Louise Clark analyses a case in the High Court establishing that different rules apply to making deposit payments where there is already a prior contractual or proprietary relationship.
Key points
- In an ordinary sale and purchase contract, time is of the essence as to the date for payment of a deposit
- Where there is a prior contractual and/or proprietary relationship between the parties, the situation is out of the ordinary and more is required
In IAA Vehicle Services Ltd v HBC Ltd [2024] EWHC 1 (Ch); [2024] PLSCS 8, the High Court considered whether time was of the essence as to the date for payment of deposits under lease options.
Options to acquire freehold reversions
The case concerned the exercise of options in three leases of commercial premises at Bilsthorpe, Canvey Island and Billingham, each for 10 years from 14 June 2013. The leases were protected by the Landlord and Tenant Act 1954.
The options were to purchase the defendant’s reversionary interest in each of the premises and exercisable at any time over the 10-year terms of the Billingham and Bilsthorpe leases and in the last six years of the Canvey Island lease for the purchase prices of £1.6m, £210,000 and £2.1m respectively.
Preconditions to the exercise of the options included compliance with notice provisions in the lease and payment of all sums due under specified loan notes. Option notices were served on 7 June 2023. The parties agreed that the preconditions had all been complied with and that binding contracts for the sale and purchase of the freehold interests had arisen.
The contracts incorporated the standard commercial property conditions of sale (2nd edition), which required completion 90 days after expiry of the option notice and for the tenant to pay deposits of 10% of the purchase price “no later than the date of the contract”, by direct transfer of cleared funds to an account nominated by the seller’s conveyancer.
The claimant did not pay any deposits either when the option notices were given or subsequently. The defendant argued that by failing to pay the deposits the claimant had repudiated the contracts, that it had accepted those repudiations, and that the contracts had come to an end.
In the claimant’s action for a declaration that the options were validly exercised, the questions for the court to decide were:
- Was the claimant obliged to pay the 10% deposits on or before the date of exercise of the options?
- Did non-payment of the deposits constitute a repudiation of the purchase contracts?
- Was the defendant entitled to treat the contracts as discharged?
Contractual interpretation
The modern approach to contractual interpretation is to ascertain the meaning of the words used by applying an objective and contextual approach. What would a reasonable person having all the relevant background knowledge available to the parties when the contract was made understand it to mean? See Federal Republic of Nigeria v JP Morgan Chase Bank NA [2019] EWCA Civ 1641.
The court was satisfied that the contracts came into existence on valid exercise of the options on 7 June 2023 and the deposits were payable no later than midnight on that date. It was the claimant’s responsibility to obtain the necessary payment details to enable it to perform its obligations on time.
Had the defendant refused to provide such details or delayed unreasonably in doing so it could not have treated itself as discharged from completing the sale contracts owing to non-payment of the deposits, but no request for details was made.
Was time of the essence?
In the ordinary case of a contract for the sale and purchase of land, the requirement to pay a deposit, including the time of payment, is a condition of the contract (Samarenko v Dawn Hill House Ltd [2011] EWCA Civ 1445). Such a deposit payment is a guarantee of further performance.
Therefore, failure to pay on time is a demonstration that the buyer is unwilling to perform the contract as a whole. A right to call off the contract for failure to pay the deposit on time restores the seller its freedom to market the property. Consequently, time is of the essence as to the date for payment of the deposit.
However, the court decided that there was sufficient to take the case out of the ordinary run of cases for the sale and purchase of land, for two reasons:
- The contracts concerned the exercise of options in the context of an existing contractual or proprietary relationship, and so different considerations applied; and
- On the true interpretation of the option provisions, time was not of the essence for paying the deposits.
The options were contained in leases protected by the 1954 Act, and so the Samarenko considerations carried much less weight. The mere exercise of the options did not impose any new fetter
on the landlord’s ability to dispose of or deal with any of the three properties because they were already encumbered by the remaining terms of the leases and any statutory continuation under the 1954 Act.
While the standard property conditions were incorporated into the contracts, the option agreements contained no provision as to whether or not time was of the essence for such payments. However, it was a precondition to the exercise of the options that payment was made of all sums under specified loan notes. The court decided that had the parties intended that valid exercise of each option was contingent on the deposit being paid no later than its exercise, they would have expressly stated it.
As a result, payment of the deposits no later than the date that each contract came into existence was not a condition of each sale contract and time was not of the essence of the due date for payment. The three options were validly exercised and binding on the defendant.
Louise Clark is a property law consultant and mediator
