Commercial Leasehold Property Tenant’s Options to buy the Freehold
In a recent important decision on IAA VEHICLE SERVICES LIMITED – v – HBC LIMITED, the high court has granted specific performance of tenant’s options to buy the freehold of the property. The tenant held three leases, which were protected by the Landlord and Tenant Act 1954, gave notice to exercise an option to the buy the freehold of the three properties in the final week of a ten-year lease period that the tenant held. The leases provided that on exercising the option, a binding agreement for sale and purchase would arise between landlord and tenant. The tenant did not pay the required 10% deposit by the time it exercised the option. As a result, the landlord argued the failure to pay the deposit was a repudiatory breach entitling it to rescind the agreement. The tenant disagreed and issued proceedings for specific performance. In the meantime, the leases expired, and the tenant continued to occupy under the 1954 Act.
His Honour Judge Hodge KC, in a judgment handed down on 05th January 2024, ruled in favour of the tenant, finding that time was not of the essence for the payment of the deposit. This was one of the quickest judgements handed down by the high court on a part 8 claim that was issued on 16th October 2023.
KEY TAKEAWAYS
Valid exercise of tenant options creates binding sale contracts with landlords; Tenants’ options differ from ordinary options for purchase as the landlord has already fettered its ability to deal with the property in granting the tenant a lease protected by the 1954 Act.
A tenant is not in repudiatory breach for late payment of a deposit where timely payment is not a fundamental condition;
A landlord cannot rely on its own failure to provide payment details to claim breach by a tenant;
The court can grant an order for specific performance of a resulting sale contract. The judge held that the sale contracts arose immediately upon valid exercise of the options, not when the landlord’s conveyancer supplied its bank details. Payment of the deposit is a fundamental term in a typical land sale contract, and a purchaser’s failure to pay a deposit will usually entitle the seller to terminate the contract. The purpose of a deposit is a guarantee of further performance and failure to pay it demonstrates an unwillingness to perform the contract.
In this case, however, the judge held that the rise in value of the properties between the grant of the option and the tenant’s serving notice to exercise it created an assumption that the tenant ‘meant business’.
JUDGE’S CONCLUSION
(1) this is not the case of a payment of a deposit on an ordinary contract for the sale and purchase of land, but rather the exercise of a tenant’s option to purchase the landlord’s reversionary interest; and
(2) on the true interpretation of the option provisions, time should not be treated as being of the essence for the payment of the deposits. The existing leases, which would continue under the 1954 Act, already restricted the landlord’s rights over the properties. Payment of the deposit would not restore any additional “freedom” to the landlord or provide additional security, unlike in an ordinary sale.
The judge found the failure to pay the deposit was not a repudiatory breach and ordered the landlord to transfer the freehold reversions in return for the purchase prices previously fixed under the options.
HOW KTS CAN HELP?
If you are a landlord or tenant and have any queries in relation to the above article or if you need assistance with commercial leases, please speak to the property team at KTS and we would be happy to assist.
We can be reached by email at info@ktslegal.com or by telephone at +44 (0) 20 8367 0505.
