Buy-back option – Construction of agreement – Shareholders’ agreement – Appellant providing finance for respondent’s business – Land and shares transferred to appellant – Date provided prior to notice served – Appellant serving notice – Dispute over valuation of land in connection with purchase price – Whether specific performance available to appellant – Whether time of the essence for completion — Whether valid valuation obtained – Appeal dismissed
The respondent ran a pig farming business in Scotland, which went into receivership in 1998. The appellant agreed to provide £2.5m under a shareholders’ agreement in order to rescue the business. The agreement provided for the land to be transferred to the appellant, along with 50% of the shares in a new company that would take over the business and lease the land from the appellant. A buy-back option entitled the respondent, upon serving notice, to repurchase the appellant’s shares and the land on 31 March 2004 at a price to be calculated in accordance with a formula set out in the agreement, which included provision for a valuation of the land by a valuer. If the notice had not been served prior to 31 March 2004, the agreement would terminate on that date.
The business continued to fail and, in February 2004, the appellant presented a petition to wind up the company. The respondent served notice to exercise the buy-out option. A valuer was appointed to value the land but the parties disagreed as to the basis for valuation. The valuer proceeded to give both a vacant possession value of £3.705m (the appellant’s basis) and a value of £2.038m subject to the lease (the respondent’s basis).
The parties continued to disagree. The respondent applied for an order for specific performance requiring completion of the sale for a consideration of £2.5m. The judge refused to make the order, on the grounds that: (i) time was of the essence for completion of the sale on 31 March 2004; and (ii) there had been no effective valuation for the purposes of the agreement since the valuer had put forward two values. He further held that vacant possession was the correct valuation basis under the agreement.
The respondent conceded the valuation point, but appealed against the refusal of specific performance. Allowing the appeal, the Inner House of the Court of Session held that the option had been exercised by the service of the notice, and that although time was of the essence for such service, it was not of the essence for completion, in line with the ordinary position for completion of an agreement for the sale of land. IT also held that the valuer’s valuation was valid once it was agreed that valuation should be on a vacant possession basis.
The appellant appealed. He submitted that the option had been exercised not by service of a notice but by tender of the purchase money, and that in any event the terms of the agreement rebutted the normal rule that time was not of the essence for completion.
Held: The appeal was dismissed.
(1) The buy-back option was exercised by the service of a notice. The buy-back provisions could operate only in the event of a notice, a valuation of the appellant’s shares and the land, and completion by the normal procedure of the buyer paying the purchase price and the seller executing all relevant documents. Commercial common sense and necessity required a term to be implied whereby, in order to exercise the option, the respondent had to serve a notice before 31 March 2004. That conclusion was supported by the fact that the agreement had provided for what would happen should a notice not be served prior to that date. The appellant’s interpretation would render the provision for a notice pointless.
Time would not be of the essence for completion of a bilateral sale agreement unless the contract so provided or the surrounding circumstances so indicated: Rodger (Builders) Ltd v Fawdry 1950 SC 483, Visionhire Ltd v Britel Fund Trustees Ltd [1992] 1 EGLR 128; [1992] 10 EG 95 and United Scientific Holdings Ltd v Burnley Borough Council [1977] 2 EGLR 61; (1977) 243 EG 43 and 127 applied. The agreement did not expressly provide that time was of the essence for completion on 31 March 2004. The agreement would terminate on that date unless a notice exercising the option had been served; but if such a notice had been served, it would continue in force until the option had either been completed or rescinded. The terms of the agreement supported, rather than rebutted, the presumption that time was not of the essence for completion. The fact that the notice could be served at any time up to and including 30 March 2004 showed that the parties had not envisaged that completion had to take place on 31 March 2004, since time would be needed for the appellant to consider and prepare the necessary documentation and for a valuation to be obtained. Moreover, the nature of the transaction as a medium-term financing arrangement for a business in difficulty militated against time being of the essence; the purpose of the transaction was to enable the respondent to recover his business and land back provided that he paid the required sum.
(2) The valuer had valued the property on the correct basis, namely with vacant possession, and his valuation was valid under the agreement. The fact that he had also valued the land on another basis did not vitiate the effectiveness of the vacant possession valuation. Where a contract provided for a payment to be made according to a valuation, and the parties disagreed as to the proper basis of that valuation, it was not unwise for a valuer to give valuations on each of the two alternative bases. He should, however, indicate his preference, since there would otherwise be no definitive valuation in the absence of a subsequent agreement or court ruling.
Christopher Haddow QC and Nick Gardiner (instructed by Brodies LLP) appeared for the appellant; Jonathan Mitchell QC and Michael Stuart (instructed by Maclay Murray & Spens LLP) appeared for the respondent.
Sally Dobson, barrister
