Landlord and tenant — Claim for specific performance of agreement alleged to have been created by exercise of option to purchase in lease — Plaintiffs assignees of lease — Defendants were the lessors, who claimed rectification of option clause on ground of unilateral mistake, their contention being that the clause should have contained a right of pre-emption, not an option to purchase — Other issues were whether assignees of lease were bound by claim for rectification and, if the claim for rectification failed, on what basis should the price of the reversion be calculated — Evidence on rectification issue considered — Held that claim for rectification failed as the necessary requirements, as expressed by Buckley LJ in Bates v Wyndham, had not been satisfied — Plaintiffs’ claim for specific performance, however, held to be premature as not all the steps required by the lease for the exercise of the option had yet been taken — Price which plaintiffs should pay for the option would be based on a sale subject to and with the benefit of the lease, not a sale with vacant possession
In these
proceedings the plaintiffs, Taylor Barnard Ltd, sought an order for specific
performance of an agreement created by the exercise of an option to purchase
the reversion contained in a lease of which they were the assignees. The lease
was of premises used for the sale, servicing and repair of motor vehicles. The
defendants, the lessors, were David A Tozer and Geoffrey Lucken.
G W Jaques
(instructed by Gudgeon Peacock & Prentice, of Stowmarket, Suffolk) appeared
on behalf of the plaintiffs; C P F Rimer (instructed by Willson & Bentley)
represented the defendants.
Giving
judgment, JUDGE THOMAS said: By a lease dated March 9 1979 and made between the
defendants, of the one part, and Neil Frank Morphew and Michael John Moore, of
the other part, the defendants demised 159 London Road, Ipswich, to Mr Morphew
and Mr Moore for the term of 15 years from December 25 1978 at a yearly rent of
£5,500 for the first three years of the term and at rents to be determined as
therein provided for each succeeding period of three years.
The premises
were demised for use for the sale, servicing and repair of motor vehicles.
Clause 30 of the lease conferred upon the tenants an option to purchase the
freehold reversion.
By an
agreement dated November 7 1980, and made between Mr Morphew and Mr Moore of
the one part and the plaintiff company of the other part, the plaintiff company
contracted to purchase the premises comprised in the lease together with the
benefit of the option to purchase the reversion for the sum of £17,500.
By an
assignment made on December 31 1980, in consideration of the sum of £17,500
then paid to them by the plaintiff company, Mr Morphew and Mr Moore assigned to
the plaintiff company the premises comprised in the lease for the residue of
the term together with the benefit of the option.
By written
notice dated January 2 1981 the plaintiff company exercised the option.
In these
proceedings the plaintiff company seeks specific performance of the agreement
created by the option and its exercise. By way of counterclaim the defendants
seek rectification of clause 30 of the lease (the option clause) on the ground
of unilateral mistake. They contend that clause 30 should have contained a
right of pre-emption and not an option. They also say that the plaintiff’s
claim for specific performance is premature.
There are two
other issues: is the plaintiff, as successor of the original tenants, bound by
the claim for rectification and, lastly, if the claim for rectification fails,
what price should the plaintiff pay for the reversion?
I shall deal
with the issues separately. First, the claim for rectification on the ground of
unilateral mistake. In late November or early December 1978 the defendants put
159 London Road on the market through agents, Bairstow Eves, who advertised the
property for sale. The sale particulars offered the freehold for sale at
£50,000 or, alternatively, a lease at an exclusive rental of £5,750 per annum.
Equipment was to be purchased separately at a valuation.
Mr Morphew and
Mr Moore, who were trading in partnership as car dealers, became interested.
They could not afford at the time to purchase the freehold although, no doubt,
they would have liked to do so. Mr Morphew went to Bairstow Eves’ Ipswich
office and there discussed taking a lease. He may well have said that he would
like an option to purchase the freehold, but I am satisfied that no agreement
as to that was reached. All that appears to have been agreed in principle was
that the lease should be for 15 years at a yearly rent of £5,000 per annum,
subject to review, and very likely there was some discussion about permitted
use and fixtures and fittings. Mr Morphew gave the name of his solicitor, Mr
Sparrow, of Gotelee & Goldsmith of Ipswich. Bairstow Eves’ Ipswich office
communicated such information as they had to Mr Richards, with whom the
defendants were dealing, of their Chingford office.
Shortly
afterwards, the defendants went to see Mr Richards. That was either on December
17 or 18 1978. There was a lengthy discussion in which the defendant, Mr
Lucken, suggested granting to the tenants a right of pre-emption.
On December 18
1978 Mr Richards wrote two letters, one to Mr Sparrow and the other to the
defendants’ solicitor, Mr Brown of Amhurst Brown of Walthamstow. The letter to
Mr Sparrow set out six terms of the proposed lease. No 6 reads as follows:
A proviso to
be contained in the lease whereby the tenants will have an opportunity of
purchasing the freehold interest at the open market value prior to the property
being offered generally for sale in the open market.
That term
reflected the suggestion made to Mr Richards by Mr Lucken and, although it
might have been better worded, it clearly proposed the granting to the tenants
of a right of pre-emption and not an option.
The letter to
Mr Brown set out 14 terms of the proposed lease, including the six terms set
out in the letter to Mr Sparrow, but not in precisely the same words. The
pre-emption term was no 14. Mr Brown was asked to send a draft lease to Mr
Sparrow, who was told to expect one.
The parties
instructed their respective solicitors to proceed. Thus the position was that
the lease to be granted was to be negotiated between the solicitors in the
normal way and would come into existence as a binding lease when the lease and
its counterpart were exchanged.
On January 15
1979, Mr Brown sent two copies of the draft lease to Mr Sparrow for approval.
The draft did not contain an option clause or a pre-emption clause.
On January 18
Mr Sparrow sent preliminary inquiries to Mr Brown. There followed a delay when
negotiations were halted. The reasons do not matter. Negotiations were resumed
on February 16 1979, by when a revised rent of £5,500 per annum had been
agreed, and when Mr Brown sent his replies to Mr Sparrow’s inquiries. The
inquiries were comprehensive. There were 14 common form general inquiries and
14 additional inquiries.
Additional
inquiry no 14 reads as follows:
14. The lease
does not contain the option to purchase the freehold interest at open market
value prior to the property being offered generally for sale. Please supply a
draft clause dealing with this.
Mr Brown’s
reply reads:
14. We were
not aware that this was agreed. When returning the lease amended would you like
to insert a clause for our consideration.
Mr Brown seems
to have overlooked the fact that his clients had proposed, and Mr Richards’
letter to him of December 18 1978 had stated, that the lease should contain a
pre-emption provision. Of course, at this stage, matters were still in
negotiation and the defendants’ proposal had not been finally agreed, but it
was that which was in their contemplation, not an option.
Mr Sparrow was
surprised to be asked to draft a clause for consideration. He regarded the
drafting to be Mr Brown’s job. On receipt of the draft lease he had noted in
his file that it did not contain an ‘option to purchase at all’ and added a
note ‘Option or pre-emption ‘open market value”. Mr Sparrow said he was not
quite sure what was wanted, so he asked Mr Morphew what he had agreed. Mr
Morphew may have told him that he had negotiated the grant of an option, but it
should have been clear to Mr Sparrow from the
contemplated by the defendants was the grant of a right of pre-emption. Mr
Morphew did, however, tell Mr Sparrow that he wanted an option.
Mr Sparrow
then drafted an option clause which became clause 30 in the lease. He made
amendments to the draft lease, some in red ink, some in blue ink, and the
amendment containing clause 30 was inserted by way of a rider which was
typewritten on a separate sheet of paper and stapled to p 12 of the draft. The
following clauses of the draft were renumbered. The rider was closely typed on
16 lines in different type and different spacing from the rest of the draft. It
was conspicuous and could not have failed to have been noticed by anyone going
through the draft with a minimum degree of care.
Mr Sparrow
returned the amended draft to Mr Brown under cover of a letter dated February
23 1979 which, among other things, said:
As arranged
we have amended the lease in accordance with our additional preliminary
enquiries and now enclose the same for your consideration.
That statement
was inaccurate in the sense that the draft clause 30 was not in accordance with
those inquiries. It was, moreover, a departure from the expressed proposal of
the defendants, which was to confer a right of pre-emption. Mr Sparrow might,
perhaps, have drawn particular attention to this in his covering letter, but I
do not think it was entirely necessary for him to do so, because the position
should have been clear enough to Mr Brown.
Mr Brown, in a
letter dated February 27 1979, replied:
Thank you for
your letter of the 23rd February enclosing the draft lease duly amended. We
agree your amendments.
Some
outstanding matters, such as agreeing a list of fixtures and fittings, were
then dealt with and the lease and counterpart were exchanged on or about March
12 1979.
Mr Morphew and
Mr Moore had signed the counterpart lease at Mr Sparrow’s office after he had
made sure they understood it. The defendants had signed the lease at Mr Brown’s
office after accepting his assurance that it was in order.
Well over 18
months later, that is not long before Mr Morphew and Mr Moore assigned the
lease to the plaintiff, the defendants discovered that it contained clause 30
conferring an option and not the right of pre-emption, which they expected.
In evidence
the defendants said that they would not have granted a lease containing an
option to purchase the reversion instead of a right of pre-emption. Mr Morphew,
on the other hand, said that he would not have taken a lease which did not
grant the option.
The
defendants, as I have said, seek to rectify clause 30 on the ground of
unilateral mistake. They contend that Mr Sparrow was guilty of conduct
bordering on sharp practice when he introduced clause 30 into the draft lease
in the way he did. They submit that the requirements entitling them to
rectification are present. The requirements appear from the judgment of Buckley
LJ in Thomas Bates & Son Ltd v Wyndham’s Lingerie Ltd [1981]
1 WLR 505 at pp 515 and 516.
I do not think
that all those requirements are present. I do not think that Mr Sparrow was
aware that Mr Brown had made a mistake, if he did in fact make one. Further, I
do not think there was any concealment of the mistake or any material omission
on Mr Sparrow’s part to draw attention to it.
The reality of
the situation was that the two solicitors negotiated the lease in the usual
way. Mr Sparrow was entitled to assume that Mr Brown would consider the
amendments to the draft lease submitted to him for consideration in the way
they were submitted, would reamend them and renegotiate them if he wanted to,
would agree them, which he did, if he thought fit, and in agreeing them was
doing so with his clients’ authority. In short, I do not think that this is a
case of rectifiable mistake at all. It may well be that Mr Brown let his
clients down by being careless as to their interests, but that is another
matter.
In the
circumstances I am bound to dismiss the counterclaim for rectification.
Secondly, are
the plaintiffs bound by the equity to rectify?
In the light of my decision on the first issue, this issue does not now
arise. I shall, nevertheless, give my opinion very shortly on it.
The plaintiff
company first received notice of the defendants’ claim for rectification on
December 17 1980, that is, between the date of the plaintiff’s contract to
purchase the lease for £17,500, which was November 7 1980, and the date of the
assignment, which was December 31 1980, which was when the purchase price was
paid.
It is not
disputed that a bona fide purchaser of an equitable interest without notice of
an equity to rectify takes free from it. See Westminster Bank Ltd v Lee
[1956] Ch 7. It is also not disputed that the plaintiff acquired an equitable
interest on entering into the contract of December 7 1980. See Shaw v Foster
(1872) LR 5 HL 321.
The question
is, was the plaintiff a bona fide purchaser for the value on that date? I do not think so. The plaintiff had not then
paid the purchase price and could not be regarded as a purchaser for value
until the full price was paid. See Tourville v Naish (1734) 24 ER
1077.
The third
issue. Is the plaintiff’s claim for specific performance premature? Clause 30 of the lease reads as follows:
If at any
time hereafter during the continuance of the term hereby created the Lessees
shall desire to purchase the reversion in fee simple in the premises hereby
demised and shall give to the Lessors notice in writing signed by the Lessees
of their intention to purchase the same then the Lessors hereby covenant that
they will transfer the demised premises to the Lessees for the price at which
the demised premises might reasonably be expected to fetch on the open market
at the date of the exercise of the option as between a willing Vendor and a
willing Purchaser such price to be determined in case of dispute by an
independent valuer jointly nominated by the respective parties hereto or by an
umpire in accordance with the provisions of the Arbitration Act 1950 or any
statutory modification or re-enactment thereof for the time being in force and
such purchase shall be completed at the office of the Lessors Solicitors
aforesaid one month after the date on which such notice is given or one month
after the date on which the price is agreed or determined in accordance with
the provisions of this Clause unless the parties shall agree upon any other
time or place for completion.
The clause
sets out the steps to be taken in order to reach a concluded agreement under
which the price to be paid for the purchase of the reversion is to be
determined and when and where the purchase is to be completed.
The first step
to be taken is for the lessees to give written notice of their intention to
purchase. That was done when the plaintiff gave notice dated January 2 1981
exercising the option. The remaining steps have yet to be taken. Until they
have been taken there is no concluded contract of which the court can decree
specific performance.
On behalf of
the plaintiff it has been argued that that does not matter and the court may
order specific performance. In support of that contention reliance was placed
upon the recent decision of the House of Lords in Sudbrook Trading Estate
Ltd v Eggleton [1982] 3 WLR 315. In that case there was an option to
purchase a reversion, which included provisions for determining the purchase
price, which provisions did not include a long stop provision under the
Arbitration Act. The machinery broke down because of a default on the part of
the lessors. The House of Lords substituted its own machinery and decreed
specific performance.
The position
in the present case is different. The machinery cannot fail because of the
Arbitration Act provisions, but until the relevant steps have been taken up to
the point at which the purchase price is determined there is no concluded
contract to be performed.
I take the
view, therefore, that the plaintiff’s claim for specific performance is
premature.
And finally
the fourth issue. What should the plaintiff pay for the reversion? The defendants contend that the price, on the
true construction of clause 30, is the price which the demised premises might
reasonably be expected to fetch on the open market at the date of the exercise
of the option on the footing that they were being sold with vacant possession.
The plaintiff
contends on the other hand that the price should be calculated on the footing
that the premises were being sold subject to and with the benefit of the lease.
Now, what is
being sold and purchased on the exercise of the option is the reversion in fee
simple. Therefore, it seems to me, that what has to be valued is the subject
matter of the sale and purchase and the price payable is the price for that.
There does not seem to me to be much logic in contracting to buy one thing and
ascertaining the price to be paid for it by valuing something else.
I can find
nothing in the language of the lease, looked at as a whole, which persuades me
to reach a different conclusion. Accordingly, I hold that the price should be
calculated on the footing that the premises were being sold subject to and with
the benefit of the lease.
