is that the negotiations will provide a basis for a continuing common intention as between the parties. However, a risk attached with this approach is seen in the recent litigation involving Chartbrook, which is that the court may refuse to consider the negotiation stage as a background for construction of contract. In that litigation, the High Court as well as the Court of Appeal refused to consider the negotiations between ourselves and Chartbrook as being relevant to construing the continuing common intention regarding the overage clause in the agreement. It is also useful to note that the authorities are overwhelmingly in favour of not considering pre-contractual negotiations for the purpose of construction of the contractual terms (ank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657; Alexiou v Campbell [2007] UKPC 11).

Negotiation stage can be ignored by the courts for the purpose of construction of contracts and the common intention may never be implemented by the courts unless it is seen in the formal contract between the parties.

Mitigation: The formal contract between us and the other party should take into account any important negotiation stage issues and understandings. For this purpose it is useful that those who were involved in negotiation stage are kept in the know with respect to the formal contract and there is particular attention paid to all issues that were considered important during the negotiations. (3) Risk/Uncertainty: We use lawyers outside of our department for the purpose of drafting some of the agreements, and the Chartbtook case is a good example of the risks that are involved with such an approach. In that case, the draft prepared by Mr Assael, which omitted the negotiation stage common intention with respect to the ARP. This went unnoticed or was not commented on by Mr Pendlebury, as a result of which, we were largely unaware of the change in the construction of the ARP from what we had intended at the time of the negotiations. The agreement with Chartbrook was unfortunately executed with this drafting error.

Potential Impact: Impact of using outside lawyers for drafting final contracts is that there is a possible lack of communication, as seen in our problem with the Chartbrook case, due to which important negotiations between us and the other party may be disregarded. Mitigation: Formal contracts should only be drafted by our own legal department, which will ensure in-house communications on negotiations are taken into consideration and the risks of lack of communication are mitigated.

Notes for the business people: The following recommendations suggest themselves on the basis of the risks and uncertainties that follow contracts involving overages: Those involved in negotiations with sellers of property to be developed by us, should negotiate carefully with the other parties/sellers. Overages may not be avoidable due to practical realities of our business, where such negotiations allow us to get land for development at less prices on the agreement that we pay more to the sellers if the land appreciates in value. Therefore, overages are now essential clauses in agreements that we may make with sellers. However, the trigger points need to be carefully thought out before these are agreed upon with the other parties. One example of trigger point to be avoided as based on our experience with Chartbrook is where we agree to pay the overages irrespective of whether the properties were sold by us or not. We agreed to do so with Chartbrook. However, this puts us at a disadvantage and there is no practical benefit in making such an agreement on trigger point for payment of overages. Instead, we should only agree to pay overages after we have sold the last property. It must be remembered that negotiations are not a part of formal contract and those who are involved in negotiation process with the other parties, must always be mindful that whatever is agreed to at negotiation stage is also included specifically in the formal contract as well. Unless these points are included in the formal contract, these do not have validity. It is only in the rare cases that the courts will consider the pre-contractual negotiations for constructing the contracts. Related to the above, those who are involved in negotiations, must keep a log book of all important points agreed to at the negotiation stage, and these points must be cross checked with the draft of the contract to ensure that all these points are incorporated

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in the formal contract. This is important because the lawyers drafting the contracts may omit some of these points. Those who are involved in negotiations are the best people to assess the draft of the contract to double check that none of these important points are left out. A log book or an entry book is useful because it can ensure that the negotiation stage agreements are incorporated into the formal contract. It would be useful in future that the contracts are drafted by the in house lawyers. This is because the channels of communication are clearer between in house lawyers and those who are involved in negotiations with the other parties. This would mitigate the risks of contracts that are not drafted like they were negotiated. Finally, before formalising a contract with the third party, there should be a meeting between the lawyers and those from the company involved in the negotiation phase so that the final details are threshed out and no important negotiation phase agreements are left out of the formal contract.


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