Terms of the option

IAA Vehicle Services Limited (IAA) was the tenant of commercial premises in Essex for 10 years up to 13 June 2023.

The lease contained an option to buy the freehold, which stated that: “upon valid exercise of the Option, a binding agreement shall come into existence and the Landlord will sell and the Tenant will buy the Freehold Interest for the Purchase Price on the terms of this schedule … The said contract for sale shall incorporate the standard commercial property conditions of sale…”.

The Standard Conditions of Sale, as referred to in the option, provide that “the buyer is to pay a deposit of ten per cent of the purchase price no later than the date of the contract”.

Payment of the deposit

Despite having discussed exercising the option months in advance, the tenant didn’t request – and the landlord, HBC, didn’t offer – details of its conveyancer or its account details ahead of the option period.

The tenant then served the option notice, but apparently overlooked the obligation to pay the deposit by midnight on the date that it served its notice. HBC argued that its failure to do so was a repudiatory breach of the option, giving it the right to terminate the sale contract.  

An inevitable tug of war arose due to the increase in the value of the freehold, well above the option price fixed at the date of the lease, which meant that the tenant had a lot riding on the option succeeding, and the landlord on it failing.

IAA – who was ready and willing to pay the deposit - went to court for a declaration that the option had been validly exercised, and an order for specific performance of the sale contract.

Provision of bank details

IAA argued there was no obligation to pay the deposit under the Standard Conditions of Sale as, unless and until the landlord provided the bank details for its conveyancer, it could not pay the deposit and landlord could not rely on its own failure to provide bank details to repudiate the contract.

In any case, even if a contract for sale arose when the option notice was served, IAA’s failure to pay the deposit wasn’t a “repudiatory breach” terminating the contract. It argued that a repudiatory breach occurs where one party has demonstrated a clear intention not to perform a condition of the contract. That was not the case here, as IAA was clear that it was keen to proceed with the purchase.

HBC, on the other hand, argued that the terms of the option were clear – a contract of sale arose “upon valid exercise of the option”. At that point, the parties’ relationship changed from option-holder and landlord to buyer and seller and the buyer was under an immediate obligation to pay the deposit.

HBC argued that it was up to the tenant to request its bank details before exercising the option because:

• The leases were executed, and the options granted, 10 years previously.  So, unlike an ordinary sale contract, the defendant’s account details would not be known at that time; and

• There was a wide option period – it was not clear when the tenant would exercise the option, and a tenant couldn’t expect the landlord to anticipate that and provide bank details independently.

HBC acknowledged that it could not refuse any request provide payment details and, if it did, it could not treat the sale contract as being terminated as a result. However, absent any refusal or delay in providing those details, a failure by IAA to pay would amount to a repudiation of the sale contract.

The deposit was due on exercise of the option…

The Court agreed that, if on request HBC had refused to provide its bank details, it could not “rely upon its own wrong” to terminate the contract. However, that was not the case here – rather, IAA had never asked for them. 

The Court also agreed with the landlord that “the terms of the option could not be any clearer; and they admit of no room for any flexibility”: the option provided that the contract for sale came into existence when the option notice was validly served, not when the landlord provided its bank details; and the deposit was due on the date the option was exercised.

While IAA was under no express obligation to request those bank details, it was under a “practical necessity” to request them in order to comply with its obligation to pay the deposit on the date of the sale contract (when the option notice was served). As the Judge put it, “it was for [IAA] to take the necessary steps to get all its ducks laid out in a row before it served notice exercising the options.”

…but time was not of the essence

However, the Court sided with the tenant in deciding that, while time would ordinarily be “of the essence” for payment of a deposit – and a condition of the contract -  “in my judgment, but with some hesitation, I am persuaded that the present case does indeed fall outside the ordinary run of cases, and that time was not of the essence for payment of the deposits”.  This was because:

• The option was to buy the landlord’s freehold interest, not an ordinary contract for the sale and purchase of land. The purpose of a deposit is normally to show that a buyer is serious and will follow through with the purchase. That’s not relevant with an option, where there is already a contractual relationship between the parties, and here there was an ongoing lease (protected by the Landlord and Tenant Act 1954), such that the landlord would continue to get rent, even if the sell fell through.

• Similarly, as the option price was fixed 10 years ago, as at the date of the lease, the tenant would only exercise the option if it was in its commercial interests; therefore, “the tenant exercising the option clearly means business, irrespective of payment of the agreed deposit”.

• On the true interpretation of the option provisions, time should not be treated as being of the essence for payment of the deposit. Under the Standard Conditions of Sale, the claimant was required to pay a deposit of 10% of the purchase price no later than the date that the option was exercised. However, the option agreement didn’t say anything about whether time was of the essence of such payment. The “option conditions” in the lease set out various “pre-conditions” to exercising the option, which did not include payment of the 10% deposit.  That suggested time was not of the essence.

So non-payment was not a repudiation

On that basis, IAA’s non-payment of the deposit was not a repudiation of the sale contract, and the options had been validly exercised. The High Court, therefore, ordered specific performance of the sale contracts.

As the Court says, get your ducks in a row

The key takeaways here are to check option terms carefully before exercising an option, and consider how they interact with the Standard Conditions of Sale.  The tenant in this case appears not do have done so and only just got away with it, having to incur the cost and risk of litigation in the process.