Case No: 7MB01946
Neutral Citation Number: [2010] EWHC 423 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
NEWCASTLE UPON TYNE DISTRICT REGISTRY

Date: 04/03/2010

Before :

MR JUSTICE DAVID RICHARDS
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Between :

	Bellway Homes Limited	Claimant	
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	Beazer Homes Limited	Defendant	

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Jonathan Gaunt QC (instructed by Dickinson Dees LLP) for the Claimant
Christopher Pymont QC (instructed by Walker Morris) for the Defendant

Hearing dates: 30 November, 1 December 2009
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Judgment
Mr Justice David Richards: 
	  
1.	In this action the claimant Bellway Homes Limited (Bellway) seeks a declaration that it is entitled to an allocation of development land at Middle Warren, Cleveland owned by a company which it jointly owns with the defendant Beazer Homes Limited (Beazer) to make up for an imbalance in the allocation of developable land between them at a site at Cramlington, Northumberland also owned by the company.  The claim is made pursuant to a shareholders agreement governing their relations both together and with the company.
2.	In the late 1950s, the decision was taken to develop a number of new towns in the North-East, including Cramlington in Northumberland.  Unlike other developments, Cramlington was a private venture.  The freehold of the land was vested in William Leech (Investments) Limited (WLI).  Under a succession of agreements with WLI, the new town was developed in stages by companies within two housebuilding groups, the Bellway Group and the Leech Group.  Under these agreements, the two groups would develop agreed areas of land under individual 99-year leases which would then be assigned to the residential plot buyers.  
3.	In 1990/91 WLI decided to sell its remaining land at Cramlington.  The Bellway and Leech groups agreed to form a joint venture company to acquire the land and allow its development in the same manner as before.  A dormant company in the Bellway Group called Bradview Limited (the company) was used for this purpose.  Its name was in due course changed to Leebell Developments Limited.  
4.	The arrangements between the parties were and remain governed by a Shareholders Agreement made on 26 July 1991, to which the parties were Leech Homes Limited, Bellway and the company.  The shares owned by Leech Homes Limited were later acquired by Beazer Homes Limited, which has always accepted that it is bound by the shareholders agreement in place of Leech Homes Limited, and I will use “Beazer” to cover them both.
5.	The Shareholders Agreement recites that Beazer and Bellway have agreed to regulate the business and management of the company and their relationship as shareholders on the terms and conditions of the agreement.  The share capital of 100 ordinary shares of £1 each was re-designated as 50 A shares, held by Beazer, and 50 B shares, held by Bellway.  Under the agreement and the Articles of Association adopted in accordance with the agreement, each shareholder could appoint an equal number of directors and there were deadlock provisions applicable at shareholder and board level.
6.	Clause 1.1 of the agreement defined “Development” as:
“all demolition and clearance operations and all excavation building and other construction works and all associated drainage and infrastructure works for the development of land in the Counties of Northumberland, Durham, Cumbria, Tyne and Wear, Cleveland and North Yorkshire in accordance with this Agreement”
It is important for the present case to note that this definition is not confined to Cramlington.  The parties envisaged that the company might be used to hold development land elsewhere and in 1995 land at Middle Warren, Cleveland comprising 166.5 developable acres was acquired by the company and is currently in the course of development by Beazer and Bellway.
7.	Clause 3.1 sets out the business of the company, including the acquisition of land and premises in the areas identified in the definition of Development, the obtaining of all planning permissions, approvals and licences necessary for the development of such land, obtaining finance and procuring development of the land.  Importantly for the present case, cl.3.1(d) includes in the business of the company:
“(d) to dispose of the whole of or any part of such land and premises (whether by sale exchange or by lease then sale including disposals to the A shareholders and B shareholders in parcels of equal value as near as may be unless the Shareholders shall otherwise agree) and otherwise deal with such land and premises as the Shareholders shall think fit.”
By cl.3.2 each of Beazer and Bellway undertakes to the other to observe and perform, and to procure that the company observes and performs, the provisions of the agreement.
8.	There had previously been extensive coal mining in the Cramlington area and substantial areas of the development land had to be remediated, as it is called, before development work could take place.  Subject to planning requirements, Beazer and Bellway generally built first on the areas which were easier or cheaper to develop.
9.	Development by Beazer and Bellway did not proceed over equal areas.  When further land was needed for development it would be sold to them, not necessarily in equal amounts but often in agreed proportions to reflect the capacity of each to undertake development at that stage.  In terms of cl.3.1 (d) of the agreement, these were therefore not sales “in parcels of equal value as near as may be”, but cases in which the shareholders had agreed otherwise.  Importantly though, they proceeded on the basis that any imbalance would be made up in subsequent sales by the company to them.
10.	Sales of land by the company to the shareholders were not at open market value but on the basis of original cost plus interest, together with payment to another jointly-owned company to cover remediation costs.  Remediation and infrastructure costs for the whole area allocated in each distribution were shared by Beazer and Bellway in proportion to the total area allocated to each of them, not by reference to the work required on any particular piece of land.
11.	Distinctions were not made between different areas on the basis that some were, by reason of location or otherwise, more valuable than others.  Sales were not made on the basis that x acres in one area were worth the same as y acres in another area.  Acreage was in effect taken as a proxy for value.  Prior to each distribution, the particular allocation of land would be discussed and agreed between the appropriate directors of Beazer and Bellway.
12.	By 1999 the entire site had been developed with the exception of areas known as areas 2D (ii) and 3A.  By that stage Beazer had received a total of 294.40 acres and Bellway had received 291.05 acres.  In order to redress the balance, the parties agreed in an exchange of correspondence in September 1999 that Beazer should be sold 3.87 acres of area 2D (ii) and 6.29 acres of area of area 3A, while Bellway should receive 1.95 acres of area 2D (ii) and 11.58 acres of area 3A.  By these means, Bellway would have received in aggregate the same acreage as Beazer.  Neil Foster, at all material times the technical director of Beazer, stated in his second witness statement:
“Because Beazer had drawn down its land more quickly than Bellway, Bellway was entitled to a larger allocation by way of a final, balancing allocation of land.”
13.	Unknown to either party in September 1999 when the allocation of the remaining land at Cramlington was agreed, it soon transpired that area 3A was incapable of development.  The local authority considered that there was sufficient risk that the remediation works would release methane gas from the old mine workings that it refused to permit development.  The effect was therefore that instead of balancing the distribution of land so that overall each party received land of equal value from the Cramlington development, as the parties intended, the final allocation agreed in September 1999 exacerbated the imbalance.
14.	The result was that Beazer had received more acres of developable land than Bellway, the difference being 5.27 acres, estimated by Bellway to be worth about £5m.
15.	It is Bellway’s case that the imbalance which has in fact occurred in the distribution of land at Cramlington should be made up by an allocation of land of equal value from the company’s holding at Middle Warren.  Beazer submits that each development must be taken separately and that the allocation agreed in September 1999 was final as regards the parties’ rights under the shareholders agreement, so that the risk of development passed to the parties individually.  It points to the wording cl.3.1 (d) which applies separately to each disposal of land to shareholders which must be in parcels of equal value or as the shareholders otherwise agree.  Value for these purposes is to be taken at the date of disposal.  Once values have been agreed as at that date and disposals made accordingly, there is no room under the contract for the question of value to be revisited subsequently and adjusted in the light of any changes in value or in agreed or perceived value.  Value at the date of disposal will be the value on the facts as then understood.  It was not anticipated by the parties in September 1999 that detailed planning permission would be refused and there was no reason therefore at that time to discount the value of area 3A.
16.	There are important features of the shareholders agreement and the parties’ dealings pursuant to it for the purposes of this dispute.  First, as earlier mentioned, the agreement is not confined to the development at Cramlington, which is not in fact specifically mentioned.  The agreement expressly contemplates that there may be a number of developments.
17.	Secondly, disposals of land to the shareholders are to be in parcels of equal value unless they otherwise agree.  To make this provision workable “equal value” must be objectively ascertainable and refers, in my view, to the open market value of the relevant parcels of land at the date of disposal.  In relation to the land at Cramlington the parties agreed to use acreage as a proxy for value, but it does not appear that this was intended to produce any significant difference in the respective market values of the total areas allocated to each.
18.	Thirdly, the parties in fact agreed to disposals to them in parcels of unequal value.  But this was on the basis that the party which received a smaller allocation would in due course be entitled to catch up through a further disposal in its favour of parcels of unequal value.
19.	The parties intended the final allocation of land at Cramlington to be the means by which Bellway caught up, so that overall it had acquired the same amount of developable land as Beazer.  If at the date of disposal it had received its intended share of developable land, I agree with Mr Pymont QC for Beazer that Bellway could not complain of a subsequent change in its suitability for development.  However, it seems clear that area 3A was not developable at the date of disposal.  The old mine workings were of course present and well-known, and there is no suggestion of any subsequent change in the local authority’s policy of giving planning permission.  Planning permission was in fact refused within a relatively short period.  Equally, if it is looked at in terms of the value of the land, any potential third party purchaser would inevitably look carefully at whether planning permission would be given in light of the old mine workings, including making extensive enquiries of the local authority, and there is no reason to suppose that a purchaser would conclude that permission would be given.
20.	The final allocation of land at Cramlington did not therefore achieve what the parties intended.  Mr Pymont accepted that if in September 1999, area 3A was known to be incapable of development, it would have been excluded, and Bellway would have been entitled to make up its existing shortfall of 3.35 acres from area 2D(ii).  The course of dealing between the parties demonstrates in my judgment that if what occurred in relation to area 3A had occurred at an earlier allocation of land at Cramlington, Bellway would have been entitled to make up the balance at a subsequent allocation of land at Cramlington.
21.	It is therefore only if the allocation of land at Cramlington must necessarily be divorced from the allocation of land at Middle Warren that the course of dealing between the parties would not result in Bellway’s shortfall being made up from land at Middle Warren.  There is in my judgment nothing in the shareholders agreement which dictates this result.  The terms of cl.3.1 (d) do not do so.  Having embarked on disposals of parcels of unequal value, on the basis that the balance would subsequently be redressed, the agreement does not in my view prevent that arrangement from being carried forward from one development to another.  Equally, there was no agreement between the parties that the allocation agreed in September 1999 was to be a final and binding settlement of their respective entitlements, irrespective of whether the whole or parts of the land then allocated was capable of development.
22.	Bellway seeks a declaration that:
“..Beazer is obliged by clauses 3.1 and 3.2 of the shareholders agreement to exercise its voting rights in Leebell in such a way that Bellway receives a disposal of land from the Middle Warren site which is sufficient to rectify the imbalance in the values of the land disposed of to Bellway and Beazer from the Cramlington site.”
It also seeks an inquiry, if necessary, into what additional acreage of land from the Middle Warren site ought to be disposed of to Bellway in order to rectify the imbalance.  By a case management order made by DJ Bullock, this trial is of a preliminary issue, namely Bellway’s entitlement to the declaration.
23.	Mr Pymont submitted that the declaration sought raised so many questions as to be unworkable.  In particular, bearing in mind that the imbalance occurred cumulatively during the development of Cramlington, there were unanswered problems as to the dates of valuation, the land to be valued and the basis of valuation.  In reply, Mr Gaunt pointed out that the final allocation failed to provide Bellway with an additional 5.27 acres of developable land at Cramlington and submitted that, in determining what it should have received, that amount of developable land at Cramlington should be valued as at September 1999, on the basis that it was remediated and the infrastructure was built.  He submitted that developable land at Middle Warren should be valued as at the same date and on the same basis and that Bellway would be entitled to such amount of land at Middle Warren as had a value equal to 5.27 acres at Cramlington, on the basis of such valuations.
24.	Bellway had not previously set out how in its submission a valuation process to give effect to a declaration would proceed.  I have not heard submissions on behalf of Beazer in response to Mr Gaunt’s reply.  It would not therefore be right for me to express any concluded view on this and, indeed, there may be issues which will come to light only once valuers look at the task in detail.  I am however satisfied that the declaration sought by Bellway does not pose insuperable problems so as to make it unworkable.
25.	I will accordingly make the declaration sought by Bellway.