Contracts for sale are often subject to conditions that must be satisfied before a longstop date in the future, failing which the parties will have the right to rescind. Many contracts stop there and do not state whether the parties can refuse to complete if the condition is satisfied after the longstop date and, if so, in what circumstances.
McGahon v Crest Nicholson Regeneration Ltd [2010] EWCA Civ 842; [2010] 30 EG 63 (CS) illustrates the difficulties that arise in such cases. The parties’ contract for the sale of a new apartment in a mixed-use development was conditional on the grant of a headlease before 1 June 2008, failing which either party was entitled to rescind the contract.
Contracts for sale are often subject to conditions that must be satisfied before a longstop date in the future, failing which the parties will have the right to rescind. Many contracts stop there and do not state whether the parties can refuse to complete if the condition is satisfied after the longstop date and, if so, in what circumstances.
McGahon v Crest Nicholson Regeneration Ltd [2010] EWCA Civ 842; [2010] 30 EG 63 (CS) illustrates the difficulties that arise in such cases. The parties’ contract for the sale of a new apartment in a mixed-use development was conditional on the grant of a headlease before 1 June 2008, failing which either party was entitled to rescind the contract.
The buyers were unable to obtain a mortgage because the downturn in the property market. Recognising that they were in danger of losing their deposit, they asked for a reduction in the price, without realising that they were entitled to rescind as a result of a delay in completing the headlease.
The buyers began to suspect that something was amiss at the end of September. They asked the seller to prove that the headlease had been granted before 1 June 2008, failing which they purported to exercise their right to rescind. The seller confirmed that the headlease had been granted on 4 September 2008 and claimed that the contract had become unconditional before the buyers had purported to rescind.
The Court of Appeal noted that the contract for sale did not make time of the essence of the grant of the headlease and did not state whether a notice to rescind would be effective if it was served after the headlease had been granted. Since the contract did not make the position clear, the court would have to interpret it.
The court agreed with the seller that it would be uncommercial to hold that the right to rescind continued to subsist after the date of the grant of the headlease. This would enable the parties to sit back and wait to see how the market moved before deciding what to do.
If the market moved in the seller’s favour, the seller might rescind the contract many months later, return the deposit to the buyers and sell to another party at a higher price. Conversely, the buyers could wait to see if the property market fell, and then rescind, recover their deposit and buy a better apartment elsewhere.
Consequently, the court held that the buyers had been entitled to serve a notice of rescission while the condition remained unperformed but that their right to rescind fell away after the grant of the headlease.
The case highlights the importance of ensuring that a right to rescind is unambiguous. Instead of conferring such a right if a condition has not been satisfied by a specified date, it would be better to confer it “at any time after the longstop date but before the condition has been satisfied” – if this is what the parties intend.
Allyson Colby is a property law consultant
