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An agreement under section 106 of the 1990 Town and Country Planning Act allows a local authority to secure a benefit for the community from a housebuilder in return for planning permission – but these agreements must be drafted with great care if they are to be effective, as one recent case showed.

Berkeley Homes (Hampshire) entered into a section 106 agreement with Christchurch council in which Berkeley was obliged to build a hotel in return for the grant of planning permission for 69 homes on the same site. The agreement stated that construction of the hotel must start at the same time as that of the homes, and that the hotel must be "substantially complete" before the 50th home was occupied.

Berkeley subsequently sold the residential part of the site to Prowting, both companies remaining bound by the obligations of the section 106. Construction of the hotel could not start until an operator had been found, and the council accepted this. Berkeley made considerable efforts to attract an operator but none was found. Meanwhile, Prowting continued to build the homes and it looked likely the 50th unit would be built before the hotel had even been begun. The council agreed that all 69 homes could be built, but reserved its position regarding occupation of more than 50 units.

But about the time the 50th unit was occupied, the council obtained an injunction without notice against Prowting and Westbury, which had purchased Prowting in summer 2002, restraining occupation. This prevented reservations, exchange of contracts and/or completion of the sales of the remaining unoccupied units.

So the remaining units had been built but could not be occupied – and anyway, the litigation deterred prospective purchasers. Prowting and Westbury also faced significant problems as they were looking at the prospect of removing the workforce and their equipment from the site until the dispute was resolved, maintaining the unoccupied units and arranging for the workforce to return at some time in the future. On top of this was the possibility that if the injunction continued until the hotel was built, the owners of the 50 homes that had been sold might have been unable to sell them again because the site might have become blighted. This in turn may have led to more claims from aggrieved homeowners. Clearly, it was imperative that the case be dealt with promptly.

The judge decided the developer was not obliged to delay building the homes until the section 106 commitment was fulfilled

Sensibly, the judge in the High Court addressed the interpretation of the relevant clause in the agreement. It read: "The owner covenants at its own cost and expense with the council to commence the construction of the hotel at the same time as the owner commences construction of the residential units on the land and thereafter to proceed diligently with the same so that the hotel shall be substantially complete prior to the occupation of the 50th residential unit."

The judge considered that this clause imposed a positive obligation on Berkeley to start building the hotel and to proceed diligently so that it was substantially complete by the time of the occupation of the 50th unit. Importantly, though, it did not impose a negative obligation on Prowting and Westbury to restrain the occupation of more than 50 units if the hotel had not been begun, or if Berkeley had not proceeded diligently with its construction.

It may have been the intention of the parties to ensure that the construction of the hotel proceeded in tandem with the construction of the homes, but the clause, as drafted, did not ensure that this intention became reality.

The judge refused permission to appeal so the council was obliged to ask the Court of Appeal for permission to appeal. Rather than limit itself only to the question of permission to appeal, the Court of Appeal reviewed the clause. The Court of Appeal agreed with the judge's interpretation of the clause, refused the council permission to appeal and discharged the injunction, so Prowting and Westbury were able to continue to sell the remaining homes.