by John Adams
The far-reaching effects of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 are rapidly becoming apparent. (The writer now facetiously thinks of it as the Law of Property (Multiplying Problems) Act!) Some were discussed in an article by Lawrance Heller at [9] 49 EG 46: this article discusses its likely drastic impact on options, a central feature of many property deals. The efficacy of many pre-Act options may be called into question.
The problem
The normal pattern for an option is its grant, by separate deed or document or as part of a larger transaction, followed within a stated time (which must normally exceed 21 years) by exercise by notice. Exercise may or may not be qualified by reference to various conditions. The option should be protected by noting on the register if the land is registered or by a Class C(iv) land charge for unregistered land and the 1989 Act does not affect that. The signature of the original option document by the grantor and the signature of the notice of exercise by the grantee will not, however, meet the imperative demands of section 2, although they satisfied those of now-repealed section 40, Law of Property Act 1925. How significant that is depends on the true legal analysis of the option.
Analysis of the option
Traditionally an option is treated as a standing irrevocable offer to sell. For example, in Helby v Matthews [5] AC 471 two speeches in the House of Lords refer to an option as a “binding offer”. Obviously it must be part of a contractual bargain or given under seal. Later cases accepted that analysis, but Griffith v Pelton [1958] Ch 205 offered a different explanation. Jenkins LJ (at p 225) described an option as “a conditional contract … which the grantee is entitled to convert into a concluded contract of purchase”. That was strongly challenged by Buckley J in Beesly v Hallwood Estates Ltd [1960] 1 WLR 549 at p 556; the appeal in that case did not deal with the point.
Later cases revert to what the writer regards as orthodoxy — in the Court of Appeal in Mountford v Scott [5] Ch 258, for example, Russell LJ twice expressly describes an option as “an irrevocable offer to sell” (at p 264) — but none directly challenge the Jenkins formulation. Only if the minority view holds good can the conveyancer continue as before. What if the traditional view holds good?
Post-Act drafting
For options granted after September 27 1989, adaptation to meet the new law is easy. A simple separate document is created, signed by the grantor and handed to the grantee. It consists, at that stage, of an express agreement to sell, incorporating the property description and all other terms of the option. Section 2(2) expressly allows incorporation by reference. Exercise of the option requires signature of an acceptance on the same document by the grantee — whether the original grantee or his successor to the option — and service of the signed document, or an authenticated copy, as the grantor.
This machinery mirros the conceptual structure of option and exercise in the traditional analysis; the only activating steps required come from the grantee. A precedent will appear in the next release of the Conveyancer Precedents, which incorporates provisions to protect the grantee if the grantor sells before the option is exercised. A successor would be burdened by the option itself through registration or as an overriding interest, but without his signature on the same document as the grantee’s no contract can arise by acceptance which could be enforced, by specific performance or an award of damages.
Pre-Act options
Such machinery would not have been created before the new Act. Section 2(7) preserves the effect of contracts made before the Act; the whole point of Helby v Matthews and all that has followed, except Griffith v Pelton, is that there is no contract until acceptance. So what can a grantee now do to ensure that exercise creates a contract?
Possible solutions
The grantee can frame his notice to incorporate all the terms of the option by reference, send two signed copies to the grantor and invite signature of one; mere acknowledgement is insufficient. A willing or neutral grantor will comply, but an unwilling one will decline. It is quite speculative whether a court would order him to sign and it is to be borne in mind that options are strictly construed, even on mere machinery. Failing that, or some other, method to achieve the two signatures on one document incorporating all the terms, the thwarted grantee can look only to the court for help.
The consequences of section 2 for pre-Act options are so extreme and unfair that the judicial cavalry may come galloping to the rescue. Subsection (5) preserves the effect of resulting, implied or constructive trusts; help may come from that direction.
In 1932 Lord Justice Greer said: “the courts lean against so interpreting the Act as to deprive a party of an accrued right” (Ward v British Oak Insurance Co [2] 1 KB 392 at p 398 — my thanks to Richard Holbrook for the quotation); bold judicial interpretation may thus provide an escape hatch. A court, influenced by the inadvertent injustice caused, could also revive the Jenkins analysis of the prior option as a conditional contract. The chance of success on seeking any of these judicial rescue operations is slim, however, and few clients will volunteer as test case guinea-pigs.
Reform
Failing compliance, however engineered, or avoidance, however achieved, only Parliament can undo the harm it has, probably unwittingly, visited upon innocent option holders. Legislation has recently distinguished between grant of an option and its exercise — see section 4(2)(i)(i) of the Landlord and Tenant Act 1987. Putting matters right poses few terrors and needs only addition to subsection (7) of words to ensure that section 2 does not apply to the exercise of an option granted after September 27 1989 (or, to allow for some errors in the immediate wake of the Act, a later date).
How quickly would Parliament move to avoid chaos for unfortunate option holders? Over to you, Lord Chancellor.
