England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		18/07/2006

Peter Smith J :

INTRODUCTION

1. This claim is a dispute in respect of a very valuable flat (worth around £1,500,000) 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 28th 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 Dencer who appears 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 which was exercisable upon the death of Luis Bacardi and that following his death and the exchange of correspondence between the Claimant's solicitors and the Defendant's solicitors 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 which 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 Act").
5. In that context he did not assert that a contract complying with the 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 clients signature to the offer letter.
6. For his part Mr 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 and section 2 of the Act. If that was the correct construction he conceded that the letters which 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 or not the Agreement conferred on the Claimant an option.

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 ¾ 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 only be in the UK for a maximum 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 them by the Defendant.
9. Mr Bacardi died on 21st 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 deMonaco Bld de Belgique25 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 offter 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 H.M. Land Registry or H.M. Land Charges Registry to protect the rights hereby granted

(e) The service by Mr Coaten of a counter-notice accepting th 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 there is an offer 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. Sub clause (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 counter-notice stating whether or not he wishes to accept it. If he does not serve a counter-notice 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 (Sub paragraph (d)). If however he wished to accept the offer he has to serve a counter-notice in accordance with sub clause (e).
12. The only difference between clause 1 (a) (i) and the right contended to be an option in sub clause (ii) is that the latter arises automatically on the death of Mr Barcardi provided always of course that he dies within 21 years.
13. Thus under that sub clause the Defendant (i.e. 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 sub clause (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 which only arises 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 only has to make an offer 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 7th March 2005 the Claimant's solicitors 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 Defendants Swiss Lawyers dated 14th April 2005 enclosing a letter which 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 19th April 2005 the Claimant's solicitors wrote back accepting the offer and sought details as to completion. A telephone discussion took place on 15th April 2005 the present proceedings had been instituted. In their initial form it 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 was received on 18th 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 that the Agreement that was being sought to enforce and that it created an option exercisable by the Claimant and he was absolutely entitled to enforce the Defendant to make the clause 1 (a) (ii) offer which 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 Act.

CONTRACTS FOR SALE OF LAND

18. Prior to the passing of the Act the position was covered by section 40 of the Law of Property Act 1925 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 he 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.
19. All of this changed with the 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 where as that was possible under the provision of section 40 LPA 1925.
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 Act and is therefore governed by section 40. In fact the Agreement and the counterpart had been signed so that the contract created by the Agreement would satisfy the requirements of the 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 he provided all the terms in his offer letter. Equally the buyer would be bound because his letter would refer to the offer letter and thus incorporate all the terms by reference. That cannot happen under the 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 LPA 1925. 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 Act are ineffective for the reasons 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 Act and cannot now effectively be claimed unless there is a document that complies with the requirements of the Act. The correspondence (as conceded by the Claimant) does not comply with the 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 Act on the correspondence if it is the correspondence which creates a binding obligation in 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 which complied both with section 40 LPA 1925 and the 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 as that is the machinery. In order to exercise he must strictly comply with the machinery whatever its form as it is prescribed by the Agreement. If he did not it would be said he has not complied with the strict terms of the Agreement If it is truly an option the Defendant accepts 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 QC raises in his skeleton argument the possibility of the Agreement infringing section 9 (2) 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 accepts 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 Glentrown Properties Ltd [1991] Ch 537. That decision arose from arguments that the exercise machinery under standard form options did not comply with the 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 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.
31. The Spiro case was approved by the Court of Appeal in Bircham & Co Nominees No 2 Ltd v Worral Holdings Ltd [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). The Spiro case to echo the words of Barnsley "Land Options" (4th Edition) page 21 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 the Spiro case emphasises (as approved in Bircham) the courts have moved away from construing an option as an irrevocable offer as opposed to a conditional contract which 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 the machinery is gone through. I do not construe it as obliging it to make a meaningless non enforceable offer which 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 sub clause (a) (ii) is to determine the price which 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 which is set out in the Agreement that he is able to know what he is liable to pay.
36. The mechanism is clear (and involves in any event matters which only the Defendant can introduce). I accept that it is a somewhat unusual option but it seems to me the fact that the Defendant is obligated under that sub clause takes that clause away from being a pre-emption provision as opposed to being 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 they 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 QC'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 them 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.