Court rules that buyer acted unreasonably in withholding consent and refusing to enter into section 106 agreement

In a recent decision, the buyer of a development site was ordered to pay damages to the seller following the buyer’s unreasonable withholding of consent to the seller’s planning application and refusal to enter into a section 106 agreement. The court held that the buyer’s actions amounted to a breach of contract and prevented the seller earning an overage payment.

Key points for developers:

• A party whose request for consent under the terms of a sale contract has been unreasonably refused will not ordinarily waive its right to rely on the unreasonableness of the refusal by submitting a further request. However, any subsequent request for consent should still be carefully worded to avoid any inadvertent waiver of the requesting party’s rights.
• Where a contract provides that a party must communicate its decision within a set time period, or else approval will be deemed to be given, a response which states that no decision will be made within the time allowed by the contact is likely to amount to deemed consent.
• By setting tight contractual deadlines it will be more difficult for one party to claim that the other has not complied with any reasonable endeavours obligations.

What was the dispute about?

In 2013 a developer obtained planning permission for a large regeneration scheme which included a 34 storey residential tower.

Shortly before the developer obtained the planning permission it sold the site. The sale contract allowed the seller to apply for an enhanced planning permission by 20 October 2014.  The seller had to submit any plans to the buyer for approval, such approval not to be unreasonably withheld and to be given within a set time period.  If an improved planning permission was obtained, the buyer would make an overage payment to the seller to reflect the increase in value.

The seller made two requests to the buyer for approval. The first was made by email and was refused.   The second was by letter a few days later to which the buyer replied a week later, saying it would need at least 4 weeks to respond.

Despite the lack of consent from the buyer and in order to meet the contractual deadline, the seller submitted an enhanced planning permission application and a resolution to grant was passed. However, the buyer refused to enter into the revised section 106 agreement required before the actual grant of planning permission, and the resolution lapsed.

The seller claimed that the buyer’s first refusal was unreasonable and that its second response should be treated as a deemed consent due to its failure to respond in accordance with the terms of the contract. The seller also contended that the buyer’s refusal to enter the revised section 106 agreement amounted to a breach of the contract. The seller therefore sought damages for breach of contract in the amount of the overage sum that would have been earned had the enhanced permission been granted.

The buyer maintained that the first request was invalid due to a lack of supporting evidence and that its reasons for refusal were good reasons. In any event, the buyer claimed that the seller had waived any unreasonable refusal by submitting the second request. The buyer also argued that it was entitled to refuse to enter the section 106 agreement because the conditions which had to be satisfied by the seller had not been met. In particular, the seller had failed to use reasonable endeavours to minimise the section 106 contribution.

What did the court decide?

Finding in the seller’s favour, the judge held that:

• The seller’s first request was made in accordance with the sale agreement and the buyer’s reasons for refusing consent were unjustified.
• The seller had not, by making the second request, waived its right to rely on the buyer’s original unreasonable refusal.
• The buyer’s response to the second request amounted to deemed consent under the terms of the contract.
• The buyer had not acted reasonably when refusing to enter into the revised section 106 agreement. The seller had complied with its obligations to use reasonable endeavours to reduce the s106 contribution; this obligation had to be viewed against the backdrop of the tight contractual deadlines imposed by the buyer.