Failure to protect the priority of an option to purchase unregistered land, by registering an estate contract, renders the option void as against a subsequent purchaser who steps in and buys the land for money or money’s worth. In Coles (Trustees of the Ward Green Working Men’s Club) v Samuel Smith Old Brewery (Tadcaster) (an unlimited company) [2007] PLSCS 247, the High Court was asked to decide whether a landowner could sidestep its obligations to convey land to the grantee of an option by transferring the land to a subsidiary company, at an undervalue, before it could be sold to the grantee of the option.
The original landowner argued that it could not be ordered to transfer the land to the grantee of the option because it had parted with ownership of the land. The subsidiary company argued that the option was void as against it because the option had not been registered as a C(iv) land charge. They both argued that there was nothing wrong in taking advantage of the rights conferred on them by statute and relied upon the decision in Midland Bank Trust Co Ltd v Green (No1) [1981] AC 513, which established that the Land Charges Act 1972 does not require purchasers to act in good faith or to pay market value for the land.
The Court of Appeal agreed that the judge had been right to refuse to make an order for specific performance against the transferee. The transaction between the original landowner and the transferee was not a sham; it involved a genuine sale to a genuine company at a genuine price, even though the transferee had paid considerably less than the land was worth.
However, the original landowner remained liable in contract to the grantee of the option. The transferee of the land was a wholly owned subsidiary company, and the High Court decision in Jones v Lipman [1962] 1 All ER 832 established that a court could order specific performance against a party that could cause completion of a contract because it had the power to compel the owner of the land to convey that land to another party. The court would therefore grant an order for specific performance requiring the original landowner to procure the transfer of the property to the grantee of the option.
The grantee of the option was fortunate that the land had been transferred to a subsidiary company. The decision reminds us that option holders must protect their interests by registration. Indeed, some landowners insert clauses in option agreements providing that the option granted will become void if it is not protected by registration within one month. Buyers should not accept such provisions, or comply without fail. The textbooks suggest that these clauses are designed to act as an incentive to register the option. They may well do so, but sellers that include such provisions are usually motivated by the prospect of being released from liability under an option that the buyer omits to register.
Allyson Colby is a property law consultant
