Landlord and tenant — Construction of provision in agreement relating to sale of flats — Provision for notice of election by vendors withdrawing certain flats from the sale — Whether time of the essence for the purpose of time-limits for giving notice — Plaintiffs were a company incorporated to represent tenants of the large block of flats known as Chiltern Court, Baker Street, London NW1 — Plaintiff company was vehicle for the purchase by residents in the flats of long-leasehold interests from the freeholders, London Regional Transport — Residents included regulated tenants, shorthold tenants and limited companies — Some flats were vacant and some were occupied by residents not interested in purchasing long leases
transactions which gave rise to the present dispute consisted of two agreements
— The first was an agreement by the plaintiff company to acquire a term of 125
years from the freeholders, out of which subleases to the interested tenants
would be granted — The second was an agreement by the plaintiff company to dispose
to the defendant property company the interests in a number of flats and
offices in the block specified in Parts A and B of a schedule to the agreement
— Part A consisted of flats temporarily vacant and flats of which the occupiers
did not wish to buy a long lease, while Part B comprised flats of which there
was at least a chance that the occupier would wish to acquire a sublease — The
critical clause in this agreement gave the plaintiff company the right by a
notice of election to withdraw from the sale to the defendants flats in Part B
where the occupier had entered into a contract to purchase a sublease — The
clause laid down a time-limit for the notice and the present litigation arose
because the notice given, accompanied by a list of tenants who had exchanged
contracts to take subleases, was 11 days too late — The plaintiff company
claimed that time was not of the essence and that the notice was valid; the
defendant company submitted that the election provision was analogous to an
option to buy or to a ‘break’ clause, requiring a strict adherence to the
time-limit and so the notice was invalid
relied on speeches in the House of Lords in United Scientific Holdings Ltd v Burnley Borough
Council and the judge referred to the well-known distinction discussed in the
speeches between synallagmatic contracts and unilateral or ‘if’ contracts, such
as options — After considering the authorities and the parties’ submissions, he
concluded that it was unrealistic to treat the present clause as equivalent to
the classic grant of an option to acquire property or to a ‘break’ clause —
Despite juristic arguments of some force by the defendants, he considered that
the right given by the clause in question was in substance a subsidiary
mechanism for dealing with a temporary situation, the problem of how many
occupiers in Part B would contract to buy a long-leasehold interest — Hence
time was not of the essence and the plaintiffs’ notice was valid — Judgment on
summons accordingly
The following
cases are referred to in this report.
Hare v Nicoll [1966] 2 QB 130; [1966] 2 WLR 441; [1966] 1 All ER
285, CA
Prenn v Simmonds [1971] 1 WLR 1381; [1971] 3 All ER 237, HL
Samuel
Properties (Developments) Ltd v Hayek [1972]
1 WLR 1296; [1972] 3 All ER 473; (1972) 24 P&CR 223; [1973] EGD 266; 225 EG
1749, CA
United
Dominions Trust (Commercial) Ltd v Eagle
Aircraft Services Ltd [1968] 1 WLR 74; [1968] 1 All ER 104, CA
United
Scientific Holdings Ltd v Burnley Borough
Council [1978] AC 904; [1977] 2 WLR 806; [1977] 2 All ER 62; (1977) 33
P&CR 220; [1977] EGD 195; (1977) 243 EG 43 & 127, HL, [1977] 2 EGLR 61
Yates
Building Co Ltd v Pulleyn (RJ) & Sons (York)
Ltd [1976] EGD 123; (1975) 237 EG 183, [1976] 1 EGLR 157, CA
This was an
originating summons taken out by the plaintiffs, Chiltern Court (Baker Street)
Residents Ltd, raising the question whether a notice given by the plaintiffs
was a valid exercise of a provision contained in clause 16 of an agreement
dated July 17 1987 between the plaintiffs and the defendants, Wallabrook Property
Co Ltd.
N J C Stewart
QC and J A F Thorn (instructed by Reynolds Porter Chamberlain) appeared on
behalf of the plaintiffs; R N Thomas QC and G Mitchell (instructed by Rodgers
Horsley) represented the defendants.
Giving
judgment, KNOX J said: This is an originating summons between the plaintiffs,
Chiltern Court (Baker Street) Residents Ltd, and the defendant, Wallabrook
Property Co Ltd, raising the single question whether a notice given on August
28 1987 was a valid exercise of the right to give notice conferred by clause 16
of an agreement (which I will call ‘the agreement’) dated July 17 1987 and made
between the plaintiff and the defendant.
The plaintiff,
as its name indicates, is a company incorporated to represent the interests of
and hold property for residents of a large block called Chiltern Court in Baker
Street, London NW1. It had originally two issued shares, which were held on
trust for the residents. The plaintiff was the chosen vehicle for a purchase by
those residents who wished to acquire the flats they occupied of a
long-leasehold interest from the freeholder, London Regional Transport (which I
will call ‘LRT’). Chiltern Court comprises 150 flats or so as well as some
offices. There are some parts of Chiltern Court which are excluded from the
transactions which followed, and I shall refer to ‘the property’ to describe
that part of Chiltern Court excluding those parts.
Negotiations
with a view to the acquisition of long leases of their flats had been started
by residents of the property before 1986. Keith, Cardale, Groves acted for the
residents and Chestertons for LRT. The residents fell into three main
categories, according to the type of tenancy involved. First, those with
regulated tenancies; second, those with shorthold tenancies and, third, limited
companies. There were also a number of flats which for one reason or another,
such as being temporarily vacant or because the tenants did not wish to buy a
long lease, were not prospectively to be purchased by the residents. They were
described compendiously, if not flatteringly, as ‘the rump’.
An offer
subject to contract was received by Keith, Cardale, Groves in a letter dated
January 30 1987 from Chestertons:
Dear Mr Margo,
re Chiltern
Court, Baker Street, Marylebone Road NW1.
I am pleased
to be able to tell you that subject to Board approval and subject to contract,
I now have instructions from the Director of Estates and Valuation of London
Regional Transport to offer the above block to the residents on the following
terms: (1) The price is to be the sum of £11,000,000. (2) The leases to be for
a term of 125 years from January 1 1987. (3) The ground rent will be £10,000
per annum, doubling every 25 years,
and then that
is explained in figures.
(4) Subject to contract.
Then below
that, in the same letter, under the heading ‘Tenancies’:
I attach a
Schedule showing the current position with regard to the tenancies in
the block. Subject to the remarks contained in the Schedule of Tenancies, the
position is presently as follows: 25 flats are vacant, 2 flats subject to
possession proceedings, 94 let unfurnished on regulated tenancies, 8 flats let
unfurnished on companies’ tenancies, 14 flats let unfurnished on shorthold
tenancies, 1 flat let furnished to an Embassy, 1 flat occupied by the Head
Porter.
Then there are
details given of the rents received.
On the next
page there appears the following paragraph under the heading ‘Time Limit’.
These terms,
subject to contract, and the remarks above, remain open for acceptance until
March 31 1987. If arrangement has not been reached by that time, LRT reserve
the right to review the position or test the market generally.
The plaintiff
company had been incorporated by then and investigations and negotiations
continued to discover how far the residents of Chiltern Court were willing to
buy long leases of their own flats and to join in enabling the plaintiff
company to buy leases of flats in ‘the rump’. Simultaneously, negotiations
continued with LRT. It emerged by the end of February 1987 that it would not be
feasible for the plaintiff company to acquire ‘the rump’ and it was put on the
market.
The defendant
company put in an offer, subject to contract, on March 24 1987. That was by a
letter addressed to Mr Latimer of Keith, Cardale, Groves which reads as follows
in part:
Dear Mr
Latimer,
Chiltern
Court.
I refer to
the offer by the Residents’ Association of Chiltern Court, who I understand are
buying the whole block from LRT, to sell certain of the properties, as detailed
on the Schedule which was supplied by you. Subject to contract, we are prepared
to offer the sum of £5,200,000 for these properties, on the basis of normal
exchange and completion, subject to the following:
Then there
followed a variety of terms which it is not necessary for me to read.
The letter
continues:
This company
is a wholly-owned subsidiary of Authority Investments PLC and is, of course,
well-known to yourselves and we assume to the vendors through our ownership of
many mansion blocks in the London area, particularly Bickenhall Mansions,
Montague Mansions and Portland Mansions in the Baker Street area. These blocks
were acquired by Wallabrook in 1971 and we trust illustrate our long-term
involvement and commitment in the residential property field. Our policy in
these blocks has been to manage them in close co-operation with the tenants and
when the flats become vacant, to modernise them to a high standard. We are, of
course, well aware of the problems of refurbishing in occupied buildings and
ensure in completing this work that every consideration is given to other
residents. We would confirm that our parent company, Authority Investments PLC,
will make the necessary funds available to us for this acquisition. We trust,
therefore, that you will commend this company and our offer to your clients and
look forward to hearing from you in the near future.
The schedule
was annexed and it is not necessary to go through that in any detail.
That offer was
in fact accepted, on the same subject-to-contract basis, by a letter of March
27 1987. Disrepair on a larger scale than was anticipated was discovered, but
LRT were not willing to do more than adhere to the original offer of
£11,000,000. That did mean an upward revision of the prices that would need to
be paid by residents wishing to acquire long leases of their flats. Although
there was evidence of the global extra money needed, nothing turns on the exact
amount. It was of the order of £2,000,000.
The other
valuation factor of which there was some evidence, which is admissible and of
some relevance, is that the residents were being offered the chance to acquire
long leases of their flats at a substantial discount below the open market
vacant possession figures. This was only natural, since vacant possession was
not, in relation to the great majority of flats, available to the landlord,
LRT. The prices to the residents were settled by about April 1987. The discount
at that stage was of the order of 35-50% per flat.
There is some
conflict of evidence concerning the volatility of prices for tenanted,
residential property. On one side there was evidence that there was no general
perception on the market of a risk of a major downturn in residential property
prices. On the other side, evidence was adduced of particular fears which might
cause a sudden downturn in property prices, but it was accepted that direct
evidence of particular fears which were or might be felt would not be
admissible in the construction of the agreement.
I conclude on
the admissible evidence that in the late summer of 1987 there was a very small
risk indeed of such a large downturn in prices in the market for tenanted,
residential property in the Baker Street area occurring as would make it likely
that residents who were otherwise minded to buy a long leasehold in the flats
they occupied would be deterred from buying because of that risk, although,
unlike an outside purchaser, they would be in a position to realise a discount
on vacant possession prices mentioned above, and that would in practice act as
a cushion against the risk of a fall in relevant property prices. On the other
hand, there remained uncertainty whether or not any particular resident would
buy, until he or she entered into a contractually-binding agreement.
The
negotiations continued well beyond the time-limit specified by LRT in its
letter of January 30 1987 and an ultimatum was delivered on behalf of LRT by
Chestertons by a letter dated Monday, July 13 1987. That was addressed to Mr
Latimer of Keith, Cardale, Groves.
Dear Gary,
re Chiltern
Court.
As I mentioned,
we have had an offer of £12,000,000 on the basis of a 24-hour contract, subject
to contract, for the leasehold interest of Chiltern Court. In view of this, and
the fact that since we started these negotiations values have continued to
rise, I have advised LRT to take the following line in negotiations: Contracts
should be exchanged by the end of this week at £11,000,000, plus £46,000 for
Flat 105.
Then there are
provisions with regard to staff which I need not read.
Paragraph 5:
Completion of
the purchase should be not later than Friday [sic], September 14. However, if
the tenants are not able to complete by that date, they should be responsible
for interest at a commercial rate on the balance of the purchase price until
the date of completion. I have sent a copy of this letter to LRT.
That is signed
by Mr Zigland, the director of professional services at Chestertons.
There followed
some very hasty negotiations between the plaintiff and the defendant, who were
naturally told of LRT’s ultimatum. The course of those negotiations which led
to the making of the agreement was the subject of a certain amount of affidavit
evidence, the inadmissibility of which, in the light of authorities such as Prenn
v Simmonds [1971] 1 WLR 1381, was not seriously challenged. What are
admissible as the factual matrix in which the agreement was made and
established by evidence are the following facts: the plaintiff was in urgent
need to enter into a contract to take from LRT a long lease of the whole of the
property, which included ‘the rump’. There was no prospect of the plaintiff’s
being able to enter into contracts before July 17 1987 — the deadline date —
with all or even a majority of the residents who wished to acquire long leases
of their flats, but it was expected by both the plaintiff and the defendant
that the great majority of those residents would, within the next few weeks, be
willing and able to enter into such contracts. The defendant was willing not
only to purchase ‘the rump’ but also to underwrite the purchase of the property
other than ‘the rump’, so that the plaintiff, which had no significant assets
of its own, should be able to enter into a contract with LRT in the secure
knowledge that it would have the wherewithal to complete that contract,
regardless of how many of the residents decided, for one reason or another, not
to contract to buy the flats in which they had a tenancy. It was uncertain how
many of those residents there would prove to be.
I interpose at
this stage that there were some residents who wished to nominate a purchaser
other than themselves, for reasons of their own. Nothing turns on this
distinction and I include in the description ‘the residents’ those
prospectively nominated purchasers. There was a conflict of evidence on the
question whether the defendant was told that some 16 or so residents had
actually entered into conditional contracts with the plaintiff. I proceed on
the basis that the defendant officers did not know that; the point is not
critical, since on any view there was uncertainty regarding the other residents
and the knowledge that a relatively small proportion was committed would not
make any significant difference overall.
It was against
that background that the following documents were exchanged on July 17 1987. By
an agreement (which I will call the ‘principal contract’) which was dated July
17, made between LRT and the plaintiff of the other part, it was agreed in
clause 1 that LRT should grant, and the plaintiff should take, a lease of the
property, which is described more particularly, together with various easements
and ancillary rights, for a term of 125 years from midsummer 1987, in
consideration of the capital payment of £11,000,000, of which £500,000 was paid
as a deposit. Then there are provisions with regard to title, which I need not
read.
Clause 4(a)
provided that the property was agreed to be let subject to and with the benefit
of the existing tenancies, of which particulars
1987 at LRT solicitors’ office, when the balance of the capital payment was
payable. Under clause 15, the lease of the property to the lessee was to be in
the form of an annexed draft lease. Under clause 18 (a) the following was
provided:
At completion,
the Corporation,
that is to
say, LRT
shall at the
request and direction of the lessee
the plaintiff
grant
subleases in the form annexed hereto to such persons at such consideration as
the lessee shall direct and payments thereunder shall be part-payment of the
purchase price payable under this agreement, provided always that the
Corporation shall not be obliged to grant the lease and such subleases unless
and until the full sum of £11,000,000 is paid.
That was the
mechanism adopted for the grant to the residents of subleases, in a form which
was again annexed thereto, as that clause makes plain. Nothing turns on the
particular form of those proposed subleases, which were for a term of 125 years
less one day from midsummer 1987.
The other
important document was, of course, the agreement. That, also dated July 17
1987, had certain particulars on the first page — the vendor (the plaintiff),
the purchaser (the defendant), the price (£5,458,970, plus the total of the
purchase prices in part B of the Schedule, to which I will come in a moment),
the property (all those flats and offices specified in the Schedule part A and
part B), term of the lease (125 years from midsummer 1987, less one day),
completion date (September 14 1987) and the parties, whom I have already
described.
There were
some definitions. ‘Flat Leases’ meant the documents, of which again a draft was
annexed, which was the same draft as the draft in the flat lease annexed to the
principal contract; a parallel document, the ‘Office Lease’, relates to that
part of the property consisting of offices. The ‘principal contract’ means what
I have described by that name. The ‘Head Lease’ meant the lease to be granted
to the plaintiff under the terms of the principal contract, and ‘the National
Conditions’ meant the National Conditions of Sale, 20th ed.
Clause 3 read:
The vendor
agrees to grant and the purchaser to take a lease of each flat or office as set
out in the Schedule parts A and B for the price stated in the particulars and
one share in the vendor at par for each flat or office or such further shares
as are hereinafter provided. The lease of each flat shall be in the form of the
Flat Leases; the lease of the offices shall be in the form of the Office Lease.
The particulars of each flat and office are set out in the Schedule parts A and
B.
The Schedule
parts A and B contained two lists of flats. Part A was some 46 flats and some
2,000 sq ft of offices and that was ‘the rump’. Part B contained some 97 flats
and that was the other properties in respect of which there was at least a
chance of residents taking a sublease. It includes — although nothing turns on
this — the 16 or so flats in respect of which conditional contracts were
entered into, either at the time when these documents were entered into on July
17 1987, or previously thereto.
Clause 6 of
the agreement provided for the deposit in the following terms:
The purchaser
will pay a deposit of £500,000 of the price to the vendor’s solicitors as
agents for the vendor on the signing hereof and it is expressly agreed that the
vendor must use the said deposit in payment of the deposit required in the
principal contract.
Para 13 (2)
(ii) provided inter alia that in National Conditions 22(2) and (3), the
period of 10 working days should be substituted for the stated period of 16
working days.
I come now to
the critical clause, clause 16, headed ‘Variations’, which reads as follows:
The vendor
may, by not less than fourteen days notice in writing to the purchaser,
expiring no later than fourteen days prior to the completion date, elect not to
grant to the purchaser any one or more of the flat leases in respect of the
flats specified in part B of the Schedule, whereupon the price shall be reduced
by the aggregate of the amounts specified against such flat or flats in part B
of the Schedule, and the purchaser shall be under no obligation to pay any
arrears of rent, outgoings or other sums in respect of such flat or flats.
Provided always that the vendor shall not give notice in respect of any flat or
flats, unless a lease in the form of the Flat Leases shall be granted on
completion either to the current tenant thereof or to the person or persons
whose names are set out in the Schedule part B.
The completion
date, of course, as appeared from the particulars, was September 14 1987.
There are
three dates involved in the notice provision. Taking the last date first, the
completion date, September 14 1987 — and a notice under clause 16 had to expire
no later than 14 days earlier than that, ie August 31 1987 — but the notice
itself had to be one of 14 days, so that the notice needed to be given 14 days
before that, namely, on or before August 17 1987. What has caused these
proceedings is the fact that notice was not given until August 28 1987.
Before that,
however, the solicitors for the defendant wrote to the plaintiff’s solicitors a
letter dated August 13 1987, reading as follows:
Dear Mr
Jenkins,
re Chiltern
Court.
As you will
appreciate, my clients will need to make their financial arrangements some time
in advance of completion and for that reason they have asked me to remind you
of the deadlines contained in clause 16 of the contract. I am instructed to
accept notice on my clients’ behalf and I calculate that the last day for
giving notice, on which I should receive this, is August 17. The notice or
notices would then expire on August 31, which is fourteen days prior to
completion.
That is signed
by Mr Moulden, a partner in the firm of Rodgers Horsley, who were acting for
the defendant. That was sent by fax and by document exchange and was presumably
received immediately.
A list of
residents with whom the plaintiff had exchanged contracts was sent with a
letter, claiming that time was not of the essence, in reply on August 25 1987.
That, of course, was after the date of August 17 had passed. The only notice on
which reliance is placed is one dated August 28. It reads: ‘To Wallabrook
Property Co Ltd’ and the address is given.
Pursuant to
clause 16 of an Agreement in writing dated July 17 1987 made between
and then the
plaintiff’s and the defendant’s names are set out
the vendor
hereby gives notice expiring fourteen days prior to the completion date under
the said Agreement of its election not to grant to the purchaser the Flat
Leases in respect of the flats specified in the Schedule hereto,
and there is a
long list of flats specified in that Schedule. The only objection which is
taken to that notice is the date upon which it was given. There is no point on
the efficacy of the notice in any other respect.
Although
matters were in somewhat of a turmoil, in that the plaintiff had a considerable
number of contracts exchanged with residents for the grant to them of long
leases of their flats and was bound by the principal agreement to complete on
September 14 its purchase of a long lease with LRT, it did not have the
acceptance by the defendant that any flats at all had been successfully
withdrawn under clause 16 of the agreement. Proceedings ensued, but the
immediate urgency of the problem was removed by the defendant’s agreeing to the
completion of leases to residents, thus waiving its rights to specific
performance of the agreement with regard to the flats concerned, but preserving
its rights expressly to damages for loss of bargain. Hence the necessity to
determine the validity or invalidity of the notice given on August 28 1987.
The
defendant’s case is that the right conferred by clause 16 of the agreement is
an option both in form and in substance, that it is well settled that time is
of the essence with regard to the exercise of options and that the right not
having been exercised in due time, ie before August 17, it is lost. The
plaintiff’s case is that on a proper analysis of the transaction, the right
conferred by the clause is not a true option, but a provision for the variation
of the terms of the agreement, a consensual document. On that basis, there
being no express provision making time of the essence, the presumption is that
it is not, and it is submitted that there are no circumstances which warrant
the implication that time was intended to be of the essence, at least as
regards the first of the two 14-day periods involved in clause 16.
Alternatively, the plaintiff claims that even if the right conferred by clause
16 is properly analysed as an option, nevertheless, in the context, the parties
did not, as a matter of construction, intend to impose an inflexible
time-limit.
The primary
issue between the parties turns on the proper technique to use to identify the
characteristics of the provision in relation to which equity, and now the law
as well, regards time as of the essence. If, as Mr Thomas for the defendant
submitted, the proper approach is to analyse the juristic nature of the right
and what effect its exercise has upon the parties’ rights, then in my judgment
the conclusion he urges follows and time should be regarded as being
of the essence. If, as Mr Stewart for the plaintiff submitted, the proper
approach is to view the right given by clause 16 in the context of the overall
transaction as a mechanism for dealing over a short term with the problem
raised by the uncertainty as to exactly which of the residents would wish to
contract to buy their flats, in the knowledge that a very large number of them
would do so, then in my judgment it also follows that there is no necessity to
import the requirements that time should be of the essence.
Both sides
relied heavily on what was said in the House of Lords in United Scientific
Holdings Ltd v Burnley Borough Council [1978] AC 904. This is the
leading authority on rent review clauses. Lord Diplock’s speech contains the
material for both approaches; they both produced the same result in that case.
In favour of the juristic analysis is a passage at p 928, which reads as
follows:
Both in the
court of Chancery and in the courts of common law the rules that have been
developed about particular stipulations not being of the essence of the
contract or not being ‘conditions precedent’ applied to synallagmatic contracts
only. They did not apply to unilateral or ‘if contracts,’ of which the example
most germane to the instant appeals is an option. As pointed out by Lord
Denning MR in United Dominions Trust (Commercial) Ltd v Eagle Aircraft
Services Ltd [1968] 1 WLR 74, 81 where speaking of options to purchase real
or personal property or to renew a lease, he said: ‘In point of legal analysis,
the grant of an option in such cases, is an irrevocable offer (being supported
by consideration so that it cannot be revoked). In order to be turned into a
binding contract, the offer must be accepted in exact compliance with its
terms. The acceptance must correspond with the offer.’
Exact
compliance with the terms of the offer in an ‘if contract’ had been required in
courts of equity as well as in courts of common law: see Weston v Collins
(1865) 12 LT 4; Finch v Underwood (1876) 2 Ch D 310. A rationale
of the distinction which was drawn between the two kinds of contract in courts
of equity is that equity was concerned with the performance of contracts into
which parties had already entered. It did not force any person to enter into a
contract with another.
Again I will
refrain from repeating the more elaborate juristic analysis of the distinction
between the two types of contract that I attempted in the United Dominions
Trust case [1968] 1 WLR 74, 83-84.
Later on, at p
930, Lord Diplock said:
It was this
concentration of initiative and benefit in the landlord that led the Court of
Appeal in the second appeal to regard the rent review clause as conferring upon
the landlord a unilateral right to bring into existence a new contractual
relationship between the parties. This they regarded as sufficiently analogous
to an option, to make time of the essence of the occurrence of each one of the
events in the time-table laid down in a review clause for the determination of
the new rent. For my part, I consider the analogy to be misleading. The
determination of the new rent under the procedure stipulated in the rent review
clause neither brings into existence a fresh contract between the landlord and
the tenant nor does it put an end to one that had existed previously. It is an
event upon the occurrence of which the tenant has in his existing contract
already accepted an obligation to pay to the landlord the rent so determined
for the period to which the rent review relates. The tenant’s acceptance of
that obligation was an inseverable part of the whole consideration of the
landlord’s grant of a term of years of the length agreed. Without it, in a
period during which inflation was anticipated, the landlord would either have
been unwilling to grant a lease for a longer period than up to the first review
date or would have demanded a higher rent to be paid throughout the term than
that payable before the first review date. By the time of each review of rent
the tenant will have already received a substantial part of the whole benefit
which it was intended that he should obtain in return for his acceptance of the
obligation to pay the higher rent for the succeeding period.
The earlier,
more elaborate, juristic analysis of the distinction between synallagmatic
contracts and options or of unilateral contracts is contained in the United
Dominions Trust case. At p 82 of the report in [1968] 1 WLR Diplock LJ (as
he then was) said:
Under
contracts of the former kind
that is the
synallagmatic ones
each party
undertakes to the other party to do or to refrain from doing something, and in
the event of his failure to perform his undertaking the law provides the other
party with a remedy. The remedy of the other party may be limited to recovering
monetary compensation for any loss which he has sustained as a result of the
failure, without relieving him from his own obligation to do that which he
himself has undertaken to do and has not yet done or to continue to refrain
from doing that which he has undertaken to refrain from doing. Or it may be, in
addition, entitle him, if he so elects, to be released from any further
obligation to do or to refrain from doing anything . . .
And he
elaborates that aspect of the matter a little. Passing over the remainder of
that paragraph, one finds this:
Under
contracts which are only unilateral — which I have elsewhere described as ‘if’
contracts — one party, whom I have called ‘the promisor’, undertakes to do or
to refrain from doing something on his part if another party, ‘the promisee’,
does or refrains from doing something, but the promisee does not himself
undertake to do or to refrain from doing that thing. The commonest contracts of
this kind in English law are options for good consideration to buy or to sell
or to grant or take a lease, competitions for prizes and such contracts as that
discussed in Carlill v Carbolic Smoke Ball Co. A unilateral
contract does not give rise to any immediate obligation on the part of either
party to do or to refrain from doing anything except possibly an obligation on
the part of the promisor to refrain from putting it out of his power to perform
his undertaking in the future. This apart, a unilateral contract may never give
rise to any obligation on the part of the promisor; it will only do so upon the
occurrence of the event specified in the contract, viz the doing (or refraining
from doing) by the promisee of a particular thing. But it never gives rise to
any obligations upon the promisee to bring about the event by doing or
refraining from doing that particular thing.
Indeed, a
unilateral contract of itself never gives rise to any obligation upon the
promisee to do or to refrain from doing anything. In its simplest form (for
example: ‘if you pay the entrance fee and win the race, I will pay you £100’)
no obligation on the part of the promisee results from it at all. But in its
more complex and usual form, as in an option, the promisor’s undertaking may be
to enter into a synallagmatic contract with the promisee upon the occurrence of
the event specified in the unilateral contract, and in that case the event so
specified must be, or at least include, the communication by the promisee to
the promisor of the promisee’s acceptance of his obligations under the
synallagmatic contract. By entering into the subsequent synallagmatic contract
on the occurrence of the specified event, the promisor discharges his obligation
under the unilateral contract and accepts new obligations under the
synallagmatic contract. Any obligations on the promisee arise, not out of the
unilateral contract, but out of the subsequent synallagmatic contract into
which he is not obliged to enter but has chosen to do so.
Two
consequences flow from this
— and I pass
over the first one.
The second is
that as respects the promisor, the initial inquiry is whether the event, which
under the unilateral contract gives rise to obligations on the part of the
promisor, has occurred. To that inquiry, the answer can only be a simple ‘Yes’
or ‘No.’ The event must be identified by
its description in the unilateral contract; but if what has occurred does not
comply with that description, there is an end of the matter. It is not for the
court to ascribe any different consequences to non-compliance with one part of
the description of the event than to any other part if the parties by their
contract have not done so. See the cases about options: Weston v Collins
(1865) 12 LT 4, 5, Hare v Nicoll [1966] 2 QB 130.
The right in
clause 16 is a right by notice to remove from the pre-existing contract of sale
and purchase a part of the subject-matter, that is to say, the flats in respect
of which notice is given, because the relevant resident has entered into a
contract to purchase. That, as a matter of legal analysis, brings about the
partial determination of a subsisting vendor and purchaser relationship. Pro
tanto, it constitutes the putting to an end of a contract which had existed
previously. On the assumption that this is the yardstick properly to be
applied, I prefer the analysis put forward by Mr Thomas to that of Mr Stewart.
Each of them naturally emphasised the aspect of the partial termination which
suited their argument.
Mr Stewart
pointed to the part of the contract which on the exercise of the right under
clause 16 would continue to subsist, and submitted that the relationship of
vendor and purchaser survived as regards what was left. Something was bound to
be left of that relationship, because the rights and obligations of both sides
regarding part A, ‘the rump’, were indefeasible under clause 16. Mr Thomas
pointed to the part of the contract which the exercise of the rights under
clause 16 extinguished and submitted that the previously existing contract was
put an end to as regards that. The latter is the more relevant consideration if
the subject of inquiry is the precise effect of the exercise of the right
conferred by clause 16. It is more pertinent to see what the result of the
exercise is than to consider what is unaffected by the exercise of the right.
On that basis
and on the footing that the only subject of inquiry, as Diplock LJ put it in
the United Dominions Trust case, is:
Has the event
which under the unilateral contract gives rise to obligations on the part of
the promisor occurred? . . .
— an inquiry
which can only be answered ‘yes’ or ‘no’ by reference to the description in the
unilateral contract — then, in my judgment, the event as literally described
has not occurred and there has been no valid exercise.
. . . It is
not for the court to ascribe any different consequences to non-compliance with
one part of the event than to any other part if the parties by their contract
have not done so.
Diplock LJ
must have intended at least to include a consideration
[1966] 2 QB 130, where the issue concerned the compliance within stated
time-limits of requirements under an option for the giving of notice exercising
the option and the payment of money under it.
The other
approach, supported by Mr Stewart, involved an initial consideration of the
function to be performed by the relevant clause. Lord Simon of Glaisdale in the
United Scientific case at p 946 analysed the function of a rent review
clause in the following terms, inter alia:
The operation
of the rent review clauses does not at all change the relationship of the
parties, which remains that of landlord and tenant throughout the currency of
the lease whether or not the machinery of the rent review clauses is operated.
It was envisaged from the outset that the rent would be reviewed during the
currency of the leases: the clauses merely provided machinery for determination
of the new rent, which in more stable conditions might have been stipulated in
advance. Moreover, the clauses went to the very basis of the consideration
moving from the landlords: in a period of inflation the latter would not have
granted leases for such long terms without inclusion of rent review clauses —
and certainly the initial rent would in each case have been much higher without
those clauses. To put it the other way round, the rent review clauses were
integral parts of the consideration moving from the tenants, whereby they
acquired a long term of years at an initial rent lower than it would otherwise
have been. Rent review clauses cannot be considered as severable terms of
unilateral obligation. However, where a rent review clause is associated with a
true option (a ‘break’ clause, for example), it is a strong indication that
time is intended to be of the essence of the rent review clause — if not
absolutely, at least to the extent that the tenant will reasonably expect to
know what new rent he will have to pay before the time comes for him to elect
whether to terminate or renew the tenancy (cf Samuel Properties
(Developments) Ltd v Hayek [1972] 1 WLR 1296).
Lord Salmon
gave a similar analysis at p 948 when he said:
To my mind,
it is totally unrealistic to regard such clauses as conferring a privilege upon
the landlord or as imposing a burden upon the tenant. Both the landlord and the
tenant recognise the obvious, viz that such clauses are fair and reasonable for
each of them. I do not agree with what has been said in some of the
authorities, namely, that a rent revision clause is for the benefit of the
landlord alone and not at all for the benefit of the tenant. It is plainly for
the benefit of them both. It is for the benefit of the tenant because without
such a clause he would never get the long lease which he requires; and under
modern conditions, it would be grossly unfair that he should. It is for the
benefit of the landlord because it ensures that for the duration of the lease
he will receive a fair rent instead of a rent far below the market value of the
property which he demises. Accordingly the landlord and the tenant by agreement
in their lease provide that at stated intervals during the term, the rent
should be brought up to what is then the fair market rent. The revision clause
itself lays down the administrative procedure or machinery by which the fair
market rent shall be ascertained.
Mr Stewart
submitted that the function of clause 16 was not to create a new relationship,
but to vary the extent of the property sold, through a mechanism adopted as a
short-term expedient to deal with uncertainty; precisely how many residents
would contract to buy, it being contemplated that large numbers would do so.
Without clause 16 the transaction would never have been entered into, because
historically the purpose of the overall transaction was for a residents’ buyout
of the property. True it is, the defendant was brought in to provide an
essential element — the purchase of ‘the rump’ and an underwriting function —
but to treat the purchase by the defendant of the whole of the property with an
adjunct in the shape of the clause 16 right is tantamount to treating ‘the
rump’ as wagging the dog.
Similarly,
Lord Fraser relied upon what he analysed as the substance of the transaction as
the touchstone whereby the decision whether or not time is of the essence was
to be determined in the following passage at p 959:
As the
substance of a review clause is, in my opinion, to provide machinery for
ascertaining the market rent from time to time, at the intervals agreed in the
interests of both parties, rather than to confer a benefit on the landlord, it
seems to me that stipulations as to time ought not to be strictly enforced
unless there is something in a particular clause to indicate that time is of
the essence in that case.
Of the
argument that the right in question was an option and therefore time was of the
essence, he said at p 961:
In that case
— and he was
referring to Samuel Properties v Hayek —
the word
‘option’ was used in the lease (‘the yearly rent . . . shall be subject to
review at the option of the lessors in the seventh and fourteenth years . .
.’). That argument is one which, in my respectful opinion, concentrates too
exclusively on the words of the clause and pays insufficient attention to its
substantial purpose. The right to initiate a rent review, even if it is
described as an option, is in my opinion materially different from a true
option, whether granted by one clause in a larger contract or by a separate
offer. Options to purchase property or to renew a lease are both true options
and their important characteristic for the present purpose is that, if they are
exercised, they create a new contract between the parties. But when a rent
review clause is operated it merely varies one term in a continuing contract.
The term is one which the parties have agreed from the beginning is to be
variable and the review clause merely provides the machinery for effecting the
variation. Review clauses are also different in this respect from a tenant’s
option to break a lease; that, if exercised, will put an end to the contract
and release both parties from their contractual obligations. There is a good
reason why time limits should be strictly enforced in relation to an option to
purchase or renew a lease, because so long as it remains open the grantor is
not free to dispose of his property elsewhere, although the grantee is under no
obligation to him. Similarly where a tenant has an option to break his lease,
he can break it or not as he chooses, but the landlord is not free to let his
property to anyone else until the time for exercising the tenant’s option has
expired. It is fair and reasonable, and in accordance with what I would take to
be the intention of the parties, that the time limit of the restriction on the
grantor should be strictly enforced. That however does not apply in relation to
a rent review clause in a continuing lease.
Lord Diplock,
finally, also made reference to practical considerations, in addition to the
juristic arguments which I have already read. At p 929 he said:
A more
practical business explanation why stipulation as to the time by which an
option to acquire an interest in property should be exercised by the grantee
must be punctually observed, is that the grantor, so long as the option remains
open, thereby submits to being disabled from disposing of his proprietary
interest to anyone other than the grantee, and this without any guarantee that
it will be disposed of to the grantee. In accepting such a fetter upon his
powers of disposition of his property, the grantor needs to know with certainty
the moment when it has come to an end.
Mr Stewart
supported his submission by reliance on Yates Building Co Ltd v R J
Pulleyn & Sons (York) Ltd (1975) 237 EG 183, [1976] 1 EGLR 157, as
authority for the proposition that, even in an option in the strict sense of
the word, it is a question of construction of the unilateral contract that
determines the extent to which literal compliance with the terms of the event
which, to use Diplock LJ’s phrase, ‘under the unilateral contract gives rise to
obligations on the part of the promisor’ is required. The Yates case was
not concerned with time at all, but with mode of performance.
The option
clause reads as follows:
The option
hereby granted shall be exercisable by notice in writing given by or on behalf
of Yates to Pulleyns or to Pulleyns’ solicitors at any time between April 6
1973 and May 6 1973, such notice to be sent by registered or recorded delivery
post to the registered office of Pulleyns or the offices of their said
solicitors.
Notice was
given in time, but by ordinary, not by either registered or recorded, delivery.
Lord Denning MR was able to say that as a matter of construction some of the
requirements for the exercise of the option were mandatory, eg the time-limit,
but that the terms as to the type of letter were directory only and not
mandatory. Orr LJ agreed with Lord Denning. Scarman LJ agreed with the result
but declined to use the word ‘directory’. His attitude was that the part of the
clause dealing with the type of postal delivery was permissive advice to the
promisee option-holder.
The case, in
my judgment, is only of assistance in that it lends some support to the view
that the court is entitled to have regard, in construing a unilateral contract,
to the purpose which can be discerned by construing the contract as having
inspired the inclusion of a particular provision. For my part, I prefer the
approach urged by Mr Stewart, for all the intellectual attractions of Mr
Thomas’ argument. I am influenced by the consideration that it was the primary
bilateral contractual obligations for the purchase and sale of both part A and
part B of the property that imposed the maximum obligation upon the defendant
and that the exercise of the right under clause 16 operated to relieve from,
rather than add to, the burden of obligations upon the defendant.
In the light
of that consideration, which is perhaps no more than a legal explanation of the
effect of the parties’ common anticipation of what was likely to happen, relied
upon by Mr Stewart, it does appear to me to be unrealistic to treat clause 16
as on all fours with a classic grant of an option to acquire property, or an
interest in property, or even to give up an interest in property, such as a
‘break’ clause in a lease, where the person to whom the property is given up
needs notice to relet. The defendant, on receiving a notice under clause 16,
need do no more than stand down any contingent financial support it had
arranged. In that very special context, it does seem to me permissible
to allow the general rule with regard to time provisions to operate.
The passage in
Halsbury’s Laws of England, 4th ed, vol 9, para 481, which reads as
follows:
The modern
law, in the case of contracts of all types, may be summarised as follows. Time
will not be considered to be of the essence unless (1) the parties expressly
stipulate that conditions as to time must be strictly complied with; or (2) the
nature of the subject matter of the contract or the surrounding circumstances
show that time should be considered to be of the essence; or (3) a party who
has been subjected to unreasonable delay gives notice to the party in default
making time of the essence . . .
was approved by
Lord Fraser and others of their lordships.
I have not
referred to Mr Stewart’s argument on the form of clause 16, that the two stages
of the notice requirement provide no explanation for the parties not having
chosen a 28-day notice period, if time is treated as of the essence in relation
to both the 14-day periods. The only way that it appears to me that this could
be regarded as tipping the scales in favour of the plaintiff would be if it
were possible to infer that the parties deliberately intended to make time not
of the essence in relation to the first 14 days, while making it of the essence
for the second 14 days. If the same applies to both, whether in the sense of
making time or not making time of the essence, there is no discernible
difference between the clause chosen and the 28-day notice. In my judgment, the
inference of an intention to make time not of the essence for the first period
of 14 days, but of the essence for the latter period, is far too subtle. Had
the intention been that complex and specific, a specific provision drawing that
distinction would have been included.
I prefer Mr
Thomas’ approach that this is the rather unusual technique which the parties
adopted, from which no solid conclusion can be drawn either way. I therefore do
not rely on that aspect, but I nevertheless conclude that time was not of the
essence in relation to the provisions of clause 16 and therefore that the
notice of August 28 was valid and I shall declare in the sense of para 1 of the
originating summons.
