Chartbrook Ltd v Persimmon Homes Ltd & Ors

Factual and Procedural Background

Company A owned a development site in The City. On 16 October 2001 it entered into a detailed development agreement with Company B, a well-known house-builder. Under the agreement Company B would:

• Secure planning permission for a mixed residential/commercial scheme;
• Build the scheme at its own expense while occupying the land under licence; and
• Sell long leases of the completed units, accounting to Company A for an agreed purchase price made up of (i) “Total Land Value” (TLV) and (ii) an “Additional Residential Payment” (ARP).

Planning permission was obtained and the project built, but the parties disagreed on the correct interpretation of the ARP formula in Schedule 6 of the contract—an issue worth several million pounds. Company B lost before Judge [Last Name] and, by a 2:1 majority, in the Court of Appeal. The House of Lords (now the UK Supreme Court) granted leave and heard Company B’s further appeal.

Legal Issues Presented

1. The proper construction of the contractual formula defining the ARP, specifically:
   1. whether ARP equates to 23.4 % of the excess of sales proceeds over a guaranteed minimum (Company B’s view); or
   2. whether ARP equates to 23.4 % of the sales proceeds after deducting that minimum (Company A’s view).
2. Whether the long-standing rule excluding evidence of pre-contractual negotiations (Prenn v Simmonds) should be relaxed so that such material can assist in construing the written contract.
3. If Company B failed on construction, whether the agreement should be rectified to reflect the parties’ alleged common intention.

Arguments of the Parties

Appellant (Company B) – Main Arguments

• The commercial purpose of Schedule 6 was to give Company A a guaranteed land value (the TRLV) plus a share (23.4 %) of any surplus achieved; construing ARP otherwise produced irrational economic consequences.
• Syntax alone did not resolve where “Costs & Incentives” (C&I) should be deducted; business common sense required deduction from the headline sale price, not after applying the 23.4 %.
• Pre-contract correspondence showed an agreed structure of “minimum plus uplift” and should be admissible.
• If construction failed, the written words should be rectified because both sides mistakenly thought the contract reflected their agreed formula.

Respondent (Company A) – Main Arguments

• Grammatical syntax supported its reading: ARP equals 23.4 % of (Sale Price − Minimum − C&I).
• The exclusionary rule in Prenn v Simmonds prevents reliance on negotiations; no reason was shown to depart from it.
• No common mistake existed; Company A always intended the wording and would not have contracted on Company B’s figures.

Table of Precedents Cited

Court's Reasoning and Analysis

1. Linguistic and commercial coherence. The Lords accepted that, read literally, the syntax favoured Company A, but literalism produced an “arbitrary and irrational” commercial result because:

• Company A would receive a windfall even if the market collapsed, undermining the concept of a “minimum guaranteed” land value.
• The expression “Additional Residential Payment” and phrases “minimum” and “if any” signalled a contingent, not automatic, payment.

2. Correction of evident drafting error. Applying East v Pantiles and KPMG, the court held both conditions for “correction by construction” were met: (a) something had clearly gone wrong with the language; and (b) it was clear what a reasonable person would have understood—namely, ARP equals the excess (if any) of 23.4 % of net sale proceeds over the guaranteed minimum.

3. Costs & Incentives (C&I). The only rational place to deduct C&I was from the headline sale price before applying the 23.4 % calculation. Reading it otherwise “magnifies the negative effect” and contradicts commercial purpose.

4. Admissibility of negotiations. While some members examined the policy debate, the House unanimously declined to relax the rule in Prenn; therefore, negotiations were not used in deciding construction.

5. Rectification (obiter). If construction had favoured Company A, rectification would likely have been granted because the objective prior consensus (demonstrated in correspondence) matched Company B’s formula.

Holding and Implications

APPEAL ALLOWED. The ARP is the amount by which 23.4 % of the net residential sale proceeds exceeds the Minimum Guaranteed Residential Unit Value. The matter is resolved by construction; rectification is unnecessary.

Implications: The decision reinforces the primacy of commercial common sense in contract interpretation, clarifies the high threshold for rewriting contractual language, and emphatically re-affirms the exclusionary rule against using pre-contractual negotiations in construing written agreements. No new precedent is set, but existing principles are powerfully restated for future contractual disputes.