Drafting interlocking contracts is a challenging task. Draftsman must produce documents that accomplish clients’ objectives, while protecting them if their relationships founder. To accomplish this, they must think ahead and provide for different contingencies, which may be difficult to foresee at an early stage.
In Mount Anvil Group Ltd v Volans Management Ltd [2009] EWHC 1934 (Ch); [2009] PLSCS 237, the High Court was asked to consider the effect of three interlocking contracts for the construction and sale of an £81m mixed-use development. The purchase of the residential units was to be completed by the grant of long leases and, in order to save stamp duty, the purchase of the commercial units (and of the freehold reversions of the residential units) was to be effected by the sale of shares to a separate, but connected, company. That company would also be granted an option to take individual leases of the commercial units as soon as they were completed, to enable it to obtain control of the commercial units at an early date.
The residential purchaser paid 5% of the total purchase price on exchange of contracts, but failed to comply with its contractual obligation to pay the balance of the deposit three months later. The seller: (i) rescinded the contract for the sale of the residential units; (ii) forfeited the sum that had been paid; (iii) issued proceedings for the payment of the balance of the deposit; and (iv) claimed that its obligations under all three contracts had been terminated. The commercial purchaser resisted the seller’s claims. It argued that the agreements operated separately and independently of each other and pressed the court to agree that the option to take leases of the commercial units remained valid.
The court upheld the seller’s claims. The judge decided that the option to take leases of the commercial units had become unworkable because the parties had expressly agreed that the option period would expire on completion of the share purchase agreement. Unfortunately, however, completion of the sale and purchase of the shares was conditional on completion of the sale of the residential units – and this was impossible because the contract for their sale had been terminated. Consequently, the contract for the sale and purchase of the shares and the option agreement were void because they could no longer function any.
Suchitigation can be avoided by ensuring, where appropriate, that termination provisions are linked. The decision serves as a reminder that draftsmen must critically evaluate interdependent contracts that seek to achieve a single commercial outcome. It is important not merely to focus on the parties’ aims and objectives but also to ensure that appropriate remedies are available in the event of default.
This issue is particularly acute when granting supplemental leases. Rent review provisions, alienation clauses, user covenants, alteration provisions and forfeiture clauses must all be aligned, as must provisions for the service of notices, break clauses and any dispute resolution provisions.
Allyson Colby is a property law consultant
