England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LEEDS COUNTY COURT
(HIS HONOUR JUDGE LANGAN QC)

		Royal Courts of Justice Strand London, WC2
		3rd October 2006

1. LORD JUSTICE MUMMERY: The principal issue on this appeal is whether a contractual option to purchase the freehold reversion under a tenancy agreement has been effectively exercised by the tenant in accordance with its terms. The appeal turns on the meaning and effect of the option clause in the events which have happened.
2. The appeal is from the order made by HHJ Langan QC on 17 March 2006. He ordered specific performance of the option agreement comprised in clause 8 of the Tenancy Agreement dated 25 October 2001 ("the Tenancy Agreement") upon the terms and conditions set out in the order. He made the order on a counterclaim in possession proceedings brought by the appellant landlords against the respondent tenants. The proceedings related to property comprised in the tenancy agreement known as Valley Stables, Gibraltar Road, Pudsey, Leeds ("the Property"). It consisted of stables, paddocks, grazing land and storerooms.
3. The judge refused permission to appeal, but it was granted by Brooke LJ on 18 May 2006.

The Option

4. I will deal first with the option. The parties to the Tenancy Agreement, which was for a term of 5 years from 17 September 2001, were, on the one hand, Kim Taylor, who later died (the appellant Steven Taylor is his personal representative) and Sherie Wakefield (together described in the Tenancy Agreement as "the landlord"), and, on the other hand, the respondents Judith and Janine Crotty (together described in the Tenancy Agreement as "the tenant"). In order to avoid confusion I will refer to the parties from now on, as "the landlord" and "the tenant".
5. Clause 8 contained both a right of pre-emption, which is not material to these proceedings, and an option to purchase the freehold. I should read clause 8 in full:

"It is hereby agreed between the parties that The landlord shall give the tenant first opportunity to purchase the freehold reversion of the property at the price of FIFTY FIVE THOUSAND POUNDS at any time during the said term also if the tenant shall wish to purchase the freehold reversion of the premises from the landlord at any time during the first two years of the term hereby granted (but not during any further term which may be granted) and the tenant shall also give to the landlord three months notice in writing then the tenant shall execute and supply the landlord or any other Legal representative of the landlord who the landlord shall nominate an unconditional contract to purchase the premises at a price of FIFTY FIVE THOUSAND POUNDS and the tenant shall pay to any fit person or organisation nominated by the landlord a ten per cent deposit which such person or organisation shall hold as stakeholders and upon receipt of such contract the landlord shall arrange to execute an identical contract within 21 days thereafter and supply the same to the tenant's solicitors or Licensed Conveyancer and completion shall take place no later than 4 weeks thereafter."

6. The solicitors acting for the tenant sent a letter dated 16 August 2002 to the landlord stating, after referring to the Tenancy Agreement as "the Lease", as follows:

"Pursuant to clause 8 of that Lease, please take this letter as notice on behalf of our clients that they wish to exercise the option in that clause and thereby purchase the freehold reversion of Valley Stables at the price of £55,000 (fifty five thousand pounds).

Please let us have details of your legal representatives by return, whereupon we will submit the necessary documentation.

We await hearing."

7. It will be noted at this point that the letter did not expressly refer to the period of 3 months notice which is stated in clause 8.
8. The tenant did not execute or supply an unconditional contract. This is not surprising in view of the reaction of the landlord to the service of the notice.
9. The reaction was in the reply dated 21 August 2002 from Mrs Kim Taylor, who wrote as follows:

"My partner and I refuse to accept this notice to purchase Valley Stables until Mrs Crotty settles the outstanding balance of £1,000 and will not even consider it until this money is paid.

She purchased the lease at a cost of £6,000 but she could only afford to pay £5,000 at the time. We agreed to let her pay this and she signed an agreement to pay a further £1,000 in six months when she got her riding school going. She has ignored all attempts to pay this money and has made no attempt to set up a riding school.

By sub-letting the land to others she has broken many terms of the lease.

I would also like to take this opportunity to ask you to remind her that her rent rises to £600 per month as from September as my attempts to contact her fail."

10. In their reply dated 10 September 2002 the tenant's solicitors informed Mrs Taylor that they held a cheque in the sum of £1,000 payable to her in full and final settlement of the lease premium. It was denied that there was any sub-letting of the land taking place.
11. There was further correspondence. The £1,000 cheque was sent to Mrs Taylor on 21 October 2002. An impasse was reached after a further exchange of letters. On 30 July 2003 the tenant's solicitors sent a letter threatening proceedings, as the option to purchase had not been honoured. The landlord's solicitors replied on 5 August contending that the option in clause 8 was invalid and unenforceable and had not been validly exercised. It was alleged that the tenant had breached the obligations under the Tenancy Agreement in a number of ways, including conversion of one of the stables into living accommodation and by sub-letting.
12. On 1 February 2006 the landlord began proceedings claiming possession of the Property, arrears of rent and forfeiture for non-payment of rent. The tenant defended the claim and counterclaimed for specific performance of the option to purchase contending that completion should have taken place by around 14 January 2003 and that thereafter the landlord held the reversion on trust for the tenant.

The judgment

13. The judge rejected, on both linguistic grounds and as a matter of commercial sense, the landlord's submission that clause 8 required the purchase of the property to be completed within the first two years of the term i.e. by 17 September 2003 and that there was no "three months notice in writing" sufficient to satisfy the requirements of clause 8. He said (paragraph 13 of his judgment):

"… if one focuses on it with the simple commercial eye what has to be done is simple and simply defined, namely three months notice must be given within the first two years of the term. That, in my judgment, was done in this case. The fact that a period of three months was not specifically mentioned in the letter of exercise is neither here nor there. The letter was written expressly pursuant to clause 8 of the lease and must therefore be taken to be a three months notice within the lease. As is rightly pointed out, the obligation of the landlord to complete in accordance with the contract between the parties could not crystallise until three months after receipt of the letter."

14. The judge also rejected the contention that it would be unfair to make an order of specific performance on account of the delay that had occurred. He said that it did not lie in the mouth of the landlord to complain of delay on the part of the tenant when at the very beginning of the controversy, the landlord in no uncertain terms insisted, that the option had not been properly exercised; I refer to what he said in paragraph 14 of his judgment.

Grounds of appeal

15. The appeal is brought on the following main grounds, first the judge had incorrectly concluded that the option had been correctly exercised, notwithstanding failure to comply with all of its terms; and, secondly, that the tenant had delayed in seeking the remedy of specific performance and the landlord would suffer detriment as a result of that delay.
16. If the judge was right to grant specific performance, a third point is raised on the terms of the order as to the variations which the judge ordered in relation to the payment of the balance of the purchase price on completion. I should refer on this point to the terms of the order. Having ordered specific performance the judge set out the terms, saying that by 4.00pm on 24 March 2006 the tenant should execute and supply the claimant solicitors with an unconditional contract to purchase the property, and that, upon receipt thereof, the landlord should execute an identical contract within 21 days and supply the same to the tenant's solicitors. The completion should take place 28 days thereafter, and then (and this is the part of the order which is relevant to this third ground) he said:

"(d) the balance of the purchase price payable on completion shall be subject to the following variations:

(i) the Claimant shall be entitled to interest on the said sum of £55,000 at the rate of 4% above Barclays Bank plc base rate from time to time from 14^th January 2003 to the date of completion.

(ii) the Defendants shall be entitled to set-off against the said sum the amount of rent paid by them to the Claimants from 14^th January 2003 until the date on which such rental payments ceased together with simple interest thereon at the rate of 8% per annum.

(iii) the Defendants shall also be entitled to set-off against the said sum the sum of £8,500 being the interim award of costs made in their favour pursuant to paragraph 3 below …"

17. Mr Hill, who appears on behalf of the appellants, submits that the judge was wrong to conclude that the landlord was not entitled to rent for the period from 14 January 2003. He contended that the tenant had no right to possession after that date apart from their rights under the tenancy agreement, pursuant to which rent was payable. He therefore submits that this court should vary (d)(i) and (ii) of the judge's order; (d)(iii) would remain unaffected.

Discussion and conclusion

18. Mr Hill made detailed submissions on the ground that the option was not validly exercised. He said that the option to purchase was exercisable during the first two years of the term. The time within which the option had to be exercised had not been complied with, and so he disputed that the landlord was contractually bound to sell the property to the tenant following service of the notice.
19. I am unable to accept this line of argument. In my judgment the notice contained in the letter of 16 August 2002 was a valid notice. It was so, even though it did not expressly refer to the 3-month period. The letter stated that the notice was given pursuant to clause 8, which specified the 3-month period. In my judgment, that is sufficient to constitute compliance with the terms of clause 8. The landlord could not reasonably have been left in any doubt about the nature and purpose of the notice communicated to him in that matter.
20. After the option had been exercised provision was made in clause 8 for a series of steps to be taken towards completing the contract created by the unilateral exercise of the option by the tenant.
21. Unusually, the option provided for the creation of yet another contract, which was then (this is after the service of the notice exercising the option) to be executed and supplied to the landlord, or the landlord's nominated legal representative, to whom there was also to be paid a deposit of 10% of the agreed purchase price of £55,000. The further steps were the execution of the unconditional contract by the landlord, the supply of it to the tenant's solicitors and completion was to take place no later than 4 weeks later.
22. Mr Hill argued that, for the exercise of the option to be valid, the completion date had to be a date prior to the expiration of the first 2 years of the term. If that were not so, the landlord would find himself bound, in a case such as this, to sell the property for a price which had been agreed years earlier. The period of the first two years of the term applied, he submitted, to the whole clause, that is not only to the giving of the notice of the tenant's wish to purchase the freehold, but also to the steps for carrying into effect the contract, which had been formed by the exercise of the option, that is the steps relating to the execution of an unconditional contract and to the payment of the deposit.
23. I do not agree with Mr Hill on this point. In my judgment, the steps specified in this part of clause 8 following the word "then" were not essential to the creation of a valid and binding contract by the exercise of the option. Those steps did not relate to the conditions for the exercise of the option to purchase the property. They were a distinct part of the clause. That part was concerned with the legal formalities or mechanics which were consequential on the formation of a contract already created by the exercise of the option on service of the notice: they were not, as Mr Hill submitted, conditions precedent to the service of the notice for the exercise of the option. Non-compliance with them did not affect the validity of the binding contract for purchase, which had been created by the exercise of the option. It is clear that the purpose of the formalities was simply to carry forward to completion a contract that was already in existence as a result of the exercise of the option. Clause 8 did not in terms require that this formal process should be completed during the first two years of the term.
24. For those reasons I would reject the submission that the option was not validly exercised.

Specific performance

25. I turn to the second ground, which relates to the exercise of the judge's discretion to grant specific performance of the contract. In my judgment, there are no grounds for interfering with the judge's discretion that a decree of specific performance was appropriate in this case. The landlord is unable to point to any prejudice or equity that has arisen, which would be a ground for denying to the tenant the right to performance of the contract created by the valid exercise of the option. I agree with HHJ Langan QC that it does not lie in the mouth of landlord to complain of delay in relation to the right to complete a contract, which the landlord refuted because the landlord disputed the validity of the exercise of the option. The landlord's position could have been protected by the service of a notice making time of the essence, but this understandably was not done because the landlord was disputing the very existence of a valid contract.
26. In my judgment, therefore, the judge was right to grant specific performance.

Rent or interest

27. I turn then to the third point, which relates to terms of specific performance regarding rent and interest. The judge dealt with this in paragraph 15 of his judgment. He held that no rent should be paid by the tenant after the date on which the completion should have taken place; that is, 14 January 2003. From that date the tenant should have to pay interest on the purchase price.
28. On this point I would vary the judge's order by removing (d)(i) and (d)(ii). I agree with Mr Hill that the tenant should continue to pay rent down to the end of the period of 21 days from the order granted for specific performance of the contract.
29. My reasons for this conclusion are as follows. The position is that the tenant did not serve a contract on the landlord as required by clause 8. The tenancy continued. The tenant's right to possession of the Property was referable solely to the Tenancy Agreement. I can find nothing which terminated the Tenancy Agreement. It was not terminated by either side. It was not terminated by operation of law. It continued, and there continued with it, the contractual obligation to pay rent, which was part of the Tenancy Agreement.
30. I would direct that, in place of (d)(i) and (d)(ii), there be some other form of order, which will be discussed with counsel after we had finished delivering our judgments. It will be on the basis that the proper term is for continued liability to pay rent and not a payment of interest on the purchase price after the date fixed for completion.
31. For all those reasons I would dismiss this appeal, save for the variation which I have indicated in relation to payment of rent.
32. LORD JUSTICE JACOB: I agree.
33. LORD JUSTICE NEUBERGER: I also agree.

Order: Appeal dismissed.