A well-drafted option agreement will specify the dates upon which the option period begins and ends. Special care is needed if the period during which the option may be exercised depends upon an external trigger. The option holder must be able to ascertain exactly when the option is exercisable because time is of the essence when exercising an option to buy land.
Commission for the New Towns v Terrace Hill (Stockton) Ltd [2007] EWHC 3094 (Ch); [2008] PLSCS 2 illustrates some of the difficulties that can arise when the period during which the option is exercisable is triggered by circumstances beyond the control of the option holder, whose existence can be verified only by the grantor of the option.
The option granted by the Commission for New Towns was exercisable once the Commission had served a notice on the option holder confirming that various preconditions had been satisfied or (if earlier) on the date upon which the Commission’s notice “ought to have been served”. The parties recognised that this might cause difficulty, and so the Commission agreed to serve the requisite notice timeously and to keep the option holder reasonably informed.
The Commission subsequently wrote to the option holder to confirm, in effect, that the pre-conditions had been satisfied or waived – without actually serving the requisite notice that would have informed the option holder that the option period had started to run. The option holder asked for confirmation of the position and even managed to secure a letter confirming that the option period would not begin until the requisite notice was served. That notice was eventually served on 28 March 2007, when the Commission confirmed that the preconditions had been satisfied on 5 October 2004.
The Commission argued that the option period had expired. The option holder argued that there was an “estoppel by convention” because the Commission had agreed that the option period would not begin until the requisite notice was served. It argued that it would be inequitable if the Commission were to resile from that position.
An estoppel by convention arises where the parties to a contract, by their course of dealing, put a particular interpretation on the contract, on the face of which each of them, to the knowledge of the other, acts and conducts their mutual affairs. The parties are then bound by that interpretation, in the same way as they would be bound by a variation of the contract. It was unnecessary to enquire whether their interpretation is correct or whether they were mistaken. It suffices that the parties have put their own interpretation on the contract and the court will not allow them to resile from that.
After weighing the evidence, the judge decided that neither party had acted on the assumption that the option period would commence only when the requisite notice had been served. The option period had therefore begun when the notice “ought to have been served”, and the option period had expired.
Allyson Colby is a property law consultant
