Termination traps in conditional development agreements

Background

WEL and Thirteen Homes entered into a development agreement subject to several conditions, including a planning condition and the release of a restriction on the title (the "Restriction") which limited the use of a substantial part of the property to use only as a car park.

The development agreement included an obligation on Thirteen Homes to apply for planning permission within a specified period.

Thirteen Homes never submitted the planning application, even though it had incurred the majority of the costs in preparation for its submission, because it took the view that the Restriction should be discharged first. 

It did not obtain the release of the Restriction and served a notice purporting to terminate the development agreement on the basis that it had not become unconditional by the longstop date. 

WEL subsequently served a notice to terminate the agreement on the basis that, in failing to submit the planning application in accordance with its contractual obligations, Thirteen Homes had committed a fundamental breach of contract. The Court agreed and, on the basis of the condition attached to the termination provisions in this particular agreement, held that Thirteen Homes could not rely on the termination clause because it had failed to comply with its own obligations to submit the planning application within the timescale set out in the agreement (or at all). WEL's notice to terminate was therefore valid and effective. 

The Court also declined to exercise its discretion to order the return of the Deposit to Thirteen Homes.

Key takeaways

1. Be sure that you are happy with the unconditional obligations in a conditional contract before you exchange. Thirteen Homes asked the Court to imply into the agreement that its covenant to apply for planning permission did not arise until the Restriction had been discharged. The Court rejected the argument. Thirteen Homes' failure to submit the planning application within the time period specified in the agreement was fatal to their defence. If a development agreement is intended to require one step to happen before another, make sure that sequencing is clearly stated. Parties should not assume the Court will rescue the bargain by implying terms which were not included.
2. If you are expecting to rely on a termination right in a conditional agreement, make sure you take legal advice early so that you are aware of any conditions that must be fulfilled in order to exercise that termination right.
3. Once a conditional agreement is exchanged, take appropriate steps in good time to satisfy the relevant conditions, and take deadlines seriously.
4. The loss of a deposit is a real risk where a party to an agreement commits a fundamental breach which entitles the other party to terminate.
5. Don't lose sight of the bigger picture - Thirteen Homes chose not to submit the planning application until the Restriction was discharged because they wanted to avoid wasting application fees and approximately £5,000 in ongoing fees to its planning advisors. By failing to do so, they forfeited £245,000.

The decision serves as a reminder that contractual obligations often continue to apply while conditions are being satisfied, and parties who fail to comply with those obligations may lose valuable contractual rights. Before delaying an application, missing a deadline or serving a termination notice, it is worth checking exactly what the contract requires. As this case demonstrates, what appears to be a modest cost-saving exercise can have far more significant consequences.