Lease – Option to extend – Rule against perpetuities – Sublessee seeking to exercise option for extension of lease – Whether option relating to “interest reversionary (whether directly or indirectly)” on term of relevant lease – Whether option coming within exemption from rule against perpetuities – Claim allowed
The claimant was the sublessee of a flat in London SW7. The defendant brothers were the freehold owners of the building. In the 1940s, the then freeholder leased the building to a company for a term of 80 years from 25 December 1948. That headlease was now vested in the residents’ association for the building.
In 1981 the first defendant was registered as the proprietor of an underlease of one of the flats which was due to expire three days before the headlease. By 1987, the defendants had acquired the freehold of the building. In April 1987, they granted to the first defendant an option to extend the lease of the flat which provided: “In consideration of the sum of one pound (£1.00) … the freeholders hereby grant to the lessee the right to require … an extension lease for a term of 60 years from 25 December 2028, such right not to become exerciseable until [25 December 2008] and to cease to be exerciseable if not exercised by [20 December 2028]”.
The claimant subsequently acquired the flat and gave notice of his intention to exercise the option to extend the lease. The defendants asserted that the option was void on the grounds, inter alia, that it was void as infringing the rule against perpetuities. The claimant brought proceedings to enforce the option.
Section 9 of the Perpetuities and Accumulations Act 1964 provided: “(1) The rule against perpetuities shall not apply to a disposition consisting of the conferring of an option to acquire for valuable consideration an interest reversionary (whether directly or indirectly) on the term of a lease if— (a) the option is exercisable only by the lessee or his successors in title, and (b) it ceases to be exercisable at or before the expiration of one year following the determination of the lease”.
The defendants contended that, to come within section 9(1), an interest had to be either the freehold of the premises comprised in the lease or an existing leasehold interest superior to the lease.
Held: The claim was allowed.
An interest carved out of a superior leasehold or freehold interest could constitute “an interest reversionary (whether directly or indirectly)” on the term of a lease for the purpose of section 9(1) of the 1964 Act so that an option for a lease extension fell within section 9(1) and was exempt from the rule against perpetuities.
Section 9(1) did not in terms limit the reversionary interests to which an option could relate to existing interests. The thinking of the Law Reform Committee (when considering the rule against perpetuities in its fourth report in 1956) was reflected in section 9 of the 1964 Act. It doubtless had in mind options to acquire either existing intermediate leases or freeholds and its reasoning suggested that options, such as the option in the present case, should also be exempt from the rule against perpetuities. The committee considered that “leasehold options” should be immune from the rule on the basis that they encouraged the only person who was normally in a position to develop leasehold land (namely, the lessee) to preserve and develop it to its full capacity. If a freeholder granted a sublessee an option to call for a new lease at the expiry of his sub-lease, that would encourage the sublessee to develop the land. There was no good reason for the option in this case to be subject to the rule against perpetuities when the rule did not apply to either options for renewal contained in leases or options for lessees to acquire existing superior or freehold interests.
It was apparent from the terms of section 9(1) that a relevant reversionary interest need not be immediately expectant on the lease held by the grantee of the option. Were the position otherwise, then section 9(1) would not apply to the grant to a sublessee of an option to purchase the freehold. However, section 9(1) was applicable in such a case, as was borne out by the section’s use of the words “directly or indirectly”. It was also consistent with the Law Reform Committee’s report. An option to renew contained in a lease was unaffected by the rule against perpetuities because it would inevitably satisfy the requirements of section 9(1) and/or because section 9(1) added an extra basis on which a disposition could be exempted. Accordingly, an option granted to a lessee would be outside the rule against perpetuities if it either fell within section 9(1) or was an option for renewal contained in the lease.
Per curiam: The enactment of the Perpetuities and Accumulations Act 2009 meant that, in the future, the rule against perpetuities would not apply to options. However, the 2009 Act did not affect options granted before the Act came into force in 2010. Thus the 1964 Act would remain important for some years.
Marilyn Kennedy-McGregor (instructed by BD Laddie) appeared for the claimant; David Holland QC (instructed by Howes Percival LLP) appeared for the defendants.
Eileen O’Grady, barrister
