In Redlawn Land Ltd v Cowley, the parties had entered into an option agreement. The agreement provided for a two-stage process for exercise of the option. Following the grant of planning permission, a notice was to be served by the prospective buyer. This would trigger a mechanism for ascertaining the price to be paid for the land. Once the price was determined, the buyer would then have the option to buy the land at that price.

The agreement provided that if the parties could not agree the price (which was to be calculated by reference to the open market value of the land) within 60 days, then it was to be referred to a third party acting as an expert. However, the agreement was silent as to the date at which the property was to be valued.

The seller argued that the date should be the date on which notice was given requiring the value to be determined by a third party pursuant to the dispute resolution procedure in the agreement. The buyer contended that the correct date was the date on which the third party actually reached his decision. Since the market was falling, the later date would be more advantageous to the buyer.

The High Court agreed with the buyer. It ruled that the parties had in mind the current market value, not a retrospective valuation. It thought that it was "natural and right" for the valuation date to be as close to the exercise date of the option as possible.

Things to consider

This case emphasises the importance of setting out detailed mechanics in an option agreement to deal with ascertainment of the price. In this case, while the parties had sensibly included a dispute resolution procedure, they had failed to stipulate the date at which the property was to be valued. Where prices are moving slowly or are static, this may not have been so much of an issue. But in a sharply rising or falling market, the valuation date may be of crucial importance. The seller in this case pointed out that to fix the date as the date of the expert's decision would be to give one side or the other (depending on which way the market was moving) an incentive to drag out proceedings. Nonetheless the court thought that this was the correct date to be used.

The other factor which complicated matters in the case was that the third party appointed to determine the value was acting (by agreement of the parties) as arbitrator, and not as an expert as contemplated by the agreement. The clause provided for the third party to make his decision within three months from the date of the appointment. However, the fact that the third party was acting as arbitrator meant that considerable delay could ensue while each party made representations. The court said that the fact that there had in the event been a greater period of delay than might have been anticipated was not a factor to be taken into account in the construction of the agreement.