Vendor and purchaser — Flats and offices at Chiltern Court, Baker Street, sold off by London Regional Transport — Scheme for flat residents to acquire long leases — Property company’s role in underwriting arrangements — Two agreements to carry out scheme — Time-limit for notice withdrawing flats from sale to company — Whether time of the essence — Appeal from decision of Knox J holding notice valid although out of time
point at issue in the litigation, namely, whether the notice was valid although
not complying with the time-limit, arose out of arrangements of some complexity
— London Regional Transport wanted to dispose of flats and offices at Baker
Street and was willing to co-operate in arrangements by which individual flat
residents could, if they wished, acquire by purchase long leases of their flats
— The machinery for carrying out the transactions was necessarily a little
complicated because some of the property to be disposed of consisted of
offices, in the acquisition of which the residents were not interested; there
were also some vacant flats and others where the tenants did not wish to
purchase the long leasehold interest — A property company was introduced in
order, in effect, to underwrite the purchase by the residents of the properties
from London Regional Transport
plaintiffs (respondents to the appeal) were the residents’ company formed for
the purpose of the acquisition of the Chiltern Court properties — The
defendants (appellants) were the property company brought in to underwrite the
scheme and facilitate the acquisition of the flats by the residents — The
machinery was by means of two agreements — The first was the agreement between
London Regional Transport and the plaintiffs by which the plaintiffs were to
purchase the whole property by taking a 125-year lease — The second agreement
was between the plaintiffs and the defendant property company — This agreement
had two parts: Part A, consisting of offices and some flats, and Part B,
consisting of the remaining flats, which were set out with the list of the
tenants’ names from each flat — The defendants agreed to pay £5.5m for the
whole of the property in Part A plus the total of the individual purchase
prices for the flats specified in Part B
important withdrawal clause, clause 16, in the second agreement, under which
the plaintiffs could give notice to withdraw from the sale any of the flat
leases in Part B — This was to provide the opportunity for the individual
residents to buy their flats if they wished to do so — The withdrawal had,
however, to be made ‘by not less than 14 days’ notice in writing to the
purchaser expiring not later than 14 days prior to the completion date’ — The
plaintiffs did not give the notice within the time-limit and when it was
received later by the defendants they rejected it as invalid — Both agreements
were duly completed by the agreed completion date, but this was without
prejudice to the question of the validity of the notice under clause 16 of the
second agreement
accepted the plaintiffs’ argument that the time-limit in clause 16 was not of
the essence and that the notice was therefore valid on the analogy of the
presumption in regard to rent review clauses established by United Scientific
Holdings Ltd v Burnley Borough Council — The defendants argued that the clause was
more analogous to break clauses or option clauses, where the presumption was in
favour of time being of the essence — The Court of Appeal, although inclined to
regard clause 16 as more analogous to a break clause in a lease because it
involved the plaintiffs in clawing back certain flats from the subsale
contract, preferred to look at its commercial object — The object of the
prescribed time was to enable the defendants to know in advance how much they
would have to pay — This depended on the number of flats withdrawn from the
sale; according to the number the amount could range between £2m and £8m —
Defendants would have to consider how the finance should be arranged — The
time-limit was therefore a matter of commercial importance and must be regarded
as of the essence — Appeal accordingly allowed
The following
case is referred to in this report.
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; 243 EG 43 & 127, HL, [1977] 2 EGLR 61
This was an
appeal by Wallabrook Property Co Ltd, defendants, from a decision of Knox J
holding that a notice given by the plaintiffs (respondents to the appeal),
Chiltern Court (Baker Street) Residents Ltd, was a valid and effective notice
under clause 16 of an agreement between the parties, despite being served out of
time. The decision of Knox J is reported at [1988] 2 EGLR 253.
C P F Rimer QC
and Gregory Mitchell (instructed by Clifford Chance) appeared on behalf of the
appellants; Nicholas Stewart QC and James Thom (instructed by Reynolds Porter
Chamberlain) represented the respondents.
Giving
judgment, DILLON LJ said: This is an appeal by the defendants in the action, a
property company called Wallabrook Property Co Ltd, against a decision of Knox
J made on July 27 1988. The question at issue is whether a notice dated August
28 1987 given by the plaintiffs, Chiltern Court (Baker Street) Residents Ltd,
to the defendants was, as the judge held, a valid and effective notice under
clause 16 of a certain agreement between the plaintiffs and the defendants
which is dated July 17 1987.
Chiltern Court
is a block of flats with offices in the basement at Baker Street in London
adjoining Baker Street station. Until September 1987 it was owned by London
Regional Transport because of its connection with the station, and part of the
actual building — though not a part with which these proceedings are concerned
— was used by London Regional Transport for the purposes of Baker Street
station. London Regional Transport decided, however, to sell off the parts of
the property — the flats and offices — which it did not require for the
purposes of the station and was prepared to entertain an offer from the flat
residents which would enable individual residents, who wanted to, to acquire,
by purchase, long leases of their flats.
The plaintiffs
came into existence as a company formed for the purpose of the residents’
acquisition of Chiltern Court. The situation was, however, somewhat
complicated. The price required from the residents by London Regional Transport
was some £11m and it subsequently transpired that because of the condition of
the property a further £2m or so would have to be spent. But the property
included the offices, in which the residents were not interested. Also there
were some vacant flats and some flats whose tenants would not wish to buy long
leases in the flats. As always where flats are offered to the sitting tenant it
was envisaged that the price payable by the sitting tenant would be a
substantial discount on the open market value of his or her flat with vacant
possession.
The residents
therefore found the defendants as a property company which would in effect
underwrite the purchase of the Chiltern Court property, taking subleases of the
parts which individual residents did not wish to purchase — that is to say,
parts other than the flats of the residents who wanted to buy long leases of
their own flats. To that end, therefore, and under some pressure to get on with
it from London Regional Transport, two agreements were entered into on July 17
1987. The first was an agreement between London Regional Transport and the
plaintiffs under which the plaintiffs were to purchase the property by way of a
headlease for the term of 125 years from June 24 1987, and a deposit of
£500,000 was paid by the plaintiffs to London Regional Transport. That
agreement provided that completion should take place and the lease should be
granted on September 14 1987.
The second
agreement, of July 17 1987, was between the plaintiffs and the defendants. This
divided the property, which the plaintiffs were acquiring from London Regional
Transport under the headsale agreement, into two parts: Part A and Part B of
the schedule. Part A consists of the offices and a certain number of flats, in
particular the flats which were vacant; Part B consisted of the rest of the
flats, which were set out with a list of tenants’ names for each flat and the
scheme of the agreement was that the price to be paid by the defendants was
just under £5.5m for the whole of the property in Part A plus the total of the
individual purchase prices specified in Part B for each of the flats in Part B.
Leases for 125 years from June 24 1987 less one day were to be granted
separately in respect of each flat comprised in the agreement and in respect of
the offices. As with the headsale agreement, the completion date was to be
September 14 1987.
However, as I
have mentioned, the idea was that the tenants who wanted to buy their
individual flats should be able to do so and clause 16 of the agreement between
the plaintiffs and the defendants, which bears the heading ‘Variations’,
contains the following provisions to that effect in respect of the Part B
flats:
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.
It is common
ground that there is nothing in the subsale agreement and there is no
admissible evidence to show why in clause 16 there was adopted the rather
convoluted formula: ‘. . . may by not less than 14 days’ notice in writing to
the Purchaser expiring no later than 14 days prior to the Completion date’,
instead of a rather simpler formula: ‘The Vendor may by not less than 28 days’
notice in writing to the Purchaser expiring prior to the Completion date.’
On August 13
1987 the defendants’ solicitor wrote to the plaintiffs’ solicitors and said
that his clients, the defendants, had asked him to remind the plaintiffs’
solicitors of the deadlines contained in clause 16. The defendants’ solicitor
went on:
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 the 17th of August. The notice or notices would then
expire on the 31st of August, which is fourteen days prior to completion.
It is common
ground that in writing that letter the solicitor got his mathematics right.
The
plaintiffs’ solicitors, however, did not send their notice on August 17. They
sent a formal notice purporting to exercise the rights under clause 16 in
respect of a large number of flats, but they did not send this until August 28.
The defendants’ solicitor rejected the notice as given too late and out of time
because it was after August 17, the final date under the wording of clause 16.
In point of fact the head contract was completed on the actual agreed
completion date (September 14) and the subcontract between the plaintiffs and
the defendants was also completed on the same date, albeit without prejudice to
the present dispute. It was in all parties’ interests that the head contract
should be completed and it was obviously impossible for that to be completed
unless the subcontract was completed. I have mentioned the deposit that was
payable under the head contract. A similar deposit was payable under the
subcontract and it was expressly provided that it could be used to pay the
deposit under the head contract.
The argument
for the plaintiffs which the judge accepted was that, despite the wording of
clause 16, time, in the conventional phrase, was not of the essence and so the
notice given on August 28 was valid and effective, although technically out of
time.
In the case of
United Scientific Holdings Ltd v Burnley Borough Council [1978]
AC 904 the House of Lords made it clear that in synallagmatic contracts where
there is a stipulation as to the time for the taking of some step or the
performance of some obligation the time stipulated is prima facie not of
the essence of the contract and so tardy performance will in general still be
effective. The United Scientific Holdings case was concerned with the
timetable for a rent review clause in a lease. The House also held that the new
rent fixed under the rent review clause, even though fixed tardily and without
strict regard to the agreed timetable, would when fixed be payable
retrospectively from the relevant review date.
On the other
hand, it is well established that time is regarded prima facie as of the
essence of an agreement which has granted an option to acquire property or to
acquire an interest in property, and of the essence of a landlord’s or tenant’s
break clause in a lease. We were referred to several authorities which
established this.
The argument
on the present appeal, as in the court below, has tended to be on the lines
that clause 16 is more closely analogous to a break clause in a lease than to a
rent review clause or other clause which provides mere machinery which is
expected to be invoked to give effect to the common intentions of the parties
in operating a continuing agreement.
I do not, for
my part, find this a very happy approach to the problem, because in many ways
clause 16 has characteristics of each of the alternatives. If pressed, however,
I would regard clause 16 as more analogous to a break clause in a lease because
it involves the plaintiffs clawing back certain flats from the subsale contract
and determining the rights of the defendants in respect of those flats.
I prefer,
however, to look at the commercial object of the clause
timeously. It is agreed that the object of having a prescribed time in clause
16 was that the defendants should know in advance of completion what price they
had to raise to complete the contract — what money they had to raise. The sums
involved in respect of the Part B flats could range from nothing, if they were
all withdrawn under clause 16, to about £8m. We were told that realistically it
would be between £2m and £8m. Obviously, it is expensive to arrange a facility
for a sum of that magnitude if it is not going to be required and it is
elementary sense that the defendants as subpurchasers should know in advance
what amount they are going to have to produce in respect of the Part B flats
and, incidentally, what security they would be able to offer to any lender.
Time is not of
the essence of the completion date in the headsale agreement or in the subsale
agreement between the plaintiffs and the defendants, but clause 16 is geared to
the agreed completion date and not to the date of actual completion, whenever
it might happen to be. That is for the obvious reason that it might well be
known in advance precisely on what date the agreement would in the event be
completed.
It has been
accepted in this court for the plaintiffs that the notice under clause 16 had
to be given if at all by the agreed completion date, September 14 1987. That
was a cut-off date. It is said that if the defendants wanted to know where they
were before September 14 arrived, they would have to wait until after August 17
and then serve a notice making time of the essence for the service of any
notice under clause 16 by a new date prior to September 14, and it is said that
such a notice would have to give the plaintiffs reasonable time before the new
date to get out and serve their own notice under clause 16. Reference is made
in this context to observations of Lord Diplock at p 934 A to B and of Lord
Fraser of Tullybelton at p 962 E to F in the United Scientific Holdings case.
But the period prescribed as the minimum period in clause 16 is fairly short —
28 days — and the sum potentially to be raised in respect of the Part B flats
is large. Why, therefore, impute to the parties this complicated notion of
serving a notice to make time of the essence for serving a notice under clause
16 by reference to some fresh intermediate date reasonably prescribed by the
defendants when the parties have negotiated and agreed the formula and
time-limits in clause 16? I do not see
why, there being a necessity for a time and a cut-off date and formula agreed,
the plaintiffs should not be held to that formula.
It is
submitted in the alternative that time should be regarded as of the essence of
one of the periods of 14 days in clause 16, but not of the other, so that it is
enough if a 14-day notice was given. It is said that the second date serves no
purpose if the first date is inflexible. I do not know why the draftsman chose
to have two dates, but the second does serve a purpose even if the first is
inflexible, because they are cumulative, and I can see no basis for saying, on
the wording which I have already read, that time is of the essence of one
rather than the other. That would simply involve taking a blue pencil and
striking out the one or the other of them.
Accordingly,
in my judgment the plaintiffs were bound to comply with the time-limits and
formula in clause 16 if they were to avail themselves of clause 16. They failed
to do so. I would therefore allow this appeal, set aside the order of Knox J,
and declare that the notice dated August 28 1987 was not a valid and effective
notice under clause 16.
GLIDEWELL and
RUSSELL LJJ agreed and did not add anything.
The appeal was allowed with costs in the
Court of Appeal and below; application for leave to appeal to the House of
Lords was refused.
