Law of Property (Miscellaneous Provisions) Act 1989 — Vendor and purchaser — Option to purchase — Notice given by purchaser exercising option within the stipulated time — Purchaser, however, failed to complete — Whether contract on which vendor relied complied with the provisions of section 2 of 1989 Act — Whether the ‘contract for the sale . . . of an interest in land’ for the purposes of section 2 was the agreement by which the option was granted or the letter by which the option was exercised — If by the latter it did not comply with section 2 — Held that the agreement by which the option was granted was the contract within section 2 and complied with the statutory requirements
the Law of Property (Miscellaneous Provisions) Act 1989 provides that a
contract for the sale or other disposition of an interest in land can be made
only 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 —-
The terms may be incorporated in a document either by being set out in it or by
reference to some other document — 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
present case, if the relevant document for the purposes of section 2 was the
agreement by which the option was granted, there was no difficulty — The
agreement was executed in two exchanged parts, each of which incorporated all
the agreed terms and had been signed by the vendor and purchaser respectively —
If, however, the letter exercising the option was to be regarded as
constituting the contract, it was signed only by the purchaser and so did not
comply with section 2
which the problem came before the court was as follows — On the defendant
purchaser’s failure to complete, the plaintiff vendor, after serving notice to
complete and issuing a writ for specific performance, rescinded the contract —
The plaintiff obtained judgment in default of defence against the purchaser for
damages to be assessed — The second defendant in the action was the guarantor
of the defendant purchaser’s obligations — The matters now before Hoffmann J
were a summons by the plaintiff for judgment under Ord 14 against the guarantor
and a summons by the defendant purchaser to set aside the judgment against it —
The parties agreed to treat the present hearing as the trial of the action
Hoffmann J to be plain, apart from authority, that section 2 was intended to
apply to the agreement creating the option and not to the notice exercising it
— There was some authority supporting this view, for example the speech of Lord
Macnaghten in Helby v Matthews and the case of Re Mulholland’s Will Trusts — It was,
however, argued by the defendant purchaser that an option to purchase was
merely an irrevocable offer, which did not become a contract for the sale of
land until it had been accepted by the notice exercising the option — There was
some authority tending to support this view, although in different contexts,
but, as Diplock LJ pointed out in Varty v British South Africa Co, to
speak of an enforceable option as an ‘irrevocable offer’ was juristically a
contradiction in terms and could only be justified by way of metaphor or
analogy — The truth was, Hoffmann J said, that an option to purchase was a
relationship sui generis — In some ways it resembled an offer and in some ways
a conditional contract, but it did not conform precisely with either — Hoffmann
J’s conclusion was that the construction which most closely accorded with
Parliament’s intention in section 2 of the 1989 Act was to regard the agreement
granting the option as the contract for sale for the purposes of that section —
The most helpful authority in support of this view was perhaps Re Mulholland’s
Will Trusts — Judgment for plaintiff against both defendants
The following
cases are referred to in this report.
Beesley v Hallwood Estates Ltd [1961] Ch 105; [1961] 2 WLR 36; [1961]
1 All ER 90; [1961] EGD 366; (1960) 177 EG 71, CA
Griffith v Pelton [1958] Ch 205; [1957] 3 WLR 522; [1957] 3 All ER 57,
CA
Helby v Matthews [1895] AC 471
K
(Enduring Powers of Attorney), In re [1988] Ch 310;
[1988] 2 WLR 781; [1988] 1 All ER 358
Kennewell
v Dye [1949] Ch 517; [1949] 1 All ER 881
Laybutt v Amoco Australia Pty Ltd (1974) 48 ALJR 492
London
& South Western Railway Co v Gomm (1882)
20 ChD 562
Mulholland’s
Will Trusts, Re [1949] 1 All ER 460
Richards v Creighton Griffiths (Investments) Ltd [1973] EGD 205;
(1972) 225 EG 2104
Sainsbury
(J) plc v O’Connor (Inspector of Taxes) [1990]
STC 516
United
Scientific Holdings Ltd v Burnley Borough
Council [1978] AC 904; [1977] 2 WLR 806; [1977] 2 All ER 62; (1977) 33
P&CR 220; [1977] EGD 195; 243 EG 43 & 127, HL, [1977] 2 EGLR 61
Varty v British South Africa Co [1965] Ch 508; [1964] 3 WLR 698;
[1964] 2 All ER 975, CA
The plaintiff
in the action was the vendor, Trevor David Spiro. The property subject to the
option to purchase was in Finchley, North London, and the price was £745,000.
The first defendant was the purchaser, Glencrown Properties Ltd, and the second
defendant was the first defendant’s guarantor, Bennoy Berry.
Beverly-Ann
Rogers (instructed by Denton Hall Burgin & Warrens) appeared on behalf of
the plaintiff; Michael Douglas (instructed by Paul Shrank & Co) represented
the defendants.
Giving
judgment, HOFFMANN J said: This is an action for damages for breach of a
contract to buy land. On November 14 1989 the plaintiff granted an option to
the first defendant (‘the purchaser’) to buy a property in Finchley for
£745,000. The option was exercisable by notice in writing delivered to the
vendor or his solicitors by 5 pm on the same day. The purchaser gave a notice
exercising the option within the stipulated time. He failed to
for specific performance, rescinded the contract. The second defendant, Mr
Berry, is guarantor of the purchaser’s obligations. On May 1 1990 the vendor
obtained judgment in default of defence against the purchaser for damages to be
assessed. There are now before me a summons by the vendor for judgment under
RSC Ord 14 against Mr Berry as guarantor and a summons by the purchaser to set
aside the judgment against it. Since both summonses raise the same short point
of law and there are no other issues in the case, the parties have agreed to
treat this hearing as the trial of the action.
The only
question for decision is whether the contract upon which the vendor relies
complied with the provisions of section 2 of the Law of Property (Miscellaneous
Provisions) Act 1989, which came into force on September 27 1989, some seven
weeks before the grant and exercise of the option. It is a question which has
produced a lively debate in conveyancing journals. The relevant provisions are
as follows:
2(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.
If the
‘contract for the sale . . . of an interest in land’ was for the purposes of
section 2(1), the agreement by which the option was granted, there is no
difficulty. The agreement was executed in two exchanged parts, each of which
incorporated all the terms which had been agreed and had been signed by or on
behalf of the vendor and purchaser respectively. But the letter which exercised
the option was of course signed only on behalf of the purchaser. If the
contract was made by this document, it did not comply with section 2.
Apart from
authority, it seems to me plain enough that section 2 was intended to apply to
the agreement which created the option and not to the notice by which it was
exercised. Section 2, which replaced section 40 of the Law of Property Act
1925, was intended to prevent disputes over whether the parties had entered
into a binding agreement or over what terms they had agreed. It prescribes the
formalities for recording their mutual consent. But only the grant of the
option depends upon consent. The exercise of the option is a unilateral act. It
would destroy the very purpose of the option if the purchaser had to obtain the
vendor’s countersignature to the notice by which it was exercised. The only way
in which the concept of an option to buy land could survive section 2 would be
if the purchaser ensured that the vendor not only signed the agreement by which
the option was granted but also at the same time provided him with a
countersigned form to use if he decided to exercise it. There seems no
conceivable reason why the legislature should have required this additional
formality.
The language
of section 2 places no obstacle in the way of construing the grant of the
option as the relevant contract. An option to buy land can properly be
described as a contract for the sale of that land conditional upon the exercise
of the option. A number of eminent judges have so described it. In Helby v
Matthews [1895] AC 471, which concerned the sale of a piano on
hire-purchase, Lord Macnaghten said:
The contract,
as it seems to me, on the part of the dealer was a contract of hiring coupled
with a conditional contract or undertaking to sell. On the part of the customer
it was a contract of hiring only until the time came for making the last
payment.
In Griffith
v Pelton [1958] Ch 205, which raised the question of whether the
benefit of an option was assignable, Jenkins LJ said at p 225:
An option in
gross for the purchase of land is a conditional contract of such purchase by the
grantee of the option from the grantor, which the grantee is entitled to
convert into a concluded contract of purchase, and to have carried to
completion by the grantor, upon giving the prescribed notice and otherwise
complying with the conditions upon which the option is made exercisable in any
particular case.
In the context
of section 2, it makes obvious sense to characterise it in this way. So far,
therefore, the case seems to me to be clear.
The purchaser,
however, submits that I am constrained by authority to characterise an option
as an irrevocable offer which does not become a contract for the sale of land
until it has been accepted by the notice which exercises the option. It follows
that the ‘contract for the sale . . . of an interest in land’ within the
meaning of section 2 can have been made only by the letter.
The first case
upon which the purchaser relies is Helby v Matthews; the very
case in which, as I have said, Lord Macnaghten characterised an option to
purchase as a conditional contract to sell. Lord Herschell LC and Lord Watson,
however, expressed themselves rather differently. Lord Herschell said:
. . . when a
person has, for valuable consideration bound himself to sell to another on
certain terms, he may, in popular language, be said to have agreed to sell,
though an agreement to sell in this sense, which is in truth merely an offer
which cannot be withdrawn, certainly does not connote an agreement to buy, and
it is only in this sense that there can be said to have been an agreement to sell
in the present case.
Lord Watson
said:
In order to
constitute an agreement for sale and purchase, there must be two parties who
are mutually bound by it. From a legal point of view the appellant was in
exactly the same position as if he had made an offer to sell on certain terms,
and had undertaken to keep it open for a definite period.
It is,
however, important to read these statements in the context in which they were
made. The question in Helby v Matthews was whether, during the
currency of the hire, the hirer had ‘agreed to buy’ the goods within the
meaning of the Factors Act 1889. The purpose of the Factors Act was to give a
buyer, who was in possession but had not yet acquired title, the power to
confer title upon a third party who took in good faith. It is not surprising
that the House of Lords decided that a person who had at the relevant time no
obligation to acquire or pay for the goods had not ‘agreed to buy’ them within
the meaning of the Act. The language and purpose of the statute requires one to
look at the arrangement from the buyer’s point of view. And the essence of an
option is that while the seller may be said to be conditionally bound, the
buyer is free. In the Helby v Matthews context it was therefore
true to say that, pending exercise of the option, the position of the buyer was
as if he had been made an offer which the seller could not withdraw.
But the
concept of an offer is of course normally used as part of the technique for
ascertaining whether the parties have reached that mutual consent which is a
necessary element in the formation of a contract. In this primary sense, it is
of the essence of an offer that by itself it gives rise to no legal
obligations. It was for this reason that Diplock LJ said in Varty v British
South Africa Co [1965] Ch 508 at p 523:
To speak of
an enforceable option as an ‘irrevocable offer’ is juristically a contradiction
in terms, for the adjective, ‘irrevocable’ connotes the existence of an
obligation on the part of the offeror, while the noun ‘offer’ connotes the
absence of any obligation until the offer has been accepted.
This does not
mean that, in Lord Diplock’s opinion, Lord Herschell and Lord Watson were
speaking nonsense. They were not using ‘offer’ in its primary sense but, as
often happens in legal reasoning, by way of metaphor or analogy. Such metaphors
can be vivid and illuminating but prove a trap for the unwary if pressed beyond
their original context. As I said recently in another connection, K (Enduring
Powers of Attorney), In re [1988] Ch 310 at p 314:
. . . there
are dangers in reasoning from the metaphor as if it expressed a literal truth
rather than from the underlying principle which the metaphor encapsulates.
Here the
underlying principles are clear enough. The granting of the option imposes no
obligation upon the purchaser and an obligation upon the vendor which is
contingent upon the exercise of the option. When the option is exercised,
vendor and purchaser come under obligations to perform as if they had concluded
an ordinary contract of sale. And the analogy of an irrevocable offer is, as I
have said, a useful way of describing the position of the purchaser between the
grant and exercise of the option. Thus in the recent case of J Sainsbury plc
v O’Connor (Inspector of Taxes) [1990] STC 516 Millett J used it to
explain why the grantee of an option to buy shares did not become the
beneficial owner until he had exercised the option.
But the
irrevocable offer metaphor has much less explanatory power in relation to the
position of the vendor. The effect of the ‘offer’ which the vendor has made is,
from his point of view, so different from that of an offer in its primary sense
that the metaphor is of little assistance. Thus in the famous passage in London
& South Western Railway Co v Gomm (1882) 20 ChD 562 at p 582 Sir
George
land confers an interest in the land upon the grantee:
The right to
call for a conveyance of the land is an equitable interest or an equitable
estate. In the ordinary case of a contract for purchase there is no doubt about
this, and an option for repurchase is not different in its nature. A person
exercising an option has to do things, he has to give notice of his intention
to purchase, and to pay the purchase money; but as far as the man who is liable
to convey is concerned, his estate or interest is taken away from him without
his consent, and the right to take it away being vested in another, the
covenant giving the option must give that other an interest in the land.
The fact that
the option binds the vendor contingently to convey was the reason why an option
agreement was held to fall within section 40 of the Law of Property Act 1925:
see Richards v Creighton Griffiths (Investments) Ltd (1972) 225
EG 2104, where Plowman J rejected a submission that it was merely a contract
not to withdraw an offer. Similarly in Weeding v Weeding (1861) 1
J&H 424) Page-Wood V-C held that the grant of an option to buy land was
sufficient to deem that land converted into personalty for the purposes of the
grantor’s will, even though the option had not yet been exercised when he died.
The Vice-Chancellor said:
I cannot
agree with the argument that there is no contract. It is as much a conditional
contract as if it depended on any other contingency than the exercise of an
option by a third person, such as, for example, the failure of issue of a
particular person.
Thus, in
explaining the vendor’s position, the analogy to which the courts usually
appeal is that of a conditional contract. This analogy might also be said to be
imperfect, because one generally thinks of a conditional contract as one in
which the contingency does not lie within the sole power of one of the parties
to the contract. But this difference from the standard case of a conditional
contract does not destroy the value of the analogy in explaining the vendor’s
position. So far as he is concerned, it makes no difference whether the
contingency is within the sole power of the purchaser. The important point is
that ‘his estate or interest is taken away from him without his consent’.
Griffith v Pelton, to which I have already referred, was another case
in which the irrevocable offer analogy was unhelpful. The rule is that an offer
in the primary sense can be accepted only by the person to whom it is made. The
offeree cannot assign to someone else the right to accept an unaccepted offer.
In explaining why the benefit of an option could be assigned, so that
someone other than the grantee could accept it, Jenkins LJ (in the passage
which I have already cited) characterised the option as a conditional contract
and said:
The
conditional contract constituted by the grant of the option is a chose in
action the benefit of which can (if the terms of the contract are such as to
show that it is not merely personal to the grantor) be assigned by the grantee
to anyone he chooses, subject to any restriction imposed by the contract as to
the persons in whose favour assignment is permissible.
Similarly in
the Australian case of Laybutt v Amoco Australia Pty Ltd (1974)
48 ALJR 492, following Kennewell v Dye [1949] Ch 517, the
conditional contract analogy was used by Gibbs J to explain why an option could
be enforced against the estate of the grantor, notwithstanding the rule that an
ordinary offer lapses upon the death of the offeror.
The
purchaser’s argument requires me to say that ‘irrevocable offer’ and ‘conditional
contract’ are mutually inconsistent concepts and that I must range myself under
one or the other banner and declare the other to be heretical. I hope that I
have demonstrated this to be a misconception about the nature of legal
reasoning. An option is not strictly speaking either an offer or a conditional
contract. It does not have all the incidents of the standard form of
either of these concepts. To that extent it is a relationship sui generis.
But there are ways in which it resembles each of them. Each analogy is in the
proper context a valid way of characterising the situation created by an
option. The question in this case is not whether one analogy is true and the
other false, but which is appropriate to be used in the construction of section
2 of the Law of Property (Miscellaneous Provisions) Act 1989.
There is only
one case in which, as it seems to me, the adoption of the irrevocable offer
metaphor was allowed to dictate the result without regard to the context. This
was Beesly v Hallwood Estates Ltd [1960] 1 WLR 549 in which
Buckley J decided that an option was not a ‘contract . . . to convey or create
a legal estate’ within the meaning of that part of the definition of an estate
contract in section 10(1) of the Land Charges Act 1925. He arrived at this
conclusion on the ground that the option was not a contract to convey but only
an irrevocable offer. It seems to me, with respect to Buckley J, that this was
a misuse of the irrevocable offer metaphor. The purpose of including estate
contracts in the Land Charges Act 1925 was to enable a purchaser to obtain
notice of contracts which created interests binding upon the land. For this
purpose, as Sir George Jessel MR pointed out in Gomm’s case, there is no
difference between an option and an ordinary contract of sale. In both cases
the land is bound by an agreement which entitles a third party, either
conditionally or unconditionally, to demand a conveyance. A purposive
construction of section 10(1) therefore requires that one characterise the
option from the point of view of its effect on the land in the hands of the
grantor. For this purpose, it is more appropriate to regard it as a conditional
contract than an irrevocable offer. In fact, Buckley J was able to give effect
to the manifest intention of Parliament because the definition of an estate
contract went on to say ‘including a contract conferring . . . a valid option
of purchase’. He was therefore able to hold that an option was an estate
contract, but only by treating the word ‘including’ as extending the meaning of
the previous words. In my judgment this was unnecessary. The option would have
been an estate contract even without the additional words.
Mr Douglas,
for the purchaser, relied strongly upon the decision of the House of Lords in United
Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 as
authority for the universal application of the irrevocable offer
characterisation. That case concerned the rule that the conditions for the
exercise of an option, including any time stipulations, must be strictly
complied with. The rule had been developed by analogy with the rule that an
ordinary offer can be accepted only by strict compliance with the condition
which it lays down. The Court of Appeal had extended the analogy to a notice under
a rent review clause in a lease. The House of Lords held that this further
extension was unjustifiable. Their lordships distinguished the ordinary option
to purchase or to extend the lease from the activation of a rent review clause.
In the former case, said Lord Simon of Glaisdale:
. . . the
parties, on the exercise of the option, are brought into a new legal
relationship. It was argued . . . that the rent review clauses were also such
unilateral terms. I cannot agree. The operation of the rent review clauses does
not at all change the relationship of the parties, which remains that of
landlord and tenant throughout the currency of the lease whether or not the
machinery of the rent review clauses is operated.
The reasoning
of the other Law Lords was similar. It was rightly submitted on behalf of the
purchaser in this case that the House of Lords thereby endorsed the irrevocable
offer analogy for ordinary options. But the endorsement was in the context of
the rule that there must be strict compliance with the conditions of
acceptance. The case is no authority for extending its application in a
different context.
Perhaps the
most helpful case for present purposes is Mulholland’s Will Trusts, Re [1949]
1 All ER 460. A testator had let premises to the Westminster Bank on a lease
which included an option to purchase. He appointed the bank his executor and
trustee and after his death the bank exercised the option. It was argued for
his widow and children that the bank was precluded from exercising the option
by the rule that a trustee cannot contract with himself. Wynn-Parry J was
pressed with the irrevocable offer metaphor, which, it was said, led inexorably
to the conclusion that when the bank exercised the option it was indeed
entering into a contract with itself. But the learned judge held that if one
considered the purpose of the self-dealing rule, which was to prevent a trustee
from being subjected to a conflict of interest and duty, the only relevant
contract was the grant of the option. The rule could only sensibly be applied
to a consensual transaction. While for some purposes it might be true to say
that the exercise of the option brought the contract into existence, there
could be no rational ground for applying the self-dealing rule to the
unilateral exercise of a right granted before the trusteeship came into
existence. The learned judge quoted the passage I have cited from Sir George
Jessel MR in Gomm’s case and said:
As I
understand that passage, it amounts to this, that, as regards this option,
there was between the parties only one contract, namely the contract created by
the provisions in the lease which I have read creating the option. The notice
exercising the option did not lead, in my opinion, to the creation of any fresh
contractual relationship between the parties, making them for the first time
vendors and purchasers, nor did it bring into existence any right in addition
to the right conferred by the option.
The contrast
between this passage and my citation from Lord Simon of Glaisdale in United
Scientific Holdings is a striking illustration of how in different contexts
the law can accommodate
In my judgment
there is nothing in the authorities which prevents me from giving section 2 the
meaning which I consider to have been the clear intention of the legislature.
On the contrary, the purposive approach taken in cases like Mulholland encourages
me to adopt a similar approach to section 2. And the plain purpose of section 2
was, as I have said, to prescribe the formalities for recording the consent of
the parties. It follows that, in my view, the grant of the option was the only
‘contract for the sale or other disposition of an interest in land’ within the
meaning of the section and the contract duly complied with the statutory
requirements. There must be judgment for the plaintiff against both defendants
with costs.
