As recent years have demonstrated, market conditions are unpredictable.
Many contracts entered into before the fall in the property market were much less attractive once the recession hit. However, can adverse market conditions be valid reason to escape contractual liabilities and avoid proceeding with a contract that is no longer as profitable?
This issue was dealt with in the recent case of Gold Group Properties Limited v BDW Trading Limited. In the case a dispute arose between the parties in respect of a development agreement relating to a substantial site in Surrey. It was intended that Barratt would develop the site by building a large number of houses and flats which would then be sold on long leases. Gold (as the freehold owner) and Barratt would then share the revenue generated by the sales. However, in reality, nothing happened on the site between 2008 and 2009.
Barratt argued that it was a condition precedent to commence and carry out the building works on site that the properties would fetch the minimum prices as set out in a schedule of the development agreement. Barratt argued that it had received advice that a fall in the property market meant that the minimum prices would not be achieved. Therefore it was not obliged to start work and / or the agreement was frustrated.
In the case the Judge decided that Barratt’s agreement to commence, carry out and complete the development following the giving of vacant possession was unequivocal. The Judge concluded none of these obligations were subject to the minimum prices.
It was clear both parties foresaw the possibility that the property market would drop. Consequently it was foreseeable that the minimum prices would not be achieved. Therefore, it was the view of the Court that it could not be argued that the receipt of a “gloomy forecast” two years before the properties came on to the market was an event that could frustrate the contract.
The effects of the credit crunch, such as a fall in the projected sale proceeds of property, are an inherent commercial risk. This case is consistent with the court’s approach to date in rejecting arguments from parties that the consequences of the recession should be grounds to release them from what now turns out to be a bad deal. Clear drafting is the only way to ensure that your intentions are reflected in the final contract.
Alastair Young is a partner in the Construction Team at HBJ Gateley Wareing