Land Options: High Court rules on validity of tenant’s option to buy freehold

The tenant of 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 properties in the final week of a ten-year period. 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 delivered in January 2024, less than three months after the tenant issued its claim, ruled in favour of the tenant, finding that time was not of the essence for the payment of the deposit.

Key points:

• 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, but if they are not provided a tenant should enquire out of practical necessity;
• The court can grant an order for specific performance of a resulting sale contract.

The decision turned on the wording of the option clauses and incorporated standard conditions of sale. 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, as per a 1982 House of Lords authority, 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’.

The judge gave two key reasons for concluding that time was not of the essence for payment of the deposit in this case:

1. This was a tenant's option to buy the landlord's reversionary interest, not an ordinary land sale contract. 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.
2. The wording of the option clauses did not specify that time was of the essence for payment of the deposit, despite listing other conditions for valid exercise of the options. This suggested the parties did not intend timely payment to be a fundamental condition.

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.

The landlord may appeal

The judge granted permission to appeal, extending the normal time limit from 21 days to 49 days. There may be reasonable grounds:

1. The analysis of whether time was of the essence for the deposit payment was recognised as a difficult issue, with the judge acknowledging it was his "principal reason" for reserving judgment and that it caused him "some hesitation".
2. The judge characterised the case as "extraordinary" in concluding that it fell outside the ordinary run of cases where deposit payment timing would usually be considered a fundamental condition.
3. The judgment goes against Court of Appeal authority in Samarenko v. Dawn Hill House Ltd. (2011) that failure to pay a land sale contract deposit on time is necessarily a repudiatory breach.
4. The landlord could argue that the judge erred in law by failing to apply Samarenko or to adequately explain why this case was exceptional enough to justify departing from it.

In summary, while the prospects are not guaranteed, there does seem a reasonable basis for the defendant to lodge an appeal on the grounds that the judge misapplied the law on deposit timing. The judge's own analysis suggests he anticipated potential appeal arguments.