Coaten v PBS Corporation

Option — Construction — Agreement to sell lease — Agreement providing that contract to purchase lease coming into effect on service of counternotice to offer price — Whether agreement creating pre-emption or option — Law of Property (Miscellaneous Provisions) Act 1989 — Whether order of specific performance In 1984, the claimant held a short lease of a flat. He and his landlord agreed the grant of a new, longer lease for 57-and-three-quarter years for a premium of £105,000. This was a discounted price because the claimant was regarded as a tenant protected under the Rent Act 1977. By an agreement made in August 1984 between the claimant and the defendant, a company owned by B, it was agreed that the defendant would acquire the new lease from the landlord for a premium of £105,000. Under the terms of that agreement, the claimant agreed to guarantee the covenants of the defendant under the new lease and the defendant agreed that, in the event of the death of B within a period of 21 years, the defendant would offer to sell the lease to the claimant on specified terms. The terms stipulated a price of £105,000 plus certain legal and other costs, and that the claimant would have four weeks in which to consider an offer price made by the defendant and to serve a counternotice. The service of a counternotice accepting the offer would then constitute a contract for sale and purchase between the parties. The claimant contended that the agreement created an immediate option in his favour, exercisable upon the death of B, and that, as a result of correspondence between the parties, that option had been exercised. The defendant, which conceded that if the agreement created an option, it satisfied the provisions of either section 40 of the Law of Property Act 1925 or section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, submitted that the agreement created a pre-emption, and that it was not bound to sell the lease, which was worth around £1.5m, to the claimant. Held: The claimant was entitled to an order of specific performance of the agreement. At the date of the agreement, the provisions for the service of an offer-price notice and a counternotice accepting the price would have given rise to a contract satisfying section 40 of the 1925 Act, but a contract would not arise on the exchange of such correspondence following the coming into force of section 2 of the 1989 Act. The relevant clause of the agreement was an option. It put an immediate obligation on the defendant to sell if the claimant so wished when the condition was satisfied by the death of B. It did not create the grant of a pre-emption. The following cases are referred to in this report. Bircham & Co Nominees (No 2) Ltd v Worrell Holdings Ltd [2001] EWCA Civ 775; (2001) 82 P&CR 34; [2001] 3 EGLR 83; [2001] 47 EG 149, CA Pritchard v Briggs [1980] Ch 338; [1979] 3 WLR 868; [1980] 1 All ER 294; (1979) 40 P&CR 1, CA Spiro v Glencrown Properties Ltd [1991] Ch 537; [1991] 2 WLR 931; [1991] 1 All ER 600; [1991] 1 EGLR 185; [1991] 02 EG 167 This was an application by the claimant, Michael Coaten, for declaratory relief and an order of specific performance, in proceedings against the defendant, PBS Corporation, for breach of contract. Mark Dencer (instructed by Oliver Fisher) appeared for the claimant; Timothy Fancourt QC (instructed by Bircham Dyson Bell) represented the defendant. Giving judgment, Peter Smith J said: Introduction [1] This claim is a dispute in respect of a very valuable flat (worth around £1.5m) at the ground and first floor of 90 Eaton Place, London SW1, (the property). [2] The point raised is a short one involving the construction of an agreement in writing (the agreement) dated 28 August 1984 between the defendant (1) and the claimant (2). Following the construction of the agreement, the next question to be decided is the legal effect of the agreement as so construed. [3] At the start of the hearing, Mr Mark Dencer, who appeared for the claimant, clarified the nature of the claimant’s case. His case was that the true construction of the agreement was that it created an immediate option in the claimant’s favour that was exercisable upon the death of Mr Luis Bacardi and that, following his death and the exchange of correspondence between the claimant’s solicitor and the defendant’s solicitor, constituted an exercise of that option. [4] He accepted that if the agreement, as construed, did not constitute an option and was a right of pre-emption that merely obliged the defendant to offer the property for sale to the claimant for first refusal on the death of Mr Bacardi, the correspondence that passed between the parties on that basis fails to establish a binding contract. The reason, he conceded, was that if the contract was attempted to be constituted by that correspondence, it did not comply with the provisions of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (the 1989 Act). [5] In that context, he did not assert that a contract complying with the 1989 Act by those letters could be achieved by construing the typing of the defendant’s name as a signature and by the attaching of his client’s signature to the offer letter. [6] For his part, Mr Timothy Fancourt QC, who appeared for the defendant, acknowledged that if the agreement, as construed, conferred on the claimant an option that complied with the provisions of both section 40 of the Law of Property Act 1925 (the 1925 Act) and section 2 of the 1989 Act. If that were the correct construction, he conceded that the letters that passed between the parties’ respective solicitors constituted an effective exercise of the option despite their language. [7] Accordingly, the one issue for determination is whether the agreement conferred on the claimant an option. |page:44| Background to the agreement [8] The agreement arose in the circumstances set out in the claimant’s unchallenged witness statement. I should say that that background material does not provide any facts as to aid the construction. The question of construction is derived solely from the consideration of the agreement. Apparently, the claimant had a short lease of the property. He held a nine-year lease of the property from 1973. He was a long-standing friend of Mr Bacardi. They were all apparently well-off. When the lease was coming to an end, he negotiated to buy a new long lease. After some delay, he negotiated, by August 1984, a new lease of 57-and-three-quarter years in exchange for a premium of £105,000. That was a discount from the normal price of £150,000 because he was regarded as a protected sitting tenant. Mr Bacardi asked if he could buy the flat. The claimant agreed. At the time, the flat was not his only home and, in addition, Mr Bacardi would be in the UK only for a maximum of 90 days a year. It was therefore agreed that the flat would be acquired in the name of the defendant, an off-shore company incorporated in Panama. Thus, Mr Bacardi, through his company, paid the £105,000 and the claimant enabled that purchase to take place at a discounted price. The claimant paid all the outgoings on the flat but was reimbursed for them by the defendant. [9] Mr Bacardi died on 21 January 2005. Terms of the agreement [10] The relevant terms are as follows: 1. In consideration of Mr Coaten guaranteeing the covenants of PBS in a Lease (“the Lease”) now or intended shortly hereafter to be entered into by PBS between the Trustees of the Grosvenor Estate and itself of the Ground and First Floor Maisonette at 90 Eaton Place London SW1 (“the Premises”) PBS hereby agrees with Mr Coaten as follows: — (a)(i) PBS will not at any time during the period of twenty one years from the date hereof either: — (a) enter into any agreement or option to sell or assign the Lease or (b) sell or assign the Lease Without first offering the same to Mr Coaten for purchase in manner hereinafter appearing (ii) in the event of the death of Mr Luis del Campo Bacardi of Principoute de Monaco Bld de Belgique 25 Monaco within the said period of twenty one years PBS will offer to sell the Lease to Mr Coaten in manner hereinafter appearing (b) The price at which PBS will offer the Lease for sale to Mr Coaten shall be the aggregate of: — (i) the sum of £105,000 and (ii) legal costs and disbursements (including VAT Stamp Duty and Land Registry fees) incurred by PBS on purchase of the Lease (iii) the actual cost incurred by PBS in connecting with the installation of central heating in the Premises (as required by the terms of the Lease) and of other improvements (excluding tenant’s fixtures and fitting curtains and carpets) as evidenced by duly receipted invoices (c) An offer to sell to Mr Coaten (“the sale offer”) shall be made in writing and shall specify the sale price calculated in accordance with Clause 1(b) hereof and Mr Coaten shall within four weeks of service of the sale offer give written counter-notice to PBS stating whether or not he wishes to accept such offer (d) If Mr Coaten states by counter-notice that he does not wish to purchase the Lease or if he fails to serve within the said period a written counter-notice in response to the sale offer then PBS shall be at liberty to sell or assign the Lease to such other purchaser and on such terms as it may think fit and Mr Coaten shall cause to be cancelled or withdrawn any notice or registration made by him at HM Land Registry or HM Land Charges Registry to protect the rights hereby granted (e) The service by Mr Coaten of a counter-notice accepting the sale offer shall constitute a contract for sale and purchase made between the parties. The terms of the National Conditions of Sale then current shall apply to such sale and purchaser. Subject to any agreement to the contrary between the parties the sale and purchase shall be completed and the purchase price shall be paid and vacant possession of the property shall be given upon the date which is four weeks after service of the said counter-notice. [11] There is no dispute over the effect of clause 1(a)(i). It creates a right of pre-emption. Thus, the claimant has no rights unless PBS decided to sell the property, in which case, it must first offer it to him. It is acknowledged that no contractual rights therefore arise until an offer is made by PBS “in manner hereinafter appearing”. The terms hereinafter appearing are that the price will be £105,000 together with costs of a legal nature and installing central heating. Subclause (c) obligates the defendant to make an offer to sell in writing specifying the price calculated in accordance with the provisions set out above and giving the claimant four weeks after service of the offer to give a written counternotice, stating whether or not he wishes to accept it. If he does not serve a counternotice within that period or states that he does not wish to take up the offer, the defendant can then sell or assign the lease to such other purchaser that it thinks fit: see subpara (d). If, however, he wishes to accept the offer, he has to serve a counternotice in accordance with subclause (e). [12] The only difference between clause 1(a)(i) and the right contended to be an option in subclause (ii) is that the latter arises automatically on the death of Mr Bacardi, provided always, of course, that he dies within 21 years. [13] Thus, under that subclause, the defendant (that is, the grantor) is obliged to make an offer but the manner is still the same. The price mechanism and the other procedures are those set out in subclause (b)-(e). [14] The claimant contends that, under this provision, however, the right is in the nature of an option rather than a right of pre-emption. It is said that it is a conditional option that arises only on the death of Mr Bacardi. The difference, the claimant contends, is that significantly under this clause the defendant is obliged to make the offer, whereas, under clause 1(a)(i), it has to make an offer only if it wishes so to do. That, says the claimant, transforms the nature of the obligation so as to confer on the claimant an option rather than a right of pre-emption. It is said that the purpose of the offer letter so called is to set out the price. Thus, it is the machinery for determining the price under the terms of the agreement. Correspondence [15] On 7 March 2005, the claimant’s solicitor sent a letter to the defendant (and various other entities), requiring the defendant to make an offer to sell the property to the claimant for £105,000, together with legal costs. Ultimately, that attracted a letter from the defendant’s Swiss lawyer dated 14 April 2005, enclosing a letter that contained an offer to sell the property at £105,000. That letter was not “signed”, in that the defendant’s name was typed. The claimant wrote on his copy “I consent to this offer”. [16] By letter dated 19 April 2005, the claimant’s solicitor wrote back, accepting the offer and sought details as to completion. A telephone discussion took place on 15 April 2005; the present proceedings had been instituted. In their initial form, the claimant sought specific performance requiring the defendant to offer to sell the lease in accordance with clause 1(c) of the agreement and injunctive and other ancillary relief. That was amended by stating that an offer had been received on 18 April 2005 and accepted and that, pursuant to the agreement, there was then a concluded contract for sale and purchase under clause 1(e). [17] An amended reply was served, where it was made clear what the agreement was that was being sought to enforce, that it created an option exercisable by the claimant and that he was absolutely entitled to require the defendant to make the clause 1(a)(ii) offer that the threat and issue of the proceedings eventually compelled them to do. Accordingly, it is contended that the agreement complied with section 2 of the 1989 Act. Contracts for sale of land [18] Prior to the passing of the 1989 Act, the position was covered by section 40 of the 1925 Act, which merely required a contract for sale of land to be evidenced in writing. It was also capable of enforcement by part-performance. Thus, an oral contract could be enforced. Equally, a contract could exist where one party was bound (because it had provided a memorandum) but the other was not and, by the adoption of part-performance, a party could enforce a contract by virtue of its acts in reliance of the contract. |page:45| [19] All this changed with the 1989 Act, which provided as follows: 2 —.(1) A contract for 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… … (7) Nothing in this section shall apply in relation to contracts made before this section comes into force. [20] Fundamentally, the law was changed. A contract had to be made in writing and only by incorporating all the terms in one document or where documents are exchanged in each. Documents can incorporate by reference terms but, as section (3) provides, the document incorporating the terms must be signed by or on behalf of each party to the contract. [21] It is thus not possible to create a contract by exchange of correspondence, whereas that was possible under the provision of section 40 of the 1925 Act. [22] Equally, the doctrine of part-performance was abolished, but might have survived under the doctrine of estoppel. That does not feature in this case. [23] If the relevant contractual document is the agreement, it came into being before the 1989 Act and is therefore governed by section 40 of the 1925 Act. In fact, the agreement and the counterpart had been signed so that the contract created by the agreement would satisfy the requirements of the 1989 Act also. [24] The difference, however, is that a contract that satisfied section 40 could have come into being by the notice procedure identified in the agreement. The reason for that is that the offer letter would set out all the terms and the acceptance letter would constitute the contract. There was no need, under section 40, for both parties to be liable; the vendor would be liable if it provided all the terms in its offer letter. Equally, the buyer would be bound because its letter would refer to the offer letter and thus incorporate all the terms by reference. That cannot happen under the 1989 Act unless (unusually) the key document is signed by both of them. [25] Thus, if the rights created under clause 1(a)(ii) had created a right of pre-emption, the exercise of those rights by the exchange of letters contemplated by it would have constituted memoranda for the purpose of section 40 of the 1925 Act. The contract would come into being only by the exchange of the letters (assuming acceptance on the part of the claimant). Such letters, however, if governed by the 1989 Act are ineffective for the reasons that I have set out above. [26] It was plainly the contemplation of the parties that the claimant was intended to have a right to acquire the property on the date of the death of Mr Bacardi at a price of £105,000 or such other figure as to be determined exclusively by the defendant as set out in the agreement. [27] The defendant’s contention is a simple one, namely that the right in question is now subject to the 1989 Act and cannot now effectively be claimed unless there is a document that complies with the requirements of that Act. The correspondence (as conceded by the claimant) does not comply with the 1989 Act. Therefore, the defendant is not obliged to sell. This gives it a windfall that was not contemplated at the time the agreement came into being. The windfall arises because of the operation of the 1989 Act on the correspondence if it is the correspondence that creates a binding obligation on its part to sell. Option [28] The claimant contends, therefore, that, under the agreement, he was given an option and that was an immediate conditional contract that complied both with section 40 of the 1925 Act and with the 1989 Act. The machinery set out in the agreement does not look like the exercise of an option, as opposed to the acceptance of a fresh offer that has to be made upon the death of Mr Bacardi. No matter, the claimant contends, since that is the machinery. In order to exercise, he must strictly comply with the machinery whatever its form, since it is prescribed by the agreement. If he did not, it would be said that he has not complied with the strict terms of the agreement. If it is truly an option, the defendant accepted, that documentation in the form prescribed by the agreement is nevertheless capable of being construed as exercise of an option. [29] The defendant’s case is that the rights created by clause 1(a)(ii) is not an option. I should say that Mr Fancourt raised in his skeleton argument the possibility of the agreement infringing section 9(2) of the Perpetuities Accumulation Act 1964. That is on the basis that if the option now subsists, it is more than 21 years after its creation. He accepted, however, that if the option was validly exercised by the letter of 19 April 2005 (the claimant’s case as now appears), no perpetuity question arises. [30] The nature of an option was considered by Hoffmann J (as he then was) in Spiro v Glencrown Properties Ltd [1991] Ch 537*. That decision arose from arguments that the exercise machinery under standard form options did not comply with the 1989 Act. Similar arguments are set out above in the case of the rights under the agreement if they constitute rights of pre-emption. The reason, of course, is that, under rights of pre-emption, the grantee simply has a right to make or receive the first offer for the property should the grantor desire to sell it. As such, the right does not become an interest in land until it becomes exercisable: see Pritchard v Briggs [1980] Ch 338. Two steps are required in a right of pre-emption: namely the making of an offer and the acceptance; whereas in the case of an option, only one step is needed to constitute a buyer/seller relationship: namely the exercise of the option. ————————————————————————— * Editor’s note: Also reported at [1991] 1 EGLR 185 ————————————————————————— [31] Spiro was approved by the Court of Appeal in Bircham & Co Nominees (No 2) Ltd v Worrell Holdings Ltd [2001] EWCA Civ 775; [2001] 3 EGLR 83. [32] Neither of these cases assist in deciding whether or not the agreement creates an option or a right of pre-emption under clause 1(a)(ii). Spiro, to echo the words of Barnsley, Land Options (4th ed), at p21, does away with technicalities and artificiality. That refers to the arguments deployed addressing the manner of exercise of the option. Construction of the agreement [33] Normally, one would expect an option to be exercised by notice given by the grantee to exercise it. As Spiro emphasises (as approved in Bircham), the courts have moved away from construing an option as an irrevocable offer as opposed to a conditional contract that arises only when the grantee seeks to exercise unilaterally the option. [34] I have set out above contrasts between that and a right of pre-emption. [35] I have come to the conclusion that clause 1(a)(ii) is, in fact, an option. I conclude that from the fact that, in contrast to clause (a)(i), the defendant is obliged to sell, provided that the machinery has been gone through. I do not construe it as obliging it to make a meaningless non-enforceable offer that is the result of the defendant’s contentions. That flies in the face of commercial reality. The parties plainly intended that, upon the death of Mr Bacardi, there would arise an immediate obligation to sell if the claimant wished that to happen. It cannot therefore be said to be a right of pre-emption because the defendant has an obligation to make the offer, which the claimant can enforce upon the satisfaction of the condition, namely the death of Mr Bacardi. That means that, in my view, under the agreement, it bound itself to make the offer. That was an option because the claimant is not obliged to proceed. The mechanism in the case of subclause (a)(ii) is to determine the price that is payable. The claimant then knows the price, so he can decide whether to exercise the option by accepting the terms as identified by the offer letter. It is only by that mechanism that is set out in the agreement that he is able to know what he is liable to pay. |page:46| [36] The mechanism is clear (and involves, in any event, matters that only the defendant can introduce). I accept that it is a somewhat unusual option, but it seems to me that the fact that the defendant is obligated under that subclause takes that clause away from being a pre-emption provision as opposed to being in the nature of an option. It is the substance of the arrangement that is important, not merely its form. [37] I should also note that clause (a)(ii) could be said to be unnecessary. If Mr Bacardi died during the 21-year period and the defendant wished to dispose, it could have simply done so under clause (a)(i). On that basis, the clause the subject matter of the dispute is superfluous. I reject Mr Fancourt’s argument that it might crystallise matters in the event of a death by Mr Bacardi during the 21-year period because it could have still been crystallised by it giving notice under clause 1(a)(i). That reinforces my view that clause 1(a)(ii) was intended to give the claimant something extra, namely a right to acquire the property on the death of Mr Bacardi when he was told the price. [38] It follows therefore that clause 1(a)(ii) was designed to do something different. It put an obligation on the defendant and that, in my view, means an immediate obligation at the time of the agreement to sell if the claimant so wished when the condition was satisfied, namely the death of Mr Bacardi within 21 years of the date of the agreement. That, to my mind, makes more sense and reflects what the parties commercially, in my view, intended. [39] I will therefore determine this question in favour of the claimant and order specific performance. I will leave the parties to settle the minute of order for approving when this judgment is handed down. Claimant entitled to order of specific performance of the agreement.