Vendor and purchaser — Option to purchase — Specific performance — Provisions in option agreement — Resale of property at a profit — Whether breaches of option agreement — Summons under RSC Ord 86
under Ord 86 in an action for specific performance the plaintiff company sought
to enforce summarily against the defendant company an option agreement and
contract for the purchase of certain leasehold property — The agreement in
question provided for the payment by the plaintiffs by way of ‘option money’ of
the sum of £300,000; the purchase price in the event of the option’s being
exercised was £6m, the £300,000 in that event going towards the payment of the
£6m — A clause in the agreement precluded the assignment of the benefit of it
and another clause provided that, on any resale of the property and receipt of
proceeds by the plaintiffs within a specified period, the defendants were to be
entitled to a share in the proceeds of the sale — The option was in due course
exercised by the plaintiffs and the sum of £300,000 paid — Before the exercise
of the option, however, the plaintiffs had entered into an agreement with a
third company, to which agreement the defendants were not a party and of which
they were ignorant at the time — This second agreement provided that the
plaintiffs would exercise their option by directing the defendants to assign
the property to the third company, which would complete the purchase — The
financial arrangements under this agreement were that the price to be paid for
the property by the third company would be £7m, of which £5,700,000 would be
paid to the defendants (to make up the £6m fixed in the option agreement) and
£300,000 would be returned to the plaintiffs plus a further £1m — The agreement
provided for the situation, which in fact arose, of the refusal by the
defendants to assign directly to the third company — In that event the
plaintiffs would complete the purchase and assign immediately to the third
company
contended that the agreement between the plaintiffs and the third company was a
breach of the restriction on assignment clause in the option agreement and that
the financial arrangements breached the profit-sharing provisions on resale —
The defendants also objected that they were under no obligation to assign the
property directly to the third company — The judge accepted this last point but
rejected the defendants’ submissions on the two main issues — The restriction
on assignment affected only the benefit of the option agreement itself — The
option agreement and the contract of sale were quite separate transactions;
there had been no assignment of the option agreement itself — On the second
main issue, the fact was that the proceeds of sale to the third company had not
been received by the plaintiffs within the specified period and that was the
end of the matter
the judge made an order for the specific performance of the contract of sale
arising out of the option agreement — He did this ‘not without some hesitation’
as the decision seemed hard on the defendants — The agreements had, however, to
be construed as they were entered into — He made no order as to costs
No cases are
referred to in this report.
This was a summons adjourned from the master
to the judge under RSC Ord 86 in an action commenced by writ with a claim for
specific performance by the plaintiffs, Briargate Developments Ltd, against the
defendants, Newprop Co Ltd, a member of the Freshwater Group, in relation to a
leasehold property in the Tricorn Centre at Portsmouth.
Miss Hazel
Williamson QC and C H Pymont (instructed by McKenna & Co) appeared on
behalf of the plaintiffs; David Neuberger QC and Nicholas Dowding (instructed
by Herbert Smith) represented the defendants.
Giving judgment,
MR MICHAEL WHEELER QC said: This is an adjourned summons under Order 86 for the
specific performance of an agreement (‘the option agreement’) dated August 12
1988 and made between the plaintiff, Briargate Developments Ltd, and the
defendant, Newprop Company Ltd, which I shall call ‘Briargate’ and ‘Newprop’
respectively. It relates to a property in what is known as the Tricorn Centre
at Portsmouth. I should add that Newprop is a member of a much larger group of
companies known as the Freshwater Group.
The summons
(which was adjourned by the learned master straight to me) seeks specific
performance of the option agreement; and the conclusion which I have reached —
not without some hesitation — is that this is a case for specific performance.
I start with
some of the definitions which are used in the option agreement. One of the more
important is the definition of ‘Contract’ in clause 1 which reads as follows:
‘Contract’ means the contract
for the sale and purchase of a Property which will arise on the exercise of the
option in accordance with the provisions of this Agreement.
You can see at once that it draws a clear
and marked distinction between ‘this Agreement’ (ie the option agreement
itself) and the contract for the sale and purchase of the property which will
arise when the option is exercised. The ‘Property’ is the legal estate in some
leasehold land and leasehold flats on the Tricorn Estate.
The ‘option
money’ was the sum of £300,000 which Briargate had to pay in order to get the
benefit of the option. The purchase price, in the event of the option’s being
exercised, was £6m, so that the contemplated transactions were of a
considerable size. If the purchase price became payable, the £300,000 option
money would go towards that £6m, so there would be another £5.7m due.
Under clause 2
of the option agreement, the National Conditions of Sale, 20th ed — and I quote
from the wording of clause 2:
shall be incorporated into this Agreement
and to the Contract insofar as they are applicable and not inconsistent with
the express terms hereof
— with two modifications which do not
matter for present purposes. There again you see a clear distinction between
‘this Agreement’
incorporated into each, in so far as they are applicable and are not
inconsistent with express terms. As we shall see in a moment, although under
the National Conditions of Sale an assignment is perfectly permissible, so far
as the option agreement is concerned there was a clear and positive
restriction, but there was no such restriction — at all events in terms — in
relation to the contract. The importance of that will emerge later.
Clause 3 is
headed ‘No assignment’ and reads as follows:
This Agreement shall be personal to
Briargate and Briargate shall not assign sublet share or part with the benefit
of this Agreement or any part thereof save that Briargate shall be entitled to
assign the benefit of this Agreement or hold it in trust by way of charge in
connection with its financial arrangements for the purchase of the Property.
I do not think
that anyone has been able to explain to me precisely what is the subtlety of
the word ‘sublet’ in clause 3, but it is sufficient for my purposes that the
clause states in positive terms that Briargate is not to assign the benefit of
‘this Agreement’. I stress that, bearing in mind the distinction which has
first been made between ‘this Agreement’ and ‘the Contract’, though I note that
it does not, at any rate in terms, purport to restrict an assignment of the
contract. I shall have to come back in due course to what is meant by ‘the
benefit of this Agreement’.
Clause 4
provides for the option: Briargate is to have the option of purchasing the
property at the purchase price of £6m.
Clause 5 again
relates to the option. It is headed ‘Exercise of option’:
The option hereby granted shall be
exercisable by notice in writing given to Newprop before 1st November 1988 and
if the same shall be exercised then Newprop shall sell and Briargate shall
purchase the Property at the Purchase Price upon the terms hereunder mentioned.
As to
completion, clause 10(1) provides as follows:
The date for completion of the Contract
shall be the eighth day following the date upon which the option is exercised
provided that the same is a working day and if not the next working day
thereafter.
In the events that happened the
completion date was November 7 1988.
I must
emphasise the wording of clause 5. That clause provided that the option had to
be exercised before November 1 and, if exercised, that there was to be a sale
of the property ‘at the purchase price upon the terms hereunder mentioned’.
Thus it can be seen that the option agreement not only contains the option; it
contains, so far as necessary, any further clauses which will come into
operation for the purposes of the contract if the option is exercised. That is
not surprising, bearing in mind that completion had to take place within seven
days of the option’s being exercised.
Clause 11 is
headed ‘The Transfer’:
The Transfer to Briargate shall contain:
(i) a covenant by Briargate etc.
The importance of that is that Briargate
has been defined as meaning Briargate only — I paraphrase, of course. So clause
11, on the face of it, is contemplating a transfer to Briargate and not a
transfer to anyone else. On the other hand, one has to ask the question: is the
definition of Briargate sufficient to exclude the right which would normally
arise — not under an option, but under a contract — to direct the property to
be assigned to someone else?
Now I come to
a particularly difficult clause, clause 17, which lies at the heart of this
dispute. It is headed ‘Profits’. I will read subclause (1) and part of
subclause (2) and then indicate briefly what the rest of the clause provides.
As will be seen, it contemplates a sale of the property and a sharing of any
profit between Briargate and Newprop. Clause 17(1) reads as follows:
In this clause a ‘sale’ includes (a) a
contract (whether or not conditional) for the sale of the Property by
Briargate.
That is for present purposes by far the
most important part of the definition, but I will read paras (b), (c), (d) and
(e) so that the flavour of subclause (1) as a whole can be appreciated.
(b) a contract (whether or not conditional) for
the sale of shares in Briargate the prime or major purpose of which is to
effect the sale of the Property
(c) a sale of the shares in Briargate the prime
or major purpose of which is to effect the sale of the Property.
So (b) relates to a contract for the sale
of the shares and (c) relates to a sale of the shares. A good deal of subtlety
was seemingly being directed to the wording of this subclause.
(d) a sale or contract (whether or not
conditional) for the sale of the Property by any person other than Briargate
where Briargate has any interest in the proceeds of sale or is to receive any
payment calculated by reference to the proceeds of sale.
I do not think that that can conceivably
be brought into the context of the facts of the present case.
(e) the grant of any lease or premium other than
for occupational purposes or contract therefor whether or not conditional
either by Briargate or by any other person where Briargate has any interest in
the premium or is to receive any payment calculated by reference to the premium
and ‘the Effective Date of Sale’ shall be the date on which any such event
occurs.
Thus paras (a) to (e) between them
provide a very elaborate definition of ‘sale’.
Clause 17(2)
starts as follows:
In the event of a sale of the Property at
any time during the period of 39 months following the date hereof (‘the
Effective Period’) and the receipt by Briargate of the proceeds of sale within
the Effective Period or within six months thereafter Briargate shall within 7
days of completion of such sale (if completion so occurs) and receipt by
Briargate of the proceeds of sale pay to Newprop a sum
— and there are then varying percentages
to be calculated in accordance with a formula which depends on when the
effective date of sale takes place. Just to put that in context, ’39 months
following the date hereof’ will be November 12 1991, and the further six months
which was the extended period for the receipt of proceeds of sale will occur on
May 12 1992. Those are important dates because, if I am right in my approach to
this question, it is the use of that precise period that is the flaw in the
case which Newprop seeks to put forward.
Clause 17(3)
refers to the sale of part of the property, and there are a number of other
elaborate provisions, including some relating to Taylor Woodrow Property Co Ltd
(‘Taylor Woodrow’), though not in relation to this property.
I mention
briefly clause 29:
The parties hereto are agreed that during
the Option Period they shall not disclose to any third party the purchase price
save that Briargate may do so on a confidential basis in connection with any
discussions in respect of the financing of the purchase of the property.
It will be remembered that the purchase
price was £6m, and that £300,000 had to be found before Briargate even got the
option. The ‘Option Period’ means the period beginning with the date of the
option agreement (August 12 1988) and ending on the exercise of the option. I
do not think that anything in the confidentiality clause helps me in my
question of construction.
The option was
in fact duly exercised on October 28 1988 and the option price of £300,000 was
paid. It will be obvious from what I have read from clause 17 that the
possibility of a sale-on of the property was clearly contemplated; but it is
also clear that, at any rate within the ambit of the language of clause 17, it
contemplated Newprop’s getting a share of that profit.
Before the
option had been exercised, the second vital agreement in this case was entered
into, this time between Briargate and Taylor Woodrow. I will call it ‘the
second agreement’. It related to the Tricorn Centre and the recital reads:
WHEREAS Briargate has the benefit of the
Option Agreement for the purchase of the Leases (each as hereinafter defined)
‘The property’
is defined as meaning the same property as is defined in the option agreement
and ‘the present project’ as being the exercise of the option by Briargate and
Taylor Woodrow taking an assignment of the Newprop leases from or at the
direction of Briargate.
So the second
agreement contemplated the possibility of a direct transfer of the property
from Newprop to Taylor Woodrow; alternatively, and perhaps slightly more in
keeping with the terms of the option agreement and the sale contract, a
transfer to Briargate with Briargate then transferring on to Taylor Woodrow.
I should here
mention that in the course of argument the point was taken that the option
agreement did not permit Briargate to require a transfer direct to Taylor
Woodrow, and that may well be right. At all events, Briargate were perfectly
content to take the transfer into their own name and then transfer it on to
Taylor Woodrow. It all seems rather a waste of money to me, but there it is. At
the moment I am not satisfied that the contract (as defined in the option
agreement) contemplated a transfer direct into the name of someone other than
Briargate.
I now turn to
clause 2(1)(a) and (b) of the second agreement to which Newprop was not a party
and did not even know that it had been entered into.
Clause 2(1)(a)
reads:
Prior to the 31st October 1988 Briargate
shall exercise the Option and (subject as hereinafter provided) direct Newprop
to assign the Newprop leases (together with the benefit of the rent deposits
(if any) referred to in Clause 23 of the Option Agreement) to TWPL and if
Newprop shall comply with such direction then Taylor Woodrow shall complete the
purchase of the Newprop leases at the price of £7,000,000 (payable as to
£5,700,000 to Newprop and £300,000 to Briargate on completion of such purchase
and £1,000,000 to Briargate as hereinafter provided) pursuant to and subject to
the provisions of the Option Agreement.
Then there is a proviso which takes care
of the situation as it in fact arose, where Newprop refused to assign the
Newprop leases to Taylor Woodrow, and Briargate therefore completed the
purchase and then immediately assigned the Newprop leases to Taylor Woodrow.
It will be
seen that clause 2(1)(a) not only refers to £7m but splits it into three: first
of all, £5.7m to Newprop and £300,000 to Briargate on completion of the
purchase; pausing there, the £300,000 was repayment to Briargate for what it
had paid to get the option and which Briargate and Newprop had agreed from the
start should count towards the purchase price if the option were exercised. So
it was £5.7m to Newprop and £300,000 to Briargate, and then there was the
further £1m for which clause 2(1)(b) provided as follows:
The sum of £1,000,000 hereinbefore
referred to shall be paid to Briargate on the 1st June 1992 . . .
I do not know
why this date of June 1 1992 was used in clause 2(1)(b), but it is significant
that the period within which clause 17(2) of the option agreement operated (39
months plus six months) expired in May 1992, which would be before the
date referred to in clause 2(1)(b).
Clause 2(2)
provides that if Newprop will not assign to Taylor Woodrow, and assigns to
Briargate so that Briargate has to assign on, Taylor Woodrow will pay the stamp
duty.
Clause 8 is
headed ‘Assignability’. It has not, I think, any bearing on any question that I
have to decide, but it does serve to underline the relationship of the parties
in this very substantial transaction. It reads as follows:
ASSIGNABILITY
This Agreement and each and every
covenant term and condition hereof are personal to the parties hereto and may
not be assigned (whether outright or by way of security) without the consent of
the other party hereto (such consent not to be unreasonably withheld or
delayed) PROVIDED ALWAYS that the consent of Briargate shall not be required to
any assignment made by TWPL either for the purposes of financing the Project or
to a subsidiary of TWPL.
The second
agreement, as I say, was entered into on October 19 1988, when the option had
not in fact been exercised by Briargate, but there was with the second
agreement a side letter of the same date from Taylor Woodrow to Briargate. I
will read part of the letter:
With regard to the Agreement which has
been exchanged today between us in relation to the property, we write to advise
you that if it shall be found that there is any Development Profit or any
Profit Income (both as defined in the Agreement) which has been calculated and
which could be paid to you prior to the 1st June 1992 and you ask us for
payment of such monies to be made to you prior to that date then in our sole
discretion (and without being under any legal obligation so to do) we may make
such payments to you.
We also agree that of the sum of
£1,000,000 referred to in clause 2(1)(b) of the Agreement we shall pay to you
today the sum of £90,000 in order for you to discharge professional fees that
you have already incurred. Should you ask us for payment of the whole or any
remaining portion of the sum of £1,000,000 before the 1st June 1992 then in our
sole discretion (and without being under any legal obligation so to do) we may
make such payment to you provided that you have given to us not less than three
months notice and the sum to be repaid is not less than £250,000.
It is not intended that this letter
should give rise to any legally binding obligation on either of us, save as
expressly referred to above in relation to the payment of £90,000.
Yours faithfully
and it is signed by a director of Taylor
Woodrow.
This was a
rather extraordinary letter to be written between, if I may so describe them,
mature contracting parties. When it became known to Newprop they not
unnaturally regarded it with a great deal of suspicion. This is clear from two
passages in an affidavit sworn by Mr H E Severn, the secretary of Newprop, on
March 2 1989. In para 8 he says:
It is the Defendant’s case that the Agreement
dated 19th October 1988 between the Plaintiff and Taylor Woodrow . . .
represents a flagrant breach of clause 3 of the Option Agreement.
He then sets out the relevant passage
from clause 3 and continues:
It is further the Defendant’s case that
such breach was committed quite deliberately in order to evade the profit
sharing provisions of clause 17 of the Agreement.
So there is no doubt about it. Newprop
say that it was a breach of the option agreement and a deliberate attempt to
evade the profit-sharing provisions of the option agreement.
That is the
nub of the dispute. It is, I think, clear that what actually happened was not
within the strict language of clause 17 of the option agreement. That is why at
the end of the day, whatever else I may think, it seems to me that Briargate
are entitled to specific performance of the contract which arose as a result of
the exercise of the option.
For Briargate,
Miss Williamson put her case in this way. First, that there had been no breach
of clause 3, properly construed, and that what has in fact happened is outside
the terms of that clause. On this point there is, of course, a head-on conflict
between the parties.
Miss
Williamson’s second point — which is not, if I may say so, quite in the same
league — is that even if there is a breach of clause 3 it is a trivial and
technical breach of no fundamental importance, merely involving a payment of
money and therefore no bar to specific performance. I do not know how trivial
and technical it may be thought to be, but it does go to a payment of a very
substantial sum of money to Newprop, or an equal deprivation of that large sum
to Briargate, depending on the effect on the transactions of clause 17 of the
option agreement.
Miss
Williamson’s third point is one that I have already touched on, namely that
Briargate are entitled to require the transfer to be made direct to Taylor
Woodrow. Briargate have said that if that is not so they will take a transfer
into their own name and will then transfer on to Taylor Woodrow. I have already
expressed some doubt as to whether, on its true construction, the option
agreement contemplates a transfer other than direct to Briargate — although it
is true to say that I was very helpfully referred by Miss Williamson to
extracts from Barnsley on Land Options, 1st ed, which does suggest that
although the exercise of an option may be limited to a grantee (as indeed this
option was quite clearly limited to Briargate) it does not follow that the same
limitation attaches to the subsequent contract for sale which in effect
replaces the option agreement and imposes on the parties entirely new rights
and obligations. Alternatively, the grantee, having duly exercised the option,
is entitled at common law to require the vendor to convey to such person as he
directs.
As I have
indicated, I do not propose to hold in the instant case that Briargate had a
legal right to require Newprop to transfer the property direct to Taylor
Woodrow.
A good deal of
argument has been directed to a fairly subtle point as to the difference
between the benefit of an agreement and the benefit of the fruits of that
agreement. I do not propose to analyse those admirable arguments in detail, but
it seems to me that I am bound to look at the option agreement as a whole.
Clearly the option agreement and the contract are, and are recognised as being,
quite separate transactions, so that what may apply to the option agreement
itself may not apply to the contract. Moreover, I cannot regard the contract as
involving an assignment of the benefit of the option agreement. The option
agreement was not, and was not intended to be, assigned at all and there is
nothing in it which suggests the contrary. What was transferred to Taylor
Woodrow under the second agreement was the benefit of the fruits of the option,
that is to say the assignment to Taylor Woodrow of the benefits which would
arise from the exercise of the option.
Briargate had
to borrow, from a company which does not otherwise enter into the picture, the
£300,000 to acquire the option, and the evidence is that they would have to go
outside to get the balance of the purchase price if they exercised the option.
Briargate say that the primary object of bringing Taylor Woodrow in was so that
they could provide the balance of the purchase price, and because they were an
admirable party with whom to develop the property. That is not a view of the
facts which appeals, perhaps not surprisingly, to Newprop.
I can quite
see the importance of the option’s being made personal, because it was by the exercise
of that option that Briargate would be pinned down to complete. But once they
were pinned down and, moreover, once Newprop had received the balance of £5.7m,
but the
Briargate of the proceeds of sale) not having taken place within the
time-limits there specified, Newprop in reality went out of the picture. There
is nothing that I can see, either in common-sense or in the language which the
parties used, which resulted in the assignment of the option agreement itself.
All that happened was that the two parts of the transaction — the option and
the contract — were dealt with in one document, perfectly sensibly, because
once the option was exercised it was only a week or so before completion was to
take place.
For Newprop,
Mr Neuberger, perfectly fairly, did not mince his words. He said that when you
look at the second agreement, and not least when you look at the side letter,
this was a shabby transaction on the part of Briargate and Taylor Woodrow. It
is no part of my function to act as schoolmistress to the parties, and once I
have arrived at the answer to the question of construction — namely, that in my
judgment the second agreement was not a breach of the option agreement — I
think it better that I should refrain from comment on the way in which the
parties have seen fit to operate.
It is quite
clear that the vital clause, clause 17 of the option agreement, was entered
into after a great deal of thought. I do not know how that clause came into
being and where it stemmed from. I merely point out that I would expect it to
have originated from Newprop, and indeed there is in the evidence filed on
behalf of Newprop a statement to the effect that they made it clear to
Briargate that there would have to be some provision for participation in
development profit if they were to enter into a deal. But the fact remains that
I am left with the deal as it was entered into, and there is no suggestion on
either side that the words used were not words which they intended. It seems to
me to be inescapable that clause 17(2) means what it says (and I quote again
the key words from the subclause):
In the event of a sale of the Property at
any time during the period of 39 months following the date hereof (‘the
Effective Period’) and the receipt by Briargate of the proceeds of sale within
the Effective Period or within six months thereafter Briargate shall . . . pay
to Newprop a sum . . .
There is not a shadow of doubt that those
words were carefully and deliberately chosen. What has happened is that the
proceeds of sale are not receivable by Briargate within that period. If that be
right, that is an end to the matter.
I have not
reached this conclusion without a great deal of thought, because, without
seeking to make use of emotive adjectives, it does seem hard on Newprop, but I
can only construe the agreements as they were entered into. That being so, it
seems to me that Briargate are entitled to a decree of specific performance of
the contract as defined. I do not think, as at present advised, that they are
entitled to require an assignment direct to Taylor Woodrow, but I do not
consider that the second agreement was a breach of clause 3 or the option
agreement.
On the other
hand, looking at the picture as a whole, it seems to me that this would be an
appropriate case where, although granting a decree of specific performance, I
should make no order as to costs, but there may be some question of guarantees
by way of interest which were raised in the summons, which I have not
considered. I would have thought that the rest of the summons could be referred
to the Taxing Master if any problem arises between the parties.
Specific performance ordered with inquiry
into damages. No order was made as to costs. Leave to appeal was given if
required and stay allowed pending appeal.
