Option agreement – Deposit – Specific performance – Claimant tenant having option to purchase reversion – Lease and standard conditions of sale requiring purchaser to pay 10% deposit – Option exercised without payment of deposit – Claimant seeking specific performance – Whether deposit required on or before exercise of option – Whether time of essence – Whether claimant repudiating contract – Whether claimant entitled to specific performance – Claim allowed
The claimant was the tenant under three separate leases of commercial premises at Bilsthorpe, Canvey Island and Billingham, each for terms of 10 years from and including 14 June 2013. None of the leases excluded the security of tenure provisions in Part II of the Landlord and Tenant Act 1954. By clause 7(21) of each lease, the claimant had an option to acquire the freehold interest from the defendant landlord. Each of the three options was validly exercised by written notice, dated 7 June 2023, giving rise to contracts of sale between the parties.
The claimant sought a declaration that the three options were validly exercised and were binding on the defendant, and an order for specific performance of the three resulting sale contracts. The defendant contested the claim. It said the claimant repudiated the contracts by failing to pay the required 10% deposits by midnight on the date it exercised the options; and that it had accepted the repudiations, with the result that the contracts were at an end.
The defendant argued the three options were not binding due to the claimant’s failure to pay the deposits, and the defendant’s subsequent termination of the contracts. The claimant said the only obstacle to its ability to pay was the defendant’s refusal to provide payment details for its conveyancer.
Held: The claim was allowed.
(1) The modern approach to contractual interpretation was to ask what the term, in the light of the whole contract, would mean to a reasonable person having the relevant background knowledge reasonably available to the parties when the contract was made. The words used by the parties were of primary importance and one had to be careful to avoid placing too much weight on business common sense or the purpose of the term at the expense of the words used: Federal Republic of Nigeria v JP Morgan Chase Bank NA [2019] EWHC 347 (Comm); [2019] EWCA Civ 1641 (CA); [2019] 2 CLC 559 considered.
Every case turned on the precise wording of the term under consideration. Schedule 6 to the leases, and standard condition 2.2.1, clearly required each deposit to be paid no later than the date each option was exercised. In this case the wording was clear and inflexible. There was neither need, nor scope, for the law to imply any obligation to pay the deposits within a reasonable time of the nomination of the defendant’s conveyancer’s bank account: Rennie v Westbury Homes (Holdings) Ltd [2007] 2 EGLR 95 applied.
Strictly, the claimant was under no contractual obligation to ask the defendant to identify its conveyancer or ask for their relevant bank details. But if that information was not volunteered, the claimant was under a practical necessity to ask for it if it wished to comply with its contractual obligation to pay the deposit by the required date: Millichamp v Jones [1982] 1 WLR 1422 and Samarenko v Dawn Hill House Ltd [2013] Ch 36 considered.
(2) The question whether time was of the essence was answered by reference to the terms of the document itself, in the light of the circumstances when it was executed. In the ordinary case the requirement to pay a deposit, including the time of payment, was a condition of the contract. Time was of the essence of the date for payment: Samarenko considered.
However, this was not the case of the payment of a deposit on an ordinary contract for the sale and purchase of land, but on the exercise of a tenant’s option to purchase the landlord’s reversionary interest. On the true interpretation of the option provisions, time was not to be treated as of the essence of the time for payment of the deposits.
The options were contained in leases. The mere exercise of the options did not impose any new fetter upon the landlord’s ability to dispose of, or to deal with, any of the three properties, because they were already encumbered by the remaining terms of the three leases, and any statutory continuation of those tenancies under Part II of the 1954 Act.
(3) In the case of an option granted to a tenant to purchase the landlord’s reversion, because of the continued existence of the lease, or any statutory continuation thereof, any right to call off the sale contract for failure to pay the deposit on time did not restore to the seller, as landlord, his freedom to market the property.
Where, as here, the option was to purchase the reversion at an historic price, fixed up to ten years earlier, it was reasonable to anticipate that the option would only be exercised if the value of the reversion had increased since the option price was fixed. It was in the commercial interests of the tenant to secure the sale contemplated by the option agreement, and of the landlord to avoid that sale.
A tenant’s option to purchase the reversion militated against any need for the timely payment of the deposit to be treated as a fundamental condition of the option agreement, as to which time was of the essence. Here, the obligation to pay the deposits no later than the date each contract was made, and thus each option was exercised, was not a condition of each sale contract, so that time was not of the essence. It followed that the claimant’s failure to make payment of the deposits on the due date was not a repudiatory breach of contract.
(4) The notices served on the defendant exercising all three options did not constitute a separate repudiatory breach, which was highly fact sensitive. Looking at all the circumstances objectively from the perspective of a reasonable person in the position of the defendant, it was impossible to conclude that there was any intention to abandon, and altogether refuse to perform, the sale contacts constituted by the exercise of the three options: Eminence Property Developments Ltd v Heaney [2010] EWCA Civ 1168; [2010] 3 EGLR 165 considered.
Accordingly, the three options were validly exercised and binding on the defendant. An order would be made for specific performance of the three resulting sale contracts.
Alice Hawker (instructed by Freeths LLP, of Sheffield) appeared for the claimant; Tim Calland (instructed by Birketts LLP, of Ipswich) appeared for the defendant.
Eileen O’Grady, barrister
Click here to read a transcript of IAA Vehicle Services Ltd v HBC Ltd
