A great many disputes about options focus on whether an option notice was timeously served, or on whether time was of the essence of completion of the subsequent transaction. A recent House of Lords decision reminds us that parties to options should state that time is of the essence of completion, if that is what is required.
Simmers v Innes [2008] UKHL 24; [2008] PLSCS 105 concerned an option granted in a shareholders’ agreement relating to a farm in
The argument turned on the relationship between apparently conflicting clauses in the shareholders’ agreement. The first granted the option holder the right to buy back the property on a fixed date. However, a subsequent clause, relating to the duration and termination of the shareholders’ agreement, stipulated that the agreement would terminate automatically should the option holder fail to serve notice of his intention to reacquire the farm before the fixed date, without imposing any requirement that the transaction must also have been completed at the same time.
The lords accepted that it was unusual to find a provision for the service of a notice to exercise a buy-back option in a clause that dealt with the termination of the parties’ business arrangements. However, the notion that the option holder was required to exercise the option merely by proffering the money on the fixed date was nothing short of absurd. It would also make the subsequent provision for the service of a notice pointless.
The buy-back provisions were workable only if a notice was served and a valuation was made before the buy-back was completed. Consequently, necessity and commercial common sense dictated that the court must imply a term into the clause granting the option that, in order to exercise the option, the option holder must serve a notice before the date specified in that clause.
The law of Scotland, England and Wales is that time is not of the essence of a contract for the sale of land, unless the contract specifies that it is, or the nature of the subject matter of the contract or the surrounding circumstances dictates otherwise: United Scientific Holdings Ltd v Burnley Borough Council [1977] 2 EGLR 61; (1977) 243 EG 43 and 127. Consequently, failure to pay the price on the appointed date does not generally entitle a seller to rescind.
The shareholders’ agreement did not expressly provide that time was of the essence of completion of the buy-back arrangement and nothing in the agreement or in the surrounding circumstances upset the general rule. The agreement had been inartistically drafted, but the suggestion that time was of the essence was incompatible with the provision that the agreement would end on the date fixed by the parties unless a notice exercising the option had been served.
Allyson Colby is a property law consultant
