Case No. CHANF 97/1124/3
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BIRMINGHAM DISTRICT REGISTRY
(MR JUSTICE CHADWICK)

Royal Courts of Justice
Strand
London WC2

Date: Friday 4th December 1998

B e f o r e:

LORD JUSTICE MORRITT
LORD JUSTICE ALDOUS
LORD JUSTICE HUTCHISON

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SIMON GRIFFITHS
and
CLARE GRIFFITHS
Plaintiffs
- v -

W E & D T CAVE LTD
Defendants
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(Computer Aided Transcript of the Stenograph Notes of
Smith Bernal Reporting Limited, 180 Fleet Street,
London EC4A 2HD
Tel: 0171 421 4040
Official Shorthand Writers to the Court)

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MR J RANDALL QC (Instructed by Messrs Dibb Lupton Broomhead, Windsor House, Temple Row, Birmingham, B2 5LF) appeared on behalf of the Appellant

MR J GAUNT QC (Instructed by Messrs Burges Salmon, Narrow Quay House, Narrow Quay, Bristol BS1 4AH) appeared on behalf of the Respondent

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J U D G M E N T

1.	LORD JUSTICE ALDOUS:  This appeal is concerned with the construction of an agreement dated 21st February 1986 between the late Mr Leonard Griffiths and W E and D T Cave Ltd (which I will refer to as "Cave"), which gave Cave an option to acquire certain land.  The plaintiffs are Mr Simon Griffiths and Miss Clare Griffiths, who are the personal representatives of their father, Mr Leonard Griffiths.  They contend that the option clause required the land to be valued at a price which included any value derived from development potential, whereas Cave contend that the land should be valued as agricultural land only, subject to the agricultural tenancy.  That dispute came before Chadwick J who, in his judgment of 11th July 1997, held that the Griffiths' contention was correct.

2.	Mr Leonard Griffiths was up to 1986 a director and shareholder of Cave and acted as its company secretary.  In 1985 differences arose between him and his fellow directors, and it was agreed that it would be best if he would leave Cave and it would purchase his shareholding.  The parties were not able to agree the value of those shares, as they could not agree the value to be placed on about one hundred acres of land at Ludgershall which was owned by Cave.

3.	To avoid the need to resolve that dispute at that time, a scheme was evolved which is contained in three documents.  First the land was conveyed to Cave and Mr Leonard Griffiths as tenants in common.  The purchase price was £100,000, paid as to £84,000 by the company, and as to £16,000 by Mr Leonard Griffiths.  That reflected the number of shares held by him.  By a second document the purchasers granted an agricultural tenancy of the land to the company.  Thirdly, Cave and Mr Griffiths entered into the option agreement, which gave to Cave a call option to purchase the land at a price to be determined in the way provided for in the agreement.  The overall effect of the arrangement was to postpone the need to resolve the differenceS of opinion as to the development of the value of the land to a further time.  

4.	Since those agreements were signed, the local council has adopted a new local plan, which shows a part of the land as being zoned for residential and industrial use.  Accordingly, there are grounds to believe that the value of the land exceeds the value it would obtain on the open market as agricultural land.

5.	The option agreement required Cave to use all reasonable endeavours to obtain planning permission for building or other development in respect of all or part of the land.  By clause 2.1 Mr Leonard Griffiths granted to Cave in consideration of the sum of £1, paid by Cave, the option to purchase his interest in the land on the terms set out in the agreement.

6.	Clause 2.2 set out two ways that the option could be exercised.  First the option could be exercised at any time after the grant of planning permission and prior to the expiry date, which was defined as 21st February 1996, being a date ten years after the date of the agreement.  Where the option was exercised under the first way, the price payable was 16 per cent (subsequently reduced to 12 per cent by a later agreement) of "the net profit of Cave in relation to the land the subject of the option".  Net profit was defined as: 

		"means the open market value of the Subject Land at the date of service of a Notice of Exercise of Option less the cost thereof to the Company including any cost of purchase of a ransom strip from M Hines Limited or payment or value given to it for the acquisition of a right of access and less the amount of any taxation to be borne by the Company on or by reference to a disposal or anticipated disposal of the Subject Land at the open market value and less the amount of any costs of acquisition development or disposal (which shall include a capital sum of £600,000 and such interest as the Company shall incur in borrowing that sum or if no such interest is paid or ascertainable interest at the rate of 2% above the base rate from time to time of Midland Bank Plc from 29th September 1988) and subject to the Agricultural Tenancy 
		Provided that in the event of the Net Profit failing to be assessed on or prior to a disposal of the Subject Land by the Company regard shall be had in assessing the open market value to the anticipated proceeds of disposal".
 
7.	It follows that if development took place during the ten year period contemplated by the agreement, Mr Leonard Griffiths would in essence obtain the open market value, subject to the agricultural tenancy, less the costs of Cave.  Of course, where development was to take place, the agricultural tenancy could be determined, but that might involve compensatory cost.  The arrangement enabled Mr Leonard Griffiths to benefit from any increase in value obtained from development.

8.	The option could also be exercised in a second way, namely at any time up to three months after the expiry date, in accordance with clause 2.2.2 which provided: 

		"at any time after the date of this Agreement if 

		(A) at that time the Company shall have ceased to enjoy the benefit of all or a substantial part of the War Department Tenancy for any reason other than a reason outside the Grantor's control or 

		(B) at that time the Grantor, or his personal representative, shall have transferred or purported to transfer his interest in the Subject Land otherwise than to the Grantor's wife or children; or 

		(C) at that time the Grantor shall have been adjudicated bankrupt; or 

		(D) the option has not already been exercised on the Expiry Date, within the three months of the Expiry Date."
 
9.	It is accepted that the option was exercised within the time specified within clause 2.2(D).  Clause 2.4 provided for the price to be paid.  It stated:  

		"2.4	The price payable in respect of the subject land shall be: 

		2.4.1  In the case of an exercise in the circumstances described in clause 2.2.1, 16% of the net profit of the company in relation to the subject land; and 

		2.4.2  In the case of an exercise in the circumstances described in clause 2.2.2, 16% of the open market value of the subject land by reference to the existing agricultural use subject to the agricultural tenancy."
 
Clause 3 sets the way that the price is to be determined: 
 
		"3.  The price determined in accordance with the provisions of clause 2 hereof shall be as agreed between the parties or in default of agreement fixed by a chartered surveyor to be agreed in writing between the parties . . .  In so fixing such price, the surveyor shall have regard to all the circumstances of the situation, including the specific terms of this agreement, and his decision shall be final and binding on the parties hereto and he shall be acting as an expert and not as an arbitrator."
 
10.	The term "agricultural tenancy" was defined in the definitions clause as "the tenancy comprised in the tenancy agreement of even date made between the company and Mr Griffiths".

11.	After Cave had exercised the option, it became clear that the parties did not agree as to the method of valuation.  The Griffiths' believed that the open market value of the land should include any value derived from potential development.  Cave were of the view that the value was to be assessed as agricultural land subject to the tenancy.  To resolve that dispute, the Griffiths issued an originating summons seeking the court's view as to whether the price payable for the land: 

		"(a) shall include additional value which the land may possess as a result of its potential for residential and/or industrial development; or 

		(b) shall be its value as agricultural land only."

Having set out the facts and the relevant parts of the agreement, the judge said this:
 
		"The question, therefore, is whether the words 'by reference to the existing agricultural use', which appear in sub-clause 2.4.2, restrict the open market value which is to be ascertained upon valuation under that sub-clause to the value of the land on the basis that it can be used only for agriculture and will continue to be capable of use only for agriculture within the foreseeable future.  If that had been the intention of the parties, it could readily have been achieved, either by referring to the 'existing use value' of the subject land, or by including the words 'by reference only to the existing agricultural use'.  The parties have not chosen to express their intention in that way.  It is necessary,  therefore, to decide whether that intention should be attributed to them.  

		In my view, it should not be, for a number of reasons.  First - and obviously - where (as here) there is a well-known and obvious formula ("existing user value") which the parties could use to express their intention, the Court should be cautious in attributing to the parties the intention which would flow from the use of that formula if they have chosen not to use it.  

		Secondly, the parties have indicated in clause 3 that, in fixing the price, the surveyor is to have regard to all the circumstances of the situation, including the specific terms of this agreement.  If the surveyor is to have regard to all the circumstances of the situation, then he must have regard to the potential development value which is introduced, inter alia, by the adoption of the local plan.  He must have regard to that circumstance unless there is a clear direction that he should not have regard to it.  

		Thirdly, to attribute to the parties the intention that a valuation under 2.4.2 is to be made by reference only to agricultural use is to attribute an intention to create an anomaly in certain circumstances which could arise under the agreement; that is to say: 

		(a) There is no reason why the parties should have intended that, if within the 10 year period, the land had attracted considerable hope value by reason, for example, of the adoption of the local plan and perhaps encouraging responses from the planning department following an application, the benefit of that hope value should not go to Mr Griffiths' estate in the event that he died, leaving his property to someone other than to his wife and children; or to his trustee in bankruptcy for the benefit of this creditors if he were become bankrupt.  No reason has been suggested why the company or Mr Griffiths should be concerned that beneficiaries in his estate (other than his wife or children) or his creditors in a bankruptcy should not share in the true value of his interest in this land if actual planning permission had not been granted, but would share in the true value if actual planning permission had been granted.  It seems to me entirely arbitrary that the right to share in the development value in those circumstances should depend on whether the relevant meeting of the local authority planning committee occurred in January 1996 or in March 1996.  

		(b) There is no reason in principle why, if planning permission were granted in March 1996 pursuant to an application which had already been approved in principle in January 1996, Mr Griffiths should be deprived of the whole benefit.  Clearly, a planning permission in the hand may be worth more than a planning permission in the bush, but that does not lead to the conclusion that a planning permission in the bush should be treated as valueless.  

		Fourthly, the option agreement is granted for a nominal consideration in order to enable the company to recover the land conveyed on 21st February 1986 at a price to be fixed in the future.  I can see no reason why the parties should have intended that the price to be fixed in the future should not be a true price for what was being transferred.  If it were not to be a true price, then the effect of the agreement is that the company will be entitled, by the exercise of that option, to expropriate some part of the value of the interest which Mr Griffiths was to have in the land.  That is, of course, a bargain which the parties can make; but, in circumstances where there seems to be no commercial reason for making it, one looks for clear language to have that effect.  As I have indicated, these parties did not use the clear and obvious phrase which was available to them.  

		Fifthly, the effect of clause 7(b) is that, notwithstanding the grant of planning permission, the company could choose not to exercise the option; it could choose not to attempt to sell the land, but to develop the land itself.  If that were the company's choice, then Mr Griffiths would share in the  increased value of the land resulting from the development.  There is, as it seems to me, no reason why the parties should have intended that that prospect should be capable of being taken from him by the exercise of an option during a three month window period from February to May of 1996; of being restored to him thereafter, if the option be not exercised with that in mind; but subject to being taken away again if he were to die without leaving a wife and children.  

		For those reasons, it seems to me that there is no sufficiently clear indication in sub- clause 2.4.2 that the parties intended that a valuation under that sub-clause should be made by reference only to existing agricultural use.  Accordingly I should not hold that that was their intention."
 
The judge then went on to answer the question posed in the originating summons in favour of the Griffiths.
 
12.	Mr Jonathan Gaunt, QC, who appeared for Cave, reminded us of the general principles applicable to the construction of agreements contained in such cases as Prenn v Simmons [1971] 1 WLR 1381, Melanesian Mission Trust v Australian Mutual Providence Society [1997] EGLR 1-8 and MFI Properties Limited v BICC Group Pension Trust Ltd [1986] All ER 974.

13.	He submitted that the words "by reference to the existing agricultural use" were clear, but that the approach of the judge failed to take account of them.  They meant that the valuation had to be by reference only to agricultural use and as tenanted.  He submitted the judge had disregarded the apparent intention of the parties, which was to provide that if within ten years Cave obtained planning permission, which they were under a duty to use their best endeavours to seek, then Mr Leonard Griffiths would participate in the profits.  If no planning permission was obtained within the ten years, then there was a cut-off.

14.	He went on to submit that the judge's construction meant that Mr Leonard Griffiths would be relatively better off if the option agreement was exercised in the second way than if it had been exercised with planning permission, because he would get the open market value before deduction of costs.  That, he submitted, was not the intention of the parties.  He also submitted that the judge was wrong when he said that all that the parties had to do, if Mr Gaunt's submissions were correct, was to use in the agreement the words "existing use value".  

15.	I will deal with that point relatively quickly at this stage in my judgment.  He is, of course, correct that those words could not be used as such.  However, the meaning of the judge is clear, namely that if the parties' intention was as Mr Gaunt submits, then there was an easy way for them to make their intention clear.

16.	Mr John Randall, QC, who appeared for the Griffiths', submitted in his skeleton argument that the judge was right for the reasons he gave.  He submitted that the judge's construction did not render the words "by reference to the existing agricultural use" otiose or mere surfeit.  They required the valuer to have regard to its existing agricultural use and the effect that it may have on the value of the land subject to the agricultural tenancy.  Further, there was no inconsistency between the prices that would be paid on the two ways the option could be exercised.  On the first way, actual planning permission would have been obtained, and it was contemplated that the company might itself in certain circumstances develop the land.  In such a case the value would have increased more than if it only had a prospect of development, and it was possible and reasonable for the valuer to take into account actual costs the company would incur so as to provide a value equivalent to the net profit from the development.  In the second case, actual development was not explicitly envisaged.  The open market value would therefore reflect the costs needed to be incurred if the land was to be developed.

17.	I conclude that the judge came to the right result for the right reasons.  In particular I am of the view that the words "by reference to the existing agricultural use subject to the agricultural tenancy" have the meaning for which the Griffiths' contend.  Those words require the value to be determined as the open market value having regard to the existing agricultural use, but subject to the agricultural tenancy.

18.	The use is that existing at the date when the option is exercised.  Could use at that time affect the price?  In my view the answer is yes but, as Mr Gaunt pointed out, that needed to be taken into account by the valuer carrying out the exercise under clause 3.  So be it, but in my view that gives to the words a meaning which could have been intended by the parties.

19.	The words to be construed require two factors to be taken into account; first, the existing agricultural use and, secondly, the agricultural tenancy.  To construe clause 2.4.2 in the way suggested by Cave requires a further qualification of the words "open market value", namely that there should be stripped away from the open market value any element due to potential development.  That requirement cannot in my view be derived from the words in the clause which require the open market value to be determined by reference to the existing agricultural use.  Nor can it be derived from the requirement that it is to be valued subject to the agricultural tenancy.  

20.	The agreement appears to me to contemplate that a particular method of agricultural use may affect its value, but that cannot mean that the potential value derived from development should be excluded.  I can find nothing in the agreement which suggests that there should be a ten year cut-off to Mr Leonard Griffiths' claim to recover a share of the value which he contemplated arose from potential development.  I do not believe it right for this court to speculate as to what the parties had in mind when they entered into the agreement.  It is just as likely that they contemplated postponing the dispute for ten years as it is likely that they agreed to have a cut-off of Mr Leonard Griffiths' claim to be paid for the development potential that he envisaged.  In actual fact, I believe the judge's reasoning in the passage which I have read on this matter points to a conclusion that it was likely that they had in mind a postponement.  

21.	I also believe that the words "open market value" do not support Cave's submissions on this matter.  They show an intention that the valuer should value the land in the real world, so as to produce a value of the land that it would obtain upon the open market, of course subject to the qualifications in the clause.  Cave's submissions require the valuer to conduct a totally artificial valuation to arrive at the figure which would be less than the land is actually worth.

22.	Mr Gaunt drew to our attention paragraphs (a), (b) and (c) in 2.2.2 which I have read.  He submitted that the intention could be derived from consideration of the application of those sub-clauses.  He submitted that those clauses were intended to be less advantageous to Mr Leonard Griffiths and to be what he called "a sanction" which would apply in the circumstances set out.  Thus he submitted that it would be wrong to construe the agreement so that the price to be paid in the event of the option being exercised in that way would give to Mr Leonard Griffiths more money than if it was exercised under clause 2.2.1.

23.	In my view it is just as consistent to read clause 2.2 as listing events when Mr Leonard Griffiths' interest would become minimal and therefore there would be a good reason for Cave to have the opportunity to exercise the call option.  It is true that the Griffiths' construction would mean that upon exercise under clause 2.2.1, the price to be paid would be that subject to deduction of costs.  But in my view you cannot derive from that that the parties did not intend that, when the option was exercised under 2.2.2, the price should be solely the agricultural price, subject to the tenancy.  What the actual valuation would be on any particular case would depend upon the facts of the case.  

24.	Mr Gaunt contemplated a case where the planning permission would have been granted and the expiry date would have expired.  Thus he said that the Griffiths' would do better under the circumstances where the option was exercised under 2.2.2.  That, he submitted, could not have been the intention of the parties.  In my view the fact that they might do better is irrelevant to the intention of the parties.  The fact that the price was to be fixed at the end of the ten-year period which was contemplated under (b) did not mean that it was not the intention of the parties that Mr Griffiths should not partake of the true development potential.  In any case, the parties could have contemplated that any development value which might occur would have occurred within the first ten years.

25.	As I have said, I believe the words point to the Griffiths' contention being the correct one.  I adopt in totality, subject to the point that I have made as to existing use value, the judge's reasoning. I believe he came to the right conclusion for the right reasons.  I therefore would dismiss this appeal. 

26.	LORD JUSTICE HUTCHISON:  I agree. 

27.	LORD JUSTICE MORRITT:  I also agree.  It seems to me that the question, ultimately, is whether as a matter of construction one should interpolate into the phrase "by reference to the existing agricultural use" the word "only".  Mr Gaunt on behalf of the company says that one should, because, he says, otherwise the words which are there are otiose and, if the interpolation is not made, there will be anomalies.  For my part I do not accept either of those submissions.  It does not seem to me that the words are necessarily otiose in the circumstances foreseeable in 1986, with a highly complex system of agricultural subsidies and grants dependent on the use to which the land was put in a particular period.  

28.	Secondly, it seems to me that anomalies will arise either way.  On Mr Gaunt's construction there are the anomalies referred by the judge.  On Mr Randall's construction it would be anomalous that at the end of the ten-year period Mr Griffiths might get more under the second method of valuation than he would have done under the first, because though both start from open market value, the first has the deductions while the second has not.  I do not think that necessarily follows.  One cannot assume that the parties could predict in 1986 what the position would be when the second method of valuation had to be applied, some time after the ten year period.  

29.	At the end of the day it comes down to whether you take the view that this ten-year period was a cut-off point, or merely a postponement of a difficult issue which the parties were unable to resolve for themselves in 1986.  As to that, it seems to me that the Court should not speculate.  I agree with my lord and the judge that this appeal should be dismissed.

	ORDER: Appeal dismissed with costs.