by Colin Sydenham and Melville Rodrigues
It is not inappropriate to liken section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 to an earthquake. Its impact on the world of land options has been discussed in Estates Gazette (February 10 1990), and the Conveyancer’s Precedents February 1990, Form 19-47. The authors believe, however, that the difficulties have been somewhat overstated in such discussion, and wish in particular to caution against uncritical insistence on the second of the Conveyancer’s Precedents.
Exercising old options
We agree that upon orthodox analysis, supported by the overwhelming weight of modern authority, an option is a standing offer by the grantor, so that upon exercise of the option by the grantee the offer is accepted and a contract of sale is created. At any rate it would be rash for property lawyers to rely on the conditional contract analysis under the new regime. It is therefore necessary to devise a new procedure for exercising old options in a way which will satisfy section 2. The revelant parts of section 2 provide as follows:
(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.
(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.
(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.
The old-style notice of exercise can easily be made to satisfy section 2(1) by incorporating all the agreed terms of the contract of sale, but it will not satisfy section 2(3), since it will not be signed by or on behalf of the grantor. What then should the grantee do?
There is a simple additional step. He will be holding the option agreement (or the part of it, if it was exchanged) signed by the grantor: this constitutes the grantor’s written offer, setting out all the agreed terms of the contract of sale. The grantee should endorse on this document, and sign, a memorandum to the effect that:
I accept the offer constituted by the within-written option agreement, so as to create a contract of sale in accordance with the terms of the agreement.
The option agreement is thus converted into a document satisfying section 2(3) as well as section 2(1): it contains offer and acceptance, and is therefore contractual; it sets out all the terms and it is signed by both parties. The grantee should not neglect to serve a notice of exercise as well, in the form required by the option agreement, and as a precaution should at the same time send a copy of the endorsed option agreement, in order to demonstrate compliance with section 2. In this way the grantee will have done everything he can to satisfy the requirements both of section 2 and of the option agreement, and in our opinion no court is likely to apply section 2 so as to strike down the resulting contract. If it be objected that the endorsed option agreement is not contractual because the offer can be accepted only by serving the prescribed notice, the answer must, in our opinion, lie in a term to be implied in the option agreement on the ground of business efficacy. The grantee must be entitled to bring a contract into being by complying with unforeseen legal formalities, provided that he also complies with the agreed formalities.
New options
New option agreements must set up some suitable procedure for exercise of the option.
The two Conveyancer’s Precedents are designed to meet this need. The first is a form of annexed agreement, which will be separately signed by the grantor at the outset and signed by the grantee on exercise. We have no criticism of this Precedent. In our view it represents a sensible method of satisfying section 2. We are surprised, however, that the accompanying note describes service of this document, once signed by the grantee, as “not strictly necessary”. It represents, after all, the acceptance of an offer, and it is elementary that acceptance must be communicated for a contract to result (see Kennedy v Thomassen [9] 1 Ch 426). As Diplock LJ put it in UDT (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 All ER 104 at p 109E (referring to the nature of a unilateral contract):
in its … more usual form, as in an option, the promisor’s [ie grantor’s] undertaking may be to enter into a synallagmatic contract with the promisee [ie grantee] on the occurrence of the event specified … and in that case the event so specified must be, or at least include, the communication by the promisee to the promisor of the promisee’s acceptance of his obligations under the synallagmatic contract.
and strict theory apart, there could not be any sense in a procedure which enabled the grantee to claim that he had exercised an option without notifying the grantor.
Binding successors of grantor
We are also surprised by the second Conveyancer’s Precedent. This is a provision to go in the option agreement, requiring the grantor to procure any successor to enter into a direct covenant with the grantee, and designed to be protected by a restriction where the land is registered. We have the following comments to make on this procedure:
(i) No express reason is given for recommending it, but it appears to be based on an assumption that once the grantor has disposed of the land the grantee needs to bring into existence a contract between himself and the grantor’s successor, for which the signature of the grantor’s successor is now essential. This, with all respect, appears to us to be a misconception. True, it is not possible in the absence of such novation for the grantee to create a contract of sale between himself and the grantor’s successor, but such a contract is not necessary for enforcement of the option. Exercise of the option creates a contract of sale between the grantee and the grantor even after the grantor has disposed of the land (see Wright v Dean [8] Ch 686), and this contract is sufficient for the grantee’s purpose, provided he has taken the necessary precautions (see below). It is sufficient because the option and its resulting contract are an equitable burden on the land, so that the contract with the grantor is enforceable against the grantor’s successor if he has taken with notice (see Du Sautoy v Symes [1967] Ch 1146 at p 1163 per Cross J). Thus the ordinary principles of property law cope with a disposal by the grantor, and enable the grantee to enforce the option against the land without any need for novation between him and the grantor’s successor.
(ii) The precautions which the grantee must take are well known. He must verify the grantor’s title and power to grant the option (not forgetting that trustees normally have no power to grant an option lasting for more than 10 years: see Settled Land Act 1925, section 51(2)). He must then protect the option by registration in the appropriate way (by notice if the land is registered, and by a C(iv) land charge if it is not) in order to make his equitable interest good against all the world.
(iii) It needs to be emphasised that the 1989 Act has made no impact on these principles. Section 2 is concerned with the formalities for the creation of land contracts, not with the passing of the burden of land contracts. If novation is necessary now for the protection of the grantee, it was equally necessary before section 2 took effect. In our experience a provision for novation was not common practice before the 1989 Act, and in our opinion there is no reason for it to become so now.
(iv) It is possible that there may be special circumstances in which it would be prudent for a grantee to seek provision for novation. In our opinion, however, the grantee will in the great majority of cases be adequately protected by the principles which we have mentioned. The machinery which this Precedent seeks to establish is cumbersome, liable to break down, and productive of unnecessary trouble and expense. It may even bring technical troubles of its own: for example, the new option would require independent registration, which might be overlooked (leading to trouble if the procedure later broke down).
We hope that property lawyers, and especially those advising grantors of options, will think twice before allowing this procedure to become common practice.
