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Sale of land and fraudulent misrepresentation
publication date: Apr 18, 2008
author/source: STEWART A G LILLY
Stewart Lilly FNAEA (Honoured) President of the Association examines an interesting case that was recently heard in the High Court.
A High Court Case, Connolly versus Bellway Homes Ltd (2007), is a cautionary lesson for all of us involved in the negotiation of contracts for the sale of land. Connolly successfully obtained compensation for deceit and fraudulent mis-representation from Bellway for mis-stating the value of the land which it had agreed to purchase under a conditional contract.
The facts are that in 2001, the seller Connolly, entered into a contract with the buyer, Bellway, for the sale of land for development. The contract was conditional upon obtaining planning permission and the price was in excess of £10,000,000. The contract gave the seller an uplift in the price if, at completion, the value of the land had increased.
These provisions which are commonly called overage are widely used, and generally the seller believes that land with development potential should be sold by this method. The overage provision requires the buyer to make a further payment to the seller, usually based on a percentage of the increase value of the land or property after the event – i.e. the issuing of a planning permission – which then operates a trigger mechanism in the contract for the overage obligation to be paid.
In this case the formula in the contract specified a figure of £212 per square foot as the comparable base figure by which any increase in value would be measured. This figure was put forward by the buyer as an estimated average sale price for the residential development at the time of the contract. It transpires that when planning permission was granted the actual sale value was calculated to be £268 per square foot. Therefore the level of increase (from £212 to £268) was insufficient to trigger any additional payment. The base figure used in the contract was much too high and should have been around £173 per square foot at the date of the contract.
This would have then triggered additional payments. Connolly commenced proceedings against Bellway and to succeed it needed to prove:
1. A false representation of fact or law.
2. Fraudulent knowledge in that Bellway knew that the representation was false, or had no belief in its truth, or was reckless whether it was true or false.
3. The intention that the representation be acted on.
4. That Connolly had relied on the representation.
5. That Connolly had suffered significant loss as a result.
In evidence it became clear that the individual negotiators on behalf of Connolly had relied upon statements as to land values made by Bellway’s representative. However, the base figure of £212 per square foot was so wide of the market conditions at the time that it could not have been a genuine estimate of the value. Expert valuation evidence that Bellway had obtained in Court confirmed this.
The result was that the Court inferred dishonesty by Bellway, and that they had attempted to deceive Connolly. Damages of £700,000 were awarded to Connolly. The legal notes go on to confirm that the law affords parties quite a bit of leeway when negotiating a price but care must always be taken to avoid statements to other parties as to value of land. Written records must be kept and as proved in this case, absence of such records prejudiced Bellway significantly.
Each case of this nature will depend upon its own facts. It is considered here that the Court inferred dishonesty where the representation figure was less than 20% from the actual value that were disclosed in the negotiation. Some may see this as a rather unfair decision by the Court, but at the time of penning this article a challenge has not been launched by Bellway.
The moral here is that when agreeing any price or overage position that forms part of the contract for this infamous term ‘overage’ always be wary about relying on the representations of the other side in those negotiations.
It is imperative that on the larger scale land deals that independent valuation advice is taken at the time the negotiations are being carried out and being put into a formal contract. It certainly is cold comfort to find that the land is worth less than you thought but then you do have a claim against the other party if such a similar circumstance does occur.
I’m obliged to TLT Solicitors (www. tltsolicitors.com) for bringing this matter to my attention.
STEWART A G LILLY FNAEA
REVIEW OF PLANNING APPLICATION REGIME LAUNCHED
The Government has launched a review of the planning application regime aiming to remove bottlenecks and create a more efficient system.
Under scrutiny will be issues such as:
Ministers have stressed that the review will make recommendations for improving the process but should not shift the balance of decision making, weaken important safeguards or reduce public consultation. Communities secretary Hazel Blears stressed: “We need to make sure that making the system more efficient doesn’t mean squeezing the ability of people to have a say. These ideas don’t have to be, and shouldn’t be, in conflict – you can make a system more efficient and engaging at the same time.”
The announcement of the review came in a keynote speech by Ms Blears at an event organised by the Commission for Architecture and the Built Environment. The Royal Town Planning Institute voiced concern that the initiative might emphasise speed rather than quality of decision.
RTPI policy director Rynd Smith said: “It is important that decisions are made promptly but the planning system should be judged by the quality of its outcomes not just the speed with which those outcomes are delivered.” In her speech the Secretary of State also called for more public involvement in development plans, particularly at the sub-regional level, and less use of jargon by planners. She warned that “space shaping, plan making and spatial dimension” were phrases which risked sending people to sleep.
Ms Blears also used her speech to highlight the fact that from April a single standard planning application form will be going national via the Planning Portal.