Too Far a Stretch? A key lesson for developers seeking to exercise an extended Option Agreement

A developer suffered substantial losses as a result of being unable to exercise an option agreement to acquire land for residential development.

Background

In Denton Homes Limited v Christoper Cobb and Nicholas Cobb, the developer and landowner entered into an option agreement (“the Option Agreement”). The Option Agreement provided for an initial four-year option period (“the Option Period”), which could be extended if various circumstances were outstanding at the point that the Option Period expired (“the Extended Option Period”). During the Option Period, the developer could make multiple planning applications.

Clause 4 of the Option Agreement provided that the Option Period could be extended if at the expiry of the Option Period:

1. the developer was awaiting a written decision on the planning application
2. the developer was awaiting a written decision in respect of an appeal in respect of the planning application; and
3. planning permission had been granted within the last 50 days of the Option Period.

In each of these circumstances, the Option Period would be replaced by the Extended Option Period which would run until the date that is 50 days after a written decision in respect of a planning application is made.

The developer submitted a planning application in November 2019 but the local planning authority was slow in dealing with the application. The developer and landowner entered into various supplemental agreements to extend the Option Period but all the other terms of the Option Agreement were left unchanged (including the circumstances which would trigger the Extended Option Period) . The final supplemental agreement extended the Option Period to 29 January 2021. As this date approached, the developer’s application was still outstanding, so on the penultimate day of the Option Period, they lodged an application against non-determination.

The Legal Issue

The developer’s appeal was dismissed on 25 October 2021. The developer submitted a new planning application within 50 days of the written decision being made in respect of the appeal. Whilst the new planning application was outstanding, the developer sought to exercise the Option.

The issue before the Court is whether clause 4 of the Option Agreement permitted the developer to further extend the Option Period by submitting a new planning application.

The Court held that the developer could not validly extend the Option Period in this way. Whilst the drafting of the Option Agreement provided that the developer could submit multiple planning application during the Option Period, once the Option Period was extended, the Option Agreement did not expressly provide for the developer to have the ability to submit a new planning application.

If the developer wishes to appeal the decision, they will need to seek permission from the Court of Appeal.

Conclusion

This case serves as a stark reminder of the importance of precise and comprehensive drafting. The judge commented that whilst the Option Agreement was poorly drafted, it did not warrant the court to depart from a literal interpretation. The judge’s view was that the facts of the case and commercial business sense aligned with a literal interpretation of the Option Agreement and it was cynical of the developer to attempt to extend the Extended Option Period with a fresh planning application.

The lesson for developers is: there is a distinction between extending the option period (which the parties can agree to in writing at any time) and having the ability to unilaterally extend an option agreement once it has fallen into the extended option period. The latter would require specific and clear drafting in the option agreement to provide the developer with the ability to do so.