Purpose of bargain relevant to interpretation

Posted: 4th September 2013

Trading estate 3In concluding that the owners of light industrial units on a trading estate are liable to contribute towards the costs of maintaining a road giving access to their premises, the Court of Appeal has emphasised that the factual background and the commercial purposes of a bargain are relevant to the interpretation of contracts.

The estate, which extended to several hundred acres, had formerly been in the ownership of a single company (the vendor) which sold off a substantial part of it, including the estate roads, to a developer. Tenants of various individual units subsequently acquired the freehold of their premises from the company.

The latter transactions were subject to a covenant requiring the unit owners to make reasonable contributions towards the expenses incurred ‘by the vendor and its successors in title’ in maintaining the relevant access road. At the time of the transactions, the vendor no longer owned the road, having already disposed of it to the developer.

An issue arose as to whether the developer could be described as a ‘successor in title’ to the vendor. It was submitted by the unit owners that, having acquired the relevant road prior to their acquisition of their freeholds, the developer did not enjoy the benefit of the covenant and had no right to levy maintenance charges.

Those arguments failed at the High Court and, in dismissing the unit owners’ appeal on that issue, the Court of Appeal noted that it was the obvious purpose of the covenant to enable whoever owned the road to recover reasonable maintenance costs from the unit owners who had the benefit of using it.

Whilst recognising that the word ‘successors’ generally refers to subsequent owners of a property, the Court found that such an interpretation would have a ‘surprising’ result on the particular facts of the case. It was most unlikely that an objective bystander would conclude that the parties’ intention was to exclude the developer from recovering reasonably incurred maintenance costs for the foreseeable future.

In circumstances where the unit owners’ interpretation of the covenant would have the effect of destroying the commercial purpose of the bargain, it was permissible to take into account the background facts in construing the agreement. The Court found that the developer was rightly viewed as a successor to the vendor and that it followed that the unit owners were contractually liable under the covenant to contribute towards the road maintenance costs.