When negotiating a conditional contract, it is important to ensure that there will not be any unexpected consequences if things do not go as planned. Thinking through all the possibilities at the outset can avoid costly litigation later.

A contract which is conditional on the occurrence of an event, such as the grant of planning permission or exchange of an agreement with an occupier, will specify a date by which the event must take place. If the event does not take place by that date then the contract will usually provide that either party may end the contract. Much can depend on the way in which the provision is worded.

This point is illustrated by a recent case, McGahon v Crest Nicholson Regeneration Ltd, which concerned an agreement to grant an underlease of a flat. The agreement was conditional on the grant of a head lease to the seller (see box).

However, the agreement did not provide for what actually happened—the head lease was not granted by the longstop date but for a while neither party tried to end the agreement. Then the market collapsed and the buyer was unable to obtain a mortgage. By that time the head lease had been granted, but nevertheless the buyer gave notice to rescind the contract.

The seller argued that as the head lease had been granted the condition had been satisfied. The buyer pointed out that the wording allowed him to rescind as long as the head lease had not been granted by the longstop date. The dispute went to the Court of Appeal, where the seller won.

The court held that the agreement was conditional on the grant of the head lease, not the grant of the head lease by the longstop date. The agreement did not “make time of the essence”. That means the agreement did not make clear that the time by which the head lease was granted was crucial and that if it was granted after the longstop date it would not count. Therefore, the court held, the agreement became unconditional once the head lease was granted, even though that was after the longstop date. Once the agreement had become unconditional, the right to rescind could no longer be exercised.

The expensive litigation could have been avoided simply by making clear in the clause that the right to rescind applied “at any time after 1 June 2008 but before the head lease has been granted”. Another example where failing to think ahead can result in an expensive dispute is where a contract is conditional on the grant of planning permission and the permission is granted but then successfully challenged under section 288 of the Town and Country Planning Act 1990 or by judicial review. A well drafted agreement will provide that the condition is not satisfied until the period for making such a challenge has passed without a challenge being made.

Taking the time to think through all the possibilities at the outset will save time in the long run.  

Source: McGahon v Crest Nicholson Regeneration Ltd [2010] EWCA Civ 842.