Option agreement – Defendant having option to purchase property on payment of specified sum – Terms requiring exercise of option within 10 years – Agreement providing for extension of option period on payment of additional sum – Defendant notifying claimant of wish to extend period – Defendant paying additional sum after expiry of option period – Whether option agreement validly extended by serving notice – Claim dismissed
The claimant and his late wife were joint owners of a farm comprising 21.53 acres of agricultural land with development potential. They entered into negotiations with the defendant developer culminating in an agreement dated 17 September 1992, which granted the defendant an option to purchase the property.
The option was for 10 years from the date of the agreement upon payment of £50,000. The defendant was entitled to extend the option period for a further 5 years if, during the last year of the option period, it served a notice in writing on the claimant of its intention to extend the period and paid an additional sum of £20,000.
The claimant’s wife died in 1998 and her interest in the property passed to the claimant. On 12 September 2002, a few days before the expiry of the option period, the defendant’s solicitor wrote to the claimant’s solicitor stating that it would be sending £20,000 for the extension of the option for a further five years. It received no reply, but, on 17 September, the sum of £20,000 was transferred to the claimant’s bank account and his solicitor acknowledged receipt of the payment.
The claimant subsequently stated that the option period had ended on 16 September and was not extended to the following day and, thus, the option had not been validly renewed. The defendant relied upon the letter of 12 September as giving the requisite notice of its intention to extend the option. It argued that it was not required to pay the £20,000 within the original 10-year option period. The claimant sought a declaration that the option agreement had ceased and determined.
Held: The appeal was dismissed.
The question for the court was how, on an objective appraisal, a reasonable recipient with knowledge of the terms of the option agreement would have understood the letter of 12 September. Taking into account the objective context of the letter, the question was what a reasonable person in the circumstances of the actual parties would have had in mind: Lancecrest Ltd v Asiwaju [2005] EWCA Civ 117; [2005] 1 EGLR 40; [2005] 16 EG 146 and Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] 1 EGLR 57; [1997] 24 EG 122; [1997] 25 EG 138 applied.
Under the terms of the option agreement, the right to extend the option period had to be exercised by a notice in writing, served by the defendant upon the claimant. There was no doubt that a reasonable recipient of the letter would have understood from it that the defendant had decided to extend the option period. It was only on that basis that the question of the £20,000 arose. Although the letter focused was on the payment arrangements, it would have conveyed unambiguously to the recipient that the defendant required the option to be extended. It therefore left the reasonable recipient in no doubt that the right reserved was being exercised and constituted a valid notice under the terms of the option agreement. In all the circumstances, the option period had been validly extended for five years.
Anthony Trace QC and Louise Hutton (instructed by Everett Tomlin Lloyd & Pratt) appeared for the claimant; John Male QC (instructed by Wragge & Co) appeared for the defendant.
Eileen O’Grady, barrister
