Key points

  • If a contract provides for a right to rescind with effect from a particular date, diarise the date
  • It should not be assumed that the right to rescind will continue for an indefinite period of time after it has arisen
  • In any event, the right to rescind may be lost if the condition is satisfied before the right is exercised – but always check the wording of the contract
  • The contract should cater for what should happen if the condition is satisfied late

Facts of McGahon v Crest Nicholson Regeneration Ltd

In October 2006, a developer entered into a contract to sell a flat off-plan. The flat was leasehold, and the contract was conditional on the grant of a headlease to the developer. The contract provided that if the headlease had not been granted by 1 June 2008, then either party had the right to rescind the contract.

1 June 2008 came and went without the headlease being granted. In the meantime, the intervening financial situation meant that the buyers were no longer able to obtain the 85% mortgage that they needed.

In September 2008 the buyers realised for the first time that the headlease had not been granted by the date laid down in the contract. On 29 September their solicitor served notice on the developer to rescind the contract. However, it transpired that the headlease had in fact been granted just a few weeks previously, on 4 September.

The court had to decide whether the buyers were entitled to rescind the contract because the headlease had not been granted before 1 June.

The Court of Appeal ruled in favour of the developer. It noted that the right to rescind existed in favour of both parties. This meant that it would have been open to the developer to rescind the sale contract if prices had risen rather than fallen, in order to obtain a better price elsewhere. This would be an uncommercial result.

The court found that the contract was conditional on the grant of the headlease, but it was capable of becoming unconditional once the headlease had been granted. Therefore, the right to rescind existed only up to the grant of the headlease.

Things to consider

Several recent cases have considered the circumstances in which a right to rescind remains alive or will be lost.

For example, compare the result in this case with that in Akzo Nobel UK Ltd v Arista Tubes Ltd.

In Akzo, a business transfer agreement provided for the seller to apply for landlord's consent to underlet to the buyer. Pending the licence being obtained, the buyer occupied the premises under licence from the seller. The agreement provided that if landlord's consent to underlet the properties had not been obtained within 12 months of the date of the agreement, then either party could give three months' notice to terminate all the parties' obligations in relation to the properties.

Ten years passed without landlord's consent being obtained. Eventually, in October 2007, the buyer gave notice to the seller to determine the licences with effect from January 2008.

This spurred the seller into action and it managed to obtain landlord's consent to underlet before the notice expired. The seller then tried to enforce the buyer's obligation to take underleases of the properties.

The High Court ruled that an obligation to complete the underleases could not arise once a valid termination notice had been served, and that the notice was valid to terminate the agreement.

The difference between Akzo and the McGahon case is that in Akzo, the licence to underlet had not been granted at the date at which notice to rescind was served. In McGahon, the headlease had already been granted when the buyers served notice to rescind, and so it was found that the right had been lost.

However, it should not always be assumed that a right to rescind will endure for an indefinite period of time, even if the condition which triggers the right has not been satisfied.

In Alchemy Estates v Astor, a contract for the sale of a lease provided that if landlord's consent had not been obtained three working days before completion, either party could rescind. Landlord's consent was not obtained in time and the buyer served notice to rescind two months after the contractual completion date.

The court ruled that the right to rescind had to be exercised promptly; either by the completion date, or (at most) one or two days after it. If the buyer had wanted to rescind, the court thought that it should have served a notice to complete on the seller.