Exercising options over land and paying deposits
Michael Higgin, who leads our Strategic Land team, comments on the IAA Vehicle Services Limited case and looks at the treatment of conditional completions and the payment of deposits in relation to option exercise contracts.
This case related to an option to purchase the reversion of three leased properties by their tenant, buying from their landlord. The leases were granted in 2013, with the option exercisable on prices which were pre-agreed at that time and could have been exercised at some time during the 10-year term of the relevant leases. As is often the way, they were exercised with only one week to go. There was no dispute in this case between the parties about the validity of the service of the notices, or the way in which they were served. The case was heard in December 2023 and the judgment was published quickly, on 5 January 2024.
The issue in the case was whether the obligation to pay a deposit on the day of service of the option notices was a condition, or was its non-payment a breach of sufficient severity to enable the seller to cancel the contract, which lawyers describe as a “repudiatory breach”.
The option contract contained four express conditions described as such, all of which were complied with and the Judge in the High Court said that it was material that payment of the deposit was not included in the list of “conditions”. The issue was therefore whether the breach occasioned by non-payment of the deposit was sufficiently serious to be “repudiatory” or not.
The Judge drew a distinction between options where there is no existing relationship between the parties, (such as we see in an option to buy development land where the land is still being farmed by the vendor), and this case, where the lease was ongoing between the parties throughout the ten year option period in their relationship of landlord and tenant. While ordinarily non-payment of a contract deposit was very serious and could be treated as a repudiatory breach, the Judge said that this was a special type of case where that would not apply. Accordingly, it was held by the Judge that the seller was not entitled to serve notice to terminate the contract two weeks after the option notices had been served and one week after the expiry of the option period when the leases ran out (by when it was to later to serve a second notice and pay the deposit). The Judge therefore granted an order of “specific performance” that the seller must conclude the sales to the purchasing tenant.
Things to Note
All of the law relating to options and their exercise is detailed, and it is important that competent legal advice is taken to ensure that notices are produced and then served correctly. The law sets a high standard on compliance with the specified processes for exerise of an option, as an option notice makes a contact ‘unilaterally’, at the point of service of notice. Seemingly minor errors in option notices can lead to them being held to be invalid. In this case they were done properly.
What wasn’t done properly in this case was paying the deposit “by direct credit” and “no later than the date of the contract”. The lawyers exercising the option for their client could and should have contacted the landlord/seller in advance to obtain bank account details to which the money could be paid by direct credit, which would have avoided much of the risk which gave rise to the case. If the landlord/seller had not provided the account details after they had been requested, it would have been much harder for them to make a case for non-compliance with the terms of the contract, if they had wilfully frustrated performance by the buyer with a necessary step. We note that paying by cheque or bank draft (which the buyer could have done in the face of no co-operation) was not specified by the option, and so was not a possibility.
Counsel in the case and the Judge noted that the value of the property had gone up materially in the ten years that the leases had been running, which meant that the seller was keen to strike down the purported contract if it could, to avoid an immediate profit accruing to the tenant/buyer. However, that was the deal which they had struck at the time. Parties should consider carefully when entering into options how the basis of the price is to be assessed. Presumably the relationship between the rent and the option price was something which the parties had considered when the bargains were first freely struck, even if they seemed unattractive to the landlord ten years later.
In this case the notices were correctly drafted and served and it is important that competent lawyers are used for this purpose to protect you from mistakes – or to give you a right of recourse if necessary.
The option referred to the properties as being “freehold” even though one of them was a leasehold. This was not held to be significant in the case, but it is an error which is best avoided by proper “lawyering” when entering into options, because it could well have consequences, such as if landlord consent is needed to the assignment of a leasehold property and the parties would rather do something other than what the “standard conditions” say.
If the landlord/seller had wanted the deposit to be paid as a condition of effective service of an option notice then they should have specified that in the contract, rather than relying upon the standard contract conditions which were incorporated into the option contract.
The seller could have served notice to make ‘time of the essence’ for payment of the deposit, rather than seeking immediately to terminate the contract, and could have then terminated the contract if the deposit had not been paid in accordance with the specified timescale. However, the seller was clearly keen to try to escape the contract, rather than to push for its performance, so its tactical decision made sense. Presumably the increase in value of the property in the previous ten years meant that it was worth “chancing its arm” with immediate repudiation.
Finally, the parties’ total costs in the case amounted to £80,000.00 for a case which the Judge said had been dealt with quickly and efficiently, so it is another illustration of the costs of litigating.
There is a window for appeal to be instigated before 23 February 2024. We would not be at all surprised if the judge’s conclusion that this was a “special kind of option” is appealed by the seller.
Writer’s note: the image is of Canvey Island (where one of the sites was located). It does not show that site.
