Sale of land — Contract — Rescission — Purchaser contracting to buy off-plan underlease of property — Contract conditional on vendor obtaining headlease by specified date — Vendor failing to obtain headlease within stipulated time but not informing purchaser — Headlease later obtained — Purchaser rescinding contract — Proper construction of sale contract — Whether rescission possible once headlease obtained
In October 2006, the appellants contracted to purchase from the respondent, off-plan, a long underlease of a flat for £265,000. They paid a deposit of 10%, and were funding the remainder of the purchase price by way of a substantial mortgage. The flat formed part of a development that the respondent was in the course of constructing. The respondent did not then hold any legal title to the land; accordingly, the contract was expressed to be conditional on the grant to the respondent of a headlease of the block in which the flat was situated. The relevant clause stated that if the headlease had not been granted to the respondent by 1 June 2008, either party would have the right to rescind the contract by serving written notice on the other, in which case the appellants’ deposit would be refunded.
Unknown to the appellants, the headlease was not granted by 1 June 2008. By then, the appellants were finding it impossible to obtain the necessary finance to complete their purchase owing to a drop in property values and increased difficulty in obtaining mortgages. The headlease was eventually granted in September 2008 and duly registered. Later that month, the appellants served notice purporting to rescind the contract, and requesting the return of their deposit, on the ground that the respondent had failed to obtain the headlease by the specified date. They subsequently brought proceedings to recover the deposit.
The appellants contended that the respondent’s failure entitled them to rescind notwithstanding that the headlease had subsequently been granted. The respondent contended that because the headlease had been obtained before the appellants served their notice of rescission, that notice was ineffective to terminate the contract and the appellants were required to complete. The county court judge found in favour of the respondent, holding that the appellants’ proffered construction of the relevant clause produced uncommercial results. The appellant appealed. |page:85|
Held: The appeal was dismissed. The relevant clause of the contract contained no time provision and did not make time of the essence of the contract. Its purpose was to provide a certain date by which, if the headlease had not been granted and the respondent was therefore unable to give good title, either party could terminate the contract. It granted a right of rescission should the headlease not be granted by the specified date in the nature of an option exercisable in that event, but did not seek to prevent the contract from becoming unconditional if the headlease were granted at a later date. It followed that the right to rescind existed only up to the grant of the headlease and did not continue thereafter. Although the respondent was not required to notify the appellants whether the headlease had been granted by the relevant date, the appellants could, had they wanted or had they been competently advised, have taken steps to discover the position. Had they checked the register between June and August and learnt that no headlease had been registered, they might well have been entitled to assume that none had been granted and that they were entitled to rescind. They had the means of discovering the existence of the right to rescind at a time when the right was there to be exercised. Accordingly, the issue of the appellants losing a right that they never knew they had did not arise. Moreover, if a right to rescind continued after the headlease was granted, it would have to exist in favour of either party and such a situation, where either party could terminate the contract at any time if they had found a better deal elsewhere, would produce uncommercial results.
The following cases are referred to in this report.
Mardorf Peach & Co Ltd v Attica Sea Carriers Corporation of Liberia (The Laconia) [1977] AC 850; [1977] 2 WLR 286; [1977] 1 All ER 545; [1977] 1 Lloyd’s Rep 315, HL
Millers Wharf Partnership Ltd v Corinthian Column Ltd [1991] 1 EGLR 192; [1991] 21 EG 115; [1991] 22 EG 124, Ch
This was an appeal by the appellants, Kenneth and Margaret McGahon, from a decision of HH Judge Reid QC, sitting in Guildford County Court, dismissing their claim against the respondent, Crest Nicholson Regeneration Ltd, for the return of a deposit paid under a contract for the sale of land.
Rupert Higgins (instructed by Brooks & Co Solicitors, of Setcham) appeared for the appellants; Joanne Wicks QC (instructed by Collyer Bristow LLP) represented the respondent.
Giving judgment, Longmore LJ said:
Factual background
[1] This appeal concerns an apartment in the development known as the Atrium, in Camberley, Surrey. The development is a mixed-use development that includes 214 residential units in a number of different blocks, one of which is called Aspect.
[2] On 27 October 2006, the appellants entered into a contract (the contract) to purchase a long underlease of apartment 39 (the property) in Aspect for the price of £265,000. This was an off-plan purchase; that is to say, the block was at the time in the course of development. The appellants had received a modest lump-sum payment from Mr Kenneth McGahon’s pension and, in common with a large number of people at the time, decided to invest it in the property market, which in late 2006 was buoyant. They paid a deposit of 10% and envisaged that they would complete with the benefit of a substantial mortgage, 85% mortgages then being available. They bought the property off-plan as a buy-to-let investment for their retirement. For the transaction, they instructed a solicitor recommended by the developer.
[3] The contract contained the following provision at clause 4:
This contract is conditional upon the grant to the Seller or to the Seller’s nominee of a headlease of the block of which the Property forms or is to form part. If the said headlease has not been granted to the Seller by 1st June 2008 then either party shall have the right to rescind this Contract by serving written notice of rescission upon the other. On service of such notice this contract shall become null and void save that the Seller shall within five working days refund to the Buyer the deposit paid by the Buyer and the Buyer will cancel any notice or the other entry which it may have registered at the Land Registry to protect this contract.
[4] On 20 February 2008, the respondent wrote to the appellants advising them that completion was anticipated for the autumn of 2008 and advising them to arrange their mortgage if they had not already done so. By this time, the credit crunch was under way and the sort of mortgage deals that the appellants had believed would be available to them as buy-to-let investors were no longer available. At the same time, the property, which the appellants had agreed to buy for £265,000, was valued at the substantially reduced figure of £200,000. This resulted in an unbridgeable gulf between the purchase price due to be paid on completion and the total amount that the appellants could raise either from their own resources or by borrowing. At best, it appears that they could have obtained a mortgage of 75% of the reduced value of £200,000.
[5] The first of June 2008 came and went, but (unknown to the appellants) the headlease referred to in clause 4 of the contract (the headlease) had not yet been granted. On 24 July 2008, the appellants wrote to the respondent explaining their predicament. The material passage of the letter is in these terms:
Having thought about this very carefully we have only two options left to us.
Option 1: We walk away from the deal and lose our deposit.
Option 2: We renegotiate the purchase price based on a Building Society valuation.
We have only invested in these properties because we received a lump sum from my husband’s pension. We would be totally unable to find the differential between the original price and the true valuation of this property.
We look forward to hearing from you in due course.
[6] The respondent’s parent company, Crest Nicholson plc, responded, expressing sympathy and offering as a goodwill gesture “a discount off the completion monies of £7,500”. This did not resolve the appellants’ predicament, and they did not respond.
[7] The headlease was not in fact granted until 4 September 2008 and was registered on 17 September 2008.
[8] At some point in September, the appellants instructed a new solicitor, Ms Julie West. On 29 September 2008, she purported to serve a formal notice under clause 4. The substantive part of her letter was in these terms:
1. We refer to the Contract dated 27th October 2006 by which you agreed to sell the Buyers the property known as Apartment 39 2nd floor of The Aspect The Atrium Charles Street Camberley Surrey;
2. The Contract is conditional on the grant of a head lease to you or to your nominee of the block of which the Property forms part by 1st June 2008;
3. The said head lease was not granted in compliance with clause 4 of the Contract;
4. This notice is given pursuant to clause 4 of the Contract to which the Contract was made subject.
5. We give you notice on behalf of the Buyers that the Buyers rescind the Contract with immediate effect and require you to return to us on behalf of the Buyers without delay the deposit with interest.
If the said head lease has been completed in accordance with clause 4 of the Contract then we require you to supply a full copy of the head lease by return.
This final paragraph was included because, at that stage, the appellants were not aware whether or not the headlease had been granted. Ms West was therefore, like the Syrian who killed King Ahab, drawing a bow at a venture: 1 Kings 22.34.
[9] The respondent’s solicitor responded, arguing that because the headlease had been granted before the purported notice of rescission the contract had not been terminated, and stating that the appellants would be required to complete once a completion notice had been served. The upshot was the issue of these proceedings by which the appellants seek the return of their deposit and interest.
Issue
[10] At the contract date, the respondent had not acquired a legal title to the development site but had started to develop the site. The property had not yet been constructed. Against that background, the commercial purpose of clause 4 is apparent. The appellants could not be expected |page:86| to take the property if the respondent had not acquired the headlease. Until that happened, the respondent could not give good title to the appellants, so the contract was conditional on the grant of the headlease. Both parties needed a certain date by which, if the headlease had not been granted, they could get out of the contract. The respondent would not want to continue to develop the block if it could not obtain title so it could grant underleases of the apartments once developed. Equally, the appellants would not want to continue to be bound indefinitely in circumstances where the respondent could not give them a good title to the apartment. Consequently, clause 4 gave each party an option to rescind.
[11] It is to be noted that there was no requirement on the respondent to notify the appellants that the headlease had or had not been granted by 1 June 2008. The respondent would of course have known whether the headlease had been granted by that date; the appellants would not have know and would somehow have had to discover the position. It would perhaps have been unsatisfactory for them merely to have asked the respondent because the respondent might not have replied, but they could always have checked the register and, if they had done that in June, July or August, they would have learnt that no headlease had been registered; they might well have been entitled to assume that no headlease had been granted and therefore that they were entitled to give notice of rescission. Any such notice of rescission would undoubtedly have been effective.
[12] It is further to be noted that clause 4 says nothing on the question of whether a notice of rescission is to be effective if served after a headlease has in fact been granted at the time of the notice but after 1 June 2008. The clause could have made this clear by saying, in the second sentence, that either party should “have the right at any time to rescind this contract” or “have the right at any time before the headlease is granted to rescind the contract”. Since the contract has not made this clear, the court must decide which of these alternatives is intended. It can be said that this is a question of implication, but I doubt if it is helpful for either party to assert that the other is seeking to imply a term into the contract. Something must be implied and the only question is what.
[13] Mr Rupert Higgins, for the appellants, submitted that, in the absence of any term obliging the respondent to notify the appellants whether the headlease had been granted on 1 June 2008, the only reasonable implication is that the McGahons should be able to rescind at any time after 1 June, even if that is well after the headlease has been granted. Otherwise, a valuable right would accrue to the appellants and might be lost to them without them ever having been aware that they had had it, let alone that they had lost it.
Judgment
[14] The judge decided the case against the appellants and in favour of the respondent because he considered that the appellants’ argument led to a most uncommercial result. If the right to rescind subsisted after the grant of the headlease, it would have to subsist for the benefit of both parties. Could the respondent (in the knowledge that the headlease had not been granted on the due date) sit back and wait to see how the market moved and, if it moved in its favour, rescind the contract (perhaps many months later), return the deposit to the appellants and sell elsewhere at a higher price? Conversely, could the appellants, suspecting (or even knowing) that the headlease had not been granted on the due date, sit back (similarly for many months) and wait to see if the property market fell and then rescind, claim back their deposit and buy a better apartment elsewhere?
Discussion
[15] The clause has three sentences. It is the first sentence that makes the contract conditional on the grant of a headlease. It is to be noted that, in this sentence at any rate, there is no time provision, let alone a provision making time of the essence of the contract. The contract can therefore become unconditional even if the headlease is granted after 1 June. The second sentence then grants a right of rescission if the headlease is not granted by 1 June 2008; this is an option exercisable in that event, but the sentence does not (at any rate in terms) seek to prevent the contract from becoming unconditional if the headlease is granted only after 1 June. The third sentence then spells out the consequence of the exercise of the option of rescission.
[16] To my mind, once one appreciates that the contract can still become unconditional even though the headlease is granted only after 1 June, it must follow that the right to rescind exists only up to the grant of the headlease and does not continue once the headlease has been granted. The picture (suggested by Mr Higgins) of the appellants not being aware that they had lost a right that they may never have been aware they had is a little unreal. They always knew that they could rescind after 1 June if no headlease had been granted by that date. They could, if they had wanted (or if they had been competently advised) have taken steps to discover whether the headlease had been granted. For whatever reason, they did not do so until after the headlease had in fact been granted on 4 September 2008. Even if they did not then know that they were losing a right that they had had, they at least had the means of discovering the existence of the right to rescind at a time when the right was there to be exercised.
[17] I also agree with the judge that the result for which the McGahons contend is uncommercial for the reasons given in [14] above. Mr Higgins accepted that if the right to rescind continued to exist after the headlease had been granted, it would have to exist in favour of either party. He could provide no satisfactory answer to the judge’s questions there set out beyond saying that the consequences of his argument were not so grave as the appellants being deprived of their rights without their knowledge. For the reason given in the previous paragraph, the consequences for them, if the respondent’s construction is correct, are not as grave as all that; the uncommerciality of the appellants’ argument still remains.
[18] It was suggested to Mr Higgins that the judge’s question could be answered by reference to the doctrine of waiver. However, as Mr Higgins accepted, the questions asked by the judge presupposed that neither party engaged in conduct and conduct would be needed for any such waiver.
[19] Millers Wharf Partnership Ltd v Corinthian Column Ltd [1991] 1 EGLR 192 has a superficial resemblance to the present case in as much as there was likewise a conditional contract for a lease (the conditions in that case being more numerous) and a provision (absent in the present case) that the vendor was to use all reasonable endeavours to satisfy the conditions. The relevant clause continued:
but if they have not been satisfied on or before 30th June 1988, either party may at any time thereafter serve written notice on the other rescinding this agreement…
The conditions were not satisfied by 30 June 1988 but were later satisfied. The claimant sought to enforce the agreement although a notice of rescission had been served after 30 June and after the conditions had been satisfied. Knox J said, at p198J, that one way of arguing that the right of rescission had been lost would be to qualify the right to “rescind at any time thereafter” by making it one to “rescind at any time thereafter but before the condition is satisfied”. He continued by saying that this way of advancing the case was not argued on behalf of the plaintiff “and, in my judgment, entirely justifiably”.
The reason why Mr Nicholas Patten QC (as he then was) did not advance any such argument was presumably that the words “at any time thereafter” appeared in the clause and that any implied qualification would be inconsistent with the express words. In the present case, no such express words appear in the contract and the task of the court is to ascertain the meaning of the present contract without the presence of any such words. For the reasons given, I would construe the contract as meaning that notice of rescission can be given only while the condition remains unperformed.
[20] In granting permission to appeal, Rix LJ referred the parties to Mardorf Peach & Co Ltd v Attica Sea Carriers Corporation of Liberia (The Laconia) [1977] AC 850, where a right of withdrawal had been granted to a shipowner under a time charterparty if the charterer failed |page:87| to make a punctual monthly payment of hire. The House of Lords held that if the monthly hire was not punctually paid, the right of withdrawal remained even after the hire had been paid. The right to withdraw ceased to exist only if it had been in some way waived. Mr Higgins did not, however, seek to rely on the time charterparty analogy provided by The Laconia because: (i) charterparties are different from leases or agreements for a lease; and (ii) The Laconia dealt with a contract breaker that had failed to make a punctual payment of hire. That breach of contract continued after (late) payment had been made and the shipowners were always entitled to rely on the breach of contract unless they waived the breach. There is, of course, no question of the respondent being in breach of contract in the present case.
[21] For these reasons, I would dismiss this appeal.
Sullivan LJ said:
[22] I agree.
Sir Mark Waller said:
[23] I also agree.
Appeal dismissed.
