The High Court recently considered what conditions have to be met in order to extend an option period for a further 5 years.

This is the case of Rennie v Westbury Homes (Holdings) Limited, [2007] EWHC 164. In this case an option period was deemed to have been extended upon the giving of prior written notice followed, within a "reasonable" time, by the payment of a £20,000 additional lump sum.

The Facts of the Case

Rennie was the proprietor of farmland believed to have great development potential. Rennie entered into negotiations with Westbury Homes (Holdings) Limited (''Westbury''), who wished to develop the land for house building.

An option agreement dated 17 September 1992 was then entered into between the parties. The Option Period was defined in clause 1.1.9 of the agreement :''…the period expiring on the date 10 years from and including today's date or (if the intending purchaser shall have exercised its right contained in clause 9.1) the period expiring on the date 15 years from and including today's date.''

The operation of the option agreement was governed by clause 9.1:''At any time during the last year of the Option Period…the [developer] may by notice in writing served upon the [claimant] require such period to be extended by 5 years and upon service of such notice and payment to the [claimant] of the additional sum of twenty thousand pounds (£20,000), this agreement shall be construed as if the Option Period was 15 years.''

On 12 September 2002, Westbury's solicitor wrote to Rennie's solicitor stating that they would shortly be in funds for the extension of the Option Period for a further 5 years. They also asked Rennie's solicitor to fax over bank details so that payment could be arranged. On 17 September 2002, they obtained the bank account details and transferred £20,000. This was followed by a fax to Rennie's solicitor informing them of the bank transfer.

Rennie's solicitor acknowledged receipt of the funds. However, two days later, Rennie's solicitor wrote to Westbury's solicitor claiming that the Option Period had not been extended, as the period for exercise of the option had expired. They regarded the letter sending funds on 17 September 2002 as the option notice and the option period expired on 16 September. They sought to return the £20,000 payment.

Westbury argued that the letter of 12 September 2002 acted as valid notice and that there was no requirement to pay the £20,000 before the Option Period expired.

Rennie sought a declaration from the court that the option agreement had not been validly extended and the right had ceased on midnight of the 16 September 2002.

Decision

The High Court concluded that the Option Period had been validly extended. The court determined that the three conditions of the agreement that had to be met and were met, comprised:

  • The notice had to be in writing;
  • The notice had to be served upon Rennie or their solicitor during the last year of the Option Period; and
  • Payment of £20,000 was required.

The letter of 12 September, though not a formal notice, was regarded as a statement of future intention. The decision applied the Mannai principle from the case of Mannai Investment Company Ltd v Eagle Star Life Assurance Company Ltd. The test set out in Mannai states that minor defects in notices will not necessarily invalidate the notice if a reasonable recipient, with a knowledge of the factual and contextual background, would not be perplexed by the error.

The court concluded that a reasonable recipient would have understood from the letter that Westbury intended to exercise its right to extend the Option Period. The next issue was whether there was any requirement as to when the payment of £20,000 had to be made. The contract did not specify any time for payment and therefore the court concluded that it merely had to follow within a ''reasonable time'', which it duly did.

The Message

This case highlights the fact that the Mannai principle still applies when the intentions of the parties are clear from the facts of the case, even if formal notice is not given. Notwithstanding, the point was made that the conditions of the option did require to be properly complied with. The court did not rely on the evidence surrounding the case but the judge did comment on the fact that the developer had incurred extensive costs over time in relation to site investigations and planning and the owner of the land had been aware of this.

The case also highlights the importance of precise drafting in option agreements. As option agreements, break clauses and pre-emption agreements are more prevalent than before, it is important to ensure that the mechanics of the exercise of the options are clearly provided for in the agreement. Evidence of the need for this has been encountered recently with numerous cases supporting the argument for clearer provisions to avoid uncertainty at the time of the exercise of these options.