Council wins Supreme Court battle over £5.3m land valuation

A Scottish local authority has won a long-running dispute with a developer over the terms of a lease for a golf course on council-owned land after the Supreme Court last week ruled in its favour.

In Multi-Link Leisure Developments Limited v North Lanarkshire Council [2010] UKSC 47, the court unanimously ruled that North Lanarkshire had validly rescinded an option contract to purchase the land covered by the lease.

The original 50-year lease, commencing on 1 June 1999, allowed Multi-Link to develop a golf course on an 84 acre site near Cumbernauld. It contained an option for the developers to buy the land but neither party at the time contemplated that the land might be used for residential development.

The developer exercised the option to purchase on 8 October 2007. The price was fixed by the council at £5.3m, a figure that included the land’s development potential.

Multi-Link disputed the valuation on the basis that it was far higher than the value of the land as a golf course. The developer was only prepared to pay £500,000.

When Multi-Link failed to pay the required £5.3m, North Lanarkshire Council terminated the option contract. Both parties agreed before the Supreme Court that if the termination was valid, the option was “spent” and could not be exercised again.

The original lease set out:

• The price was to be “equal to the full market value of the subjects… as at the date of entry for the proposed purchase (as determined by the landlords) of agricultural land or open space suitable for development as a golf course”
• In determining the full market value, the landlords were to assume that the subjects were in good and substantial order and repair, that all the obligations of the landlords and the tenants under the lease had been complied with and that they were ready for occupation
• The landlords were to disregard any improvements carried out by the tenants during the period of the lease otherwise than in pursuance of an obligation to the landlords, and any damage to or destruction of the subjects.

The question was whether, given the “poor quality of the drafting” as it was described by Lord Hope, the council was entitled to take into account ‘hope value’ attributable to the potential for residential development. Multi-Link claimed the use of the words “full market value… of agricultural land or open space suitable for development as a golf course” meant the valuation of the land as a potential residential site was wrong.

The Lord Ordinary found in favour of Multi-Link in July 2009. North Lanarkshire appealed to the Inner House which reversed the decision in December 2009. It decreed the use of ‘full market value’ had to be “construed as meaning what it says. Considerations that may be relevant to the market value (which may be many) are not to be ignored unless there are express words to that effect.”

In a ruling issued last week, the Supreme Court ruled that North Lanarkshire was entitled, when determining the option price, to take full account of the land’s potential for development.

Lord Hope said the problem arose because the two parts of the relevant clause approached the question of value from different bases.

The judge said: “The earlier parts were designed to settle the price for the purchase of land that will have a value in the open market that takes account of the potential for development. The assumptions and disregards were designed to settle the basis for a purchase of the land in its existing use.”

The commercial or business object of the provision had to be taken into account, Lord Hope said, adding that Multi-Link’s construction of the clause would have provided the developer with a substantial windfall at North Lanarkshire’s expense.

Lord Hope suggested that: “Had reasonable commercial parties directed their mind to the benefits which would accrue to [Multi-Link] if the option was exercised they would have agreed that the option price was to be the full market value of the land, taking account of any development potential.”

Lord Rodger also held that the lease should be constructed as a commercial agreement. Commenting that something had gone wrong with the drafting, the judge said that the approach contended for [by Multi-Link] would be an unusual and artificial approach to valuation, “given that there was no limit on the use to which the land could be put after the option was exercised”.

John O’Hagan, executive director of corporate services for North Lanarkshire, hailed the Supreme Court’s decision as a “very good outcome” for the council.

He added: “The court agreed with our argument about the valuation. Not only that, but it also supported the Inner House’s earlier judgement, that the option to purchase has itself been extinguished because the company did not take up the offer of a sale at a price assessed by us as representing market value.

“Our purpose throughout this process has been to ensure the appropriate value is secured for the public purse and that our commercial interests are fully protected and enhanced. That has been achieved.”

Ed Archer