Key points
• The High Court has answered a question about pre-emption rights that has puzzled practitioners for years.
• Section 9(2) of the Perpetuities and Accumulations Act 1964, which limits the life of option agreements to 21 years, applies to pre-emption rights as well.
The rule against perpetuities was developed to prevent property being tied up for unacceptably long periods. It restricts the time within which future interests may be created; interests that vest too remotely are void. The common law rules are complex and technical and still apply to instruments that pre-date 16 July 1964.
Options and pre-emptions
Instruments made between 16 July 1964 and 5 April 2010 are governed by the Perpetuities and Accumulations Act 1964 (the 1964 Act). Section 9(2) limits the life of options to acquire interests in land for valuable consideration to a maximum of 21 years. The section also states that rights of pre-emption granted to public or local authorities in respect of land that has been, but ceases to be, used for religious purposes are excluded from the rule.
Does this mean that section 9(2) limits the life of all other pre-emption agreements to 21 years? The question has puzzled practitioners for years and the answer remains important because a surprising number of pre-emption agreements, granted between 16 July 1964 and 5 April 2010, remain subject to the rule.
One interpretation of section 9(2) is that the statute establishes a perpetuity period of 21 years for both options and pre-emptions, subject to the exception already mentioned. However, section 9(2) applies to options to acquire interests in land. It has long been settled law that the grant of an option creates an equitable interest in land because the grantee has a right to call for a conveyance.
By contrast, a right of pre-emption gives the grantee the right to be first in the queue if a landowner decides to dispose of his land. It does not oblige the landowner to part with his land and the grantee will have no right to call for a conveyance unless and until the landowner decides to sell. Consequently, a right of pre-emption creates a “mere hope” that only the landowner can frustrate or fulfil. The landowner may choose not to sell at all. However, if he does, he must first offer to sell to the grantee. The grantee can then choose whether to accept, or decline the offer and walk away.
In Pritchard v Briggs [1980] Ch 338, a majority of the Court of Appeal rejected suggestions that a right of pre-emption was not, and never could constitute, an interest in land or, alternatively, that it constitutes an equitable interest in land from inception. The court held that, if a grantor chooses to fulfil the conditions that enable the grantee to exercise his right of pre-emption, the grantee will then have a right to call for a conveyance. In other words, the grantee acquires an equitable interest in land when the right crystallises.
Does this mean that the grant of a pre-emption right is beyond the scope of section 9(2), because it is expressed to apply to dispositions “consisting of the conferring of an option to acquire for valuable consideration any interest in land”? If so, the validity of pre-emption agreements made between 16 July 1964 and 5 April 2010 will be governed by other, less restrictive provisions in the 1964 Act.
Puzzle solved
Taylor v Couch [2012] EWHC 1213 (Ch) concerned provisions contained in an agreement for sale made in 1984. The seller granted the buyer an option to purchase additional land. The option was exercisable if the seller’s application for planning permission to erect houses on the retained land was refused and all avenues of appeal had been exhausted, or if the seller had not obtained planning permission within five years. The option was also expressed to apply if the seller were to offer the land for sale.
The rights created in the agreement were protected by the registration of a class c(iv) land charge, but the seller transferred the land to a connected party in 1989. The claimant discovered what had happened in 2009. He claimed that the sale in 1989 had triggered the rights granted in 1984 and purported to exercise the option to acquire the land. The proprietor of the land resisted the claim on the ground that the rights granted in 1984 had become void, having been granted more than 21 years previously.
The judge began by distinguishing between options and pre-emptions. He ruled that a right of pre-emption is entirely dependent upon the volition of the grantor, in a way that an option is not. On a true analysis, the rights contained in the 1984 agreement fell into two parts. The rights that were dependent on the grant of planning permission constituted an option. However, the right to purchase the land if the seller were to offer it for sale depended solely on the seller’s own volition and conferred a right of pre-emption.
This enabled the claimant to argue that there was no question of the right being void for perpetuity, because section 9(2) was not applicable. He accepted that a pre-emption right might be subject to section 9(2) once it crystallises, but argued that the perpetuity period did not start running until then.
The judge rejected both arguments. The words used in the statute suggested that the draftsman regarded pre-emption rights as a species, or sub-class, of an option. If this were not the case, the exception in section 9(2) would make no sense. Consequently, the perpetuity period applicable to the right of pre-emption was 21 years.
The 1964 Act sought to achieve clarity and it would be difficult to decide when the perpetuity period had started to run if it did not start running until the landowner had taken a positive decision to sell the land. Therefore, the only sensible way of measuring the 21-year period was from the date on which the pre-emption right was granted. Consequently, the pre-emption agreement had become void for perpetuity, having been granted more than 21 years previously.
Postscript
It is worth noting that rights of pre-emption over registered land granted on or after 13 October 2003 are treated as creating an interest in land from inception for the purposes of registering an interest at the Land Registry. In addition, following the enactment of the Perpetuities and Accumulations Act 2009, which came into force on 6 April 2010, landowners can grant options and pre-emptions that will subsist for as long as they choose – but would be well-advised to think carefully before tying up their properties indefinitely.
Allyson Colby is a senior associate and professional support lawyer at Pinsent Masons
