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Options

This page contains details of cases dealing with a number of matters relating to options including:
  • Conditional contracts and options - effect of Landlord and Tenant (Covenants) Act 1995: An option for a tenancy is not "an agreement for a tenancy" for the purposes of the 1995 Act. Nor is a condition precedent to the grant of a lease a covenant forming part of "an agreement for a tenancy" or "landlord covenants" for the purposes of s28(1) of the 1995 Act. Thus, where a party to conditional contracts and option agreements for leases sold properties in such a way as to make it impossible for it to perform its obligations the 1995 Act did not apply so as to enable the obligations to be enforced against a purchaser.
  • Drafting of notices
  • Surrender and re-grant: Where an underlease was varied by a Deed of Variation so as to increase the area of the demised premises, thereby bringing about an automatic surrender and regrant, the current underlessee was no longer a successor in title to the original underlessee to whom an option had been granted by the freeholder prior to the Deed of Variation. The option therefore could not be exercised.
  • Valuation date where not stated in the agreement: Where the parties to an option agreement failed to specify the date at which the land should be valued, the court construed the agreement as requiring valuation as at the date on which the third party expert determined the valuation.
  • Setting aside an option agreement for undue influence

Construction

Planning condition

Hallam Land Management Ltd v UK Coal Mining Ltd
[2002] EWCA Civ 982

The option was conditional upon a planning application being made for development of the Property. Held: This meant the whole, or substantially, the whole of the area covered by the property not just one part of it.


Conditional contracts and options

Effect of the Landlord and Tenant (Covenants) Act 1995

Ridgewood Properties Group v Valero Energy
[2013] EWHC 98 (Ch)

Summary

An option for a tenancy is not "an agreement for a tenancy" for the purposes of the 1995 Act. Nor is a condition precedent to the grant of a lease a covenant forming part of "an agreement for a tenancy" or "landlord covenants" for the purposes of s28(1) of the 1995 Act. Thus, where a party to conditional contracts and option agreements for leases sold properties in such a way as to make it impossible for it to perform its obligations the 1995 Act did not apply so as to enable the obligations to be enforced against a purchaser.

Facts

T and R entered into agreements relating to ten properties owned and operated by T as filling stations. Some of the agreements were conditional contracts providing for R to apply for planning permission to build flats and offices above and around the stations. They went on to provide that once satisfactory planning permission had been obtained, T would grant R a building lease. On completion of the development, R would acquire the freehold or a long leasehold interest, with a leaseback to T of the forecourt and shop. The other agreements were options for R to take a building lease, subject to conditions, rather than conditional contracts.

The agreements prohibited any assignment by R except to group companies, but there was no express restriction on assignment by T. R registered notices at the Land Registry to protect the agreements.

T transferred its interest in all of the properties to S, subject to the agreements with R. The transfers contained a covenant by S to observe and perform the covenants referred to in the registers and to indemnify T against any actions or claims in respect of any breach, non-observance or non-performance. S denied that it was obliged to perform T's obligations in the agreements.

R argued that T had put it out of its power to perform its obligations and therefore T had repudiated the agreements. R therefore claimed damages against T for breach of the agreements.

Decision

The court made a number of findings on preliminary issues relating to liability.

The High court held that T had made it impossible for it to perform the agreements by selling the properties in the way it did. There was nothing in the agreements on their true construction to prohibit disposals by T and there was no proper basis for implying a term to that effect. However, T was in breach of the admitted implied term not to do anything to prevent performances of the agreements.

T argued that the positive covenants in both the conditional contracts and the options passed to S as landlord covenants under the Landlord and Tenant (Covenants) Act 1995. The Court held that the 1995 Act was intended only to apply to the running of covenants in landlord and tenant relationships. This principle should not be extended to options, which were not, strictly, either offers or conditional contracts (see Spiro v Glencrown [1991] Ch. 537).

With regard to conditional contracts, conditions precedent to the grant of a lease were not covenants which were part of an “agreement for a tenancy” nor were they comprised within landlord or tenant covenants for the purposes of s28(1) of the 1995 Act. Accordingly, the provisions of the 1995 Act did not apply either to the conditional contracts or to the option agreements.

So far as the alleged repudiatory breach was concerned, there was clear evidence that R had affirmed the agreements and could not rely on repudiatory breach. The evidence showed that R knew about the sale of the properties and that S was arguing that it was not bound by the agreements. R obtained legal advice and proceeded with the agreements, treating them as in full force, rather than claiming that the sale constituted a repudiatory breach of contract. Further, there was no communication of any acceptance of repudiation.

Finally, it was held that R’s claim was not statute-barred. R's claim for non-repudiatory breach was adjourned for further argument.

Comment

The case makes it clear that so far as the Landlord and Tenant (Covenants) Act 1995 is concerned an agreement creating an option for a tenancy is not "an agreement for a tenancy" for the purposes of the 1995 Act. It was also held that conditions precedent to the grant of a lease are not covenants forming part of "an agreement for a tenancy" or "landlord covenants" for the purposes of s28(1) of the 1995 Act.

Where the seller has outstanding obligations affecting a property that is being sold, careful consideration should be given to how to make the buyer liable for performance of the obligations. It is clear that a covenant just to observe and perform the obligations and to indemnify the seller will not suffice in this situation. Where a seller wants to have the ability to enforce the obligations against the buyer by way of specific performance, it may be prudent to set the obligations out in full in the transfer or otherwise make it expressly clear that the covenant is not simply given by way of indemnity only.

When entering into a conditional contract to take a lease, or an option to take a lease, it would be advisable to prohibit any sale of the land by the freeholder or, at the very least, to prohibit any such sale unless and until the prospective buyer has entered into direct contractual obligations with the future tenant. Such a prohibition can then be enforced through the registration of a restriction on the freehold title at the Land Registry.


Notices

Rennie v Westbury Homes (Holdings) Ltd
[2007] EWHC 164 (Ch)

This case is relevant to draftspersons wishing to provide for an option period to be extendable on payment of an additional premium.

Facts

An option agreement granted to the developer an option to purchase the land for a period of 10 years, together with a right to extend that period to 15 years. The wording relating to extension of the period read "at any time during the last year of the option period...the intending purchaser may by notice in writing served upon the intending vendor require such period to be extended by 5 years and upon service of such notice and payment...of £20,000, this agreement shall be construed as if the option period was 15 years".

A few days before the 10-year option period was due to expire, the developer wrote advising that it would shortly be in funds to invoke the 5-year extension and requesting bank details, but the grantor did not reply. On what was thought to be the final day of the 10-year period, the developer obtained details of the grantor's solicitors' bank account and transferred the money, receipt of which was acknowledged. In fact, the option period had expired one day earlier than the date of transfer of the money and the grantor sought to return the payment in reliance on the fact that the option period had not been validly extended.

Decision

The Court held that the option period had been duly extended. The only express requirements for the notice extending the option period were for it to be in writing and be served on the grantor during the last year of the option period. In addition, the notice had to convey to the recipient that the option period was intended to be extended, and this fell within the Mannai test, i.e. would the notice have been unambiguously understood by the reasonable recipient? Although the focus of the developer's letter was on payment arrangements, there was no doubt that a reasonable recipient would have understood from it that the developer had decided to exercise its right to extend the option period, as it was only in that context that the question of the payment had arisen, and in the absence of any content concerning the mechanics of payment in the agreement itself, the letter had been unequivocal in asking for practical information to implement payment.

Further, on the facts, the clause providing for extension of the option period only obliged the developer to make a further payment of £20,000, and did not specify the timeliness of payment. There was no basis on which to imply a term that payment had to be made within the initial option period, since time had not been made of the essence, the payment terms were sufficiently certain and payment had been made within a reasonable time.

If the option period extension provision had expressly required the additional payment to be made before the initial 10-year option period expired, it is unlikely that the case would have had the same outcome. Further, when drafting an option agreement, it may be desirable to set out the form of notice required to exercise the option (or extend the option period) in order to avoid the doubts that led to the dispute in this case.


Surrender and regrant

Option no longer valid

Tweedie v Souglides
[2012] EWCA Civ 1546

Summary

Where an underlease was varied by a Deed of Variation so as to increase the area of the demised premises, thereby bringing about an automatic surrender and regrant, the current underlessee was no longer a successor in title to the original underlessee to whom an option had been granted by the freeholder prior to the Deed of Variation. The option therefore could not be exercised.

Facts

F, as freeholder, leased a block of flats to L, as lessee, who in turn granted an underlease of one of the flats to U. U extended his flat by creating a new roof terrace. In 1987, F granted U and his “successors in title” an option to acquire an extension lease on the expiry of the headlease.

U’s mortgagee subsequently took possession and sold the residue of the term created by the underlease to C. In 1994, L and C entered into a Deed of Variation so as to include the roof terrace in the premises demised by the underlease. Subsequently, C purported to exercise the option.

D, as F’s successors in title to the freehold, refused to grant the extension lease, contending (among other things) that the option had become nugatory when the 1994 Deed of Variation was signed. That contention was rejected at first instance. D appealed to the Court of Appeal.

Decision

The Court of Appeal allowed the appeal and found for D.

It was common ground that the 1994 Deed of Variation brought about a surrender and regrant of the underlease. It followed that C could not be U’s successor in title for the purposes of the option, because the title under which C held the flat only arose in 1994 on the execution of the Deed of Variation. C’s argument that the phrase “successors in title” included occupants of the flat for the time being was rejected since it plainly concerned title to property not its actual occupation. The provisions of the Deed of Variation were irrelevant to the proper construction of the option agreement.

Comment

The Chancellor, who gave the only reasoned judgment, suggested that the conclusion may have been different if the parties to the option agreement and Deed of Variation had been different:
    “The result may seem harsh and contrary to common sense, but the problem has arisen because [F], as freeholders and grantors of the option, were not parties to the Second Deed of Variation and [L], which was, was not also a party to the Option. In the more normal case where the grantor of the option is also the lessor there may well be scope for arguing that the regrant also included a regrant of the option. In that event the present problems would not have arisen. Unfortunately for [C] that is not this case.”

Valuation date

Where not stated in the agreement

Redlawn Land Ltd v Cowley
[2010] EWHC 766 (Ch)

Summary

Where the parties to an option agreement failed to specify the date at which the land should be valued, the court construed the agreement as requiring valuation as at the date on which the third party expert determined the valuation.

Facts

The parties entered into an option agreement that provided for the developer to serve a notice on the landowner once planning permission had been obtained. The notice triggered a procedure for determining the purchase price, which was 75% of the land's open market value, or a multiple of its agricultural value if greater. Once the purchase price was determined, the developer could then decide whether or not to buy the land for that amount.

The agreement provided that either party could require the purchase price to be referred to an expert, if the parties failed to agree on the price within 60 days. The expert was required to be a member of the RICS of at least 10 years standing and to be experienced in planning and development. The agreement stated that if the "expert" refused to act as an expert, he would act as arbitrator. The "expert" was required to make the determination within three months of being appointed.

The option agreement did not specify the date at which the land should be valued. The developer served notice that planning permission had been obtained, but the parties were unable to agree on the purchase price. The determination of the purchase price was referred to the "expert" who elected to act as arbitrator.

Decision

The clear and obviously correct construction of the option agreement was that the valuation date was when the expert actually determined the purchase price. The parties would be expected to have in mind the current market value, not a retrospective valuation. It would be surprising if the expert were to express his determination in the past tense and give a retrospective valuation, without any clear indication to that effect in the option agreement.

The potential for delay in the arbitration process was not relevant. The three month time limit in the option agreement applied equally to an arbitrator as to an expert. Although an arbitrator also had power to grant possibly substantial extensions under the Arbitration Act 1996, this was not in the contemplation of the parties at the time the agreement was entered into. The appointment of a person with the relevant expertise, who was required to act subject to a timetable, indicated that the parties anticipated a relatively speedy determination and did not anticipate the sort of delay that in fact occurred in this case.

The approach taken in West Midland Baptist Association v Birmingham City Corp [1970] AC 874 was also, by analogy, the right approach to take in the case of the exercise of an option. It seemed natural and right to attribute to the parties an intention to have a valuation date as close to the option exercise date as practicable. The latest available date in this case was the date of determination of the purchase price. Although the parties' submissions might become out of date, the expert had particular expertise and could hear further evidence if he thought it appropriate.

Comment

This decision highlights the need to fix a valuation date for ascertaining the purchase price under an option agreement. Option agreements may last for several years, and it is impossible to predict in advance the market conditions at the time of exercise of the option. If the date is left uncertain, the range of possible valuations may vary widely if land prices are moving rapidly. A fixed date also makes it less likely that one party has an incentive to delay the dispute resolution process to try to take advantage of a falling, or rising, market.

Undue influence

Macklin v Dowsett
[2004] ERWCA Civ 68.

A case where the CA set aside an option agreement applying the principles in Royal Bank of Scotland Plc v Etridge [2002] 2 AC 773.


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