Construction companies lose Court of Appeal challenge over expert determination

A consortium of construction companies has failed in an appeal over a High Court judge’s dismissal of its claim for a declaration that the decision of an independent expert in relation to a revised section 106 agreement was not conclusive and binding on the parties.

In Morris Homes Ltd & Anor v Cheshire West And Chester Council [2020] EWCA Civ 1516 the respondent local authority had, in August 2008, granted outline planning permission for the development of a residential housing project known as Winnington Urban Village. The urban village is intended to comprise up to 1,200 residential units. On the same date the parties also entered into a section 106 agreement.

In 2011 the appellants reviewed their position and took the view that the planning obligation  contained in the section 106 agreement was too burdensome. Negotiations took place which led to a revised section 106 agreement being made by deed on 16 April 2013.

The April 2013 agreement contained a schedule headed "Affordable Housing Contribution, Northwich Vision Contribution and Education Contribution."

The central issue in the appeal was on the correct construction of this schedule. In outline, it sets out a formula for assessing the amount of those contributions which are to be paid to the council.

On 7 October 2016, the legal completion of the sale of the 300th unit occurred. On 24 July 2017, in accordance with the April 2013 agreement, the appellants submitted information to the respondent relating to the calculation of the contributions required under Schedule 5 to that agreement. On 10 August 2017 the respondent confirmed that it was not satisfied with the information provided by the appellants.

The dispute between the parties was referred to an expert pursuant to clause 10 of the April 2013 agreement. On 7 March 2018, Ms Victoria Critchley was formally appointed to be the relevant expert. She is a Fellow of the Royal Institute of Chartered Surveyors.

There were three points of dispute, one of which was the relevance of ground rents. This latter issue was the subject of the legal proceedings.

Ms Critchley produced her determination on 8 October 2018. The relevant part of her determination was set out at paras. 2.65 – 2.67, where she said the following:

"2.65 I consider that as the freeholds have been sold then it clearly reflects the market to include [capitalised ground rent] within actual sales revenues.

2.66 The wider definition states 'SR is the actual sales revenue per square foot received from the disposal of the Units in that Phase.' The investment sales to Avivia and Adriatic clearly constitute a disposal and therefore the capitalised ground rent should be included within SR.

2.67 I hereby determine that ground rents should be capitalised and form part of actual sales revenue for the purposes of Schedule 5."

Since the appellants were dissatisfied with the expert's determination, they issued a claim in the High Court on 24 January 2019. They sought a declaration that the determination was not conclusive and binding on the parties on the ground that the expert had made an error of law.

Following a hearing on 16 and 17 March 2019, His Honour Judge Pearce (sitting as a judge of the High Court rejected the respondent council's contention that, by reason of the doctrine of estoppel by convention, the appellants were precluded from denying that the expert's decision was binding on the parties.

The judge also held, however, that the expert had made no error of law in her determination and, therefore, it was conclusive and binding upon the parties in accordance with clause 10.4 of the April 2013 agreement.

Three grounds of appeal were advanced on behalf of the appellants:

1. The judge erred in law in holding that three documents relating to the variation of the previous planning obligation of 2008 were admissible background material when interpreting the April 2013 agreement.
2. The judge erred in law in holding that the true interpretation of "sales revenue" in Schedule 5, para. 2, was that it includes (a) ground rent receipts to be taken into account after the legal completion of the sale of the 300th Unit; and/or (b) the values of retained freehold reversionary interests in dwelling houses at that time; and/or (c) the sales proceeds from the subsequent sale of those reversionary interests.
3. The judge erred in law in holding that the determination of the expert was final and binding upon the parties.

Cheshire West & Chester meanwhile filed a Respondent's Notice in which it raised again the contention which failed before the judge, that the appellants were precluded from denying that the expert's determination was binding by reason of the doctrine of estoppel by convention.

The Court of Appeal rejected the appeal and also dismissed the Respondent’s Notice.

In relation to Ground 1, Lord Justice Singh said: “The fundamental difficulty with that submission is that, on a fair reading of the judgment as a whole, I do not consider that the judge regarded these documents as having any material bearing on the issue of interpretation of the agreement which was before him. True it is that he referred to these documents but he did so without objection from the parties before him and, as I read his judgment, simply as part of his summary of the evidence: see e.g. paras. 28-29.

“When pressed at the hearing before us Mr Horne [counsel for the consortium] was unable to draw our attention to any specific passage in the judgment where the judge had regard to the three documents about which complaint is now made as part of his reasoning as to the correct interpretation of the April 2013 agreement.

“In my view, the judge did not fall into the error of having regard to pre-contractual negotiations in order to interpret an agreement, as suggested by Mr Horne. It is common ground that that would be impermissible in accordance with the decision of the House of Lords in Chartbrook, confirming the earlier decision of the House of Lords in Prenn v Simmonds [1971] 1 WLR 1381. That is not, however, what in fact occurred in the present case.”

Singh LJ said the crux of the appeal therefore turned on Ground 2, which was that “the judge erred in law in holding that the true interpretation of ‘sales revenue’ in para. 2 of Schedule 5 to the April 2013 agreement was that it includes (a) ground rent receipts to be taken into account after the legal completion of the sale of the 300th Unit; and/or (b) the values of retained freehold reversionary interests in dwelling houses at that time; and/or (c) the sales proceeds from the subsequent sale of those reversionary interests”.

The Court of Appeal judge said he had come to the clear conclusion that the phrase "the disposal" was a broad one as a matter of ordinary language. “It is not confined to the disposal of any particular interest in property.”

He continued:

“54. Furthermore, I accept the submission made by Mr Wright, that this was a legal agreement drafted on professional advice. It is not to be read simply by reference to a layperson's understanding of the English language. It is to be read by reference to fundamental legal concepts, in particular concepts of the law of property. As lawyers know, but lay people may not necessarily know, legal completion and sales of property are not actually of physical bricks and mortar. What is sold and conveyed is a legal interest in property. There can be different types of legal interest, for example a freehold or a leasehold. If only the leasehold is disposed of, the freehold reversionary interest will remain in another person. It is also well-known that there can be a market in the sale of freehold reversionary interests and in ground rents.

55. Nor, in my view, is it of any real significance that the parties would have known that some at least of the properties would be sold by way of leasehold, since they could have hardly envisaged "flying freeholds" in the sale of flats. Equally, the parties would have been aware that some of the properties to be sold were going to be houses and not flats. It would be very common for the disposal of a house to be way of a sale of the freehold interest, so the parties can reasonably be taken to have had that in contemplation as well. If in the event some or all of the houses were sold by way of leasehold the parties can reasonably be taken to have contemplated the possible sale in the future of the freehold reversionary interests.

56.  Finally, sight must not be lost of the underlying purpose of Schedule 5. Although it is convenient to use the phrase "commercial common sense", that is because most of the authorities on this subject have concerned commercial transactions. It is important to note in the present context that this was not a commercial transaction in the traditional sense. This was a planning obligation pursuant to the statutory functions of a local planning authority. A local authority has obligations not only to its council taxpayers generally but to members of the public who may be affected by proposed developments. Schedule 5 was expressly designed to achieve certain contributions towards affordable housing, education etc. in the local community. If the appellants' interpretation were correct, it seems to me that full effect would not be given to that underlying purpose of Schedule 5. This is because members of the public would not in fact receive a 50% share of their entitlement to the profits concerned.

57. No good commercial reason for excluding that element of the full profits was given on behalf of the appellants. Mr Horne submitted that it was unnecessary for him to do so. In my view, the fact that the developers are unable to provide any sound commercial reason for excluding what would otherwise naturally be regarded as part of the true profits of the scheme is a relevant factor in arriving at the correct interpretation of the April 2013 agreement. As Lord Neuberger said in Arnold, that must not detract from the natural meaning of the language the parties have used. It is nevertheless a factor which is relevant to arriving at the true meaning of the terms which the parties have used.

Lord Justice Singh therefore rejected ground 2.

In relation to ground 3, that the judge erred in law in holding that the determination of the expert was final and binding upon the parties, counsel for the consortium accepted it was no more than a conclusion which would follow if his appeal succeeded otherwise.

In rejecting Cheshire West's Respondent's Notice, the Court of Appeal judge said the dispute resolution clause in the April 2013 Agreement plainly had the effect that all disputes must be referred to an expert but that the ensuing determination was not necessarily conclusive and binding.

“It will be so except where there is a manifest error or there is an error of law. It was common ground between the parties before us that the phrase ‘on a matter of law’ must mean in this context where there has been an error of law by the expert.”

Lord Justice Singh continued: “This did not lead, as Mr Wright [counsel for Cheshire West] submitted, to the status of the determination of the expert being reduced to that of merely an advisory opinion.

“There can be many reasons why parties may agree that they will be under an obligation to refer a dispute to an expert rather than going immediately to court. They may consider that it would be in their interests for reasons of cost, timing or convenience. They may also agree that, ultimately, if it is necessary to do so, they should be able to refer a question of law to the ordinary courts for authoritative resolution. There is nothing inconsistent between those two positions being taken by the parties. If that is what they have agreed, the court's duty is to give effect to their agreement, not to rewrite it.

“I have come to the conclusion that the Respondent's Notice must also be dismissed.”

Lord Justice Baker and Lady Justice Simler agreed.