The recent High Court case of Cantt Pak Limited v Pak Southern China Property Investment Limitedconfirms that, at least on the facts of that case, a seller’s subsequent repudiatory breach of contract will not invalidate a notice to complete which has been served, nor will it prevent rescission of the sale contract where the buyer was also in repudiatory breach.
- Cantt Pak Limited (the “Seller”) contracted to sell land and buildings, occupied by various business tenants under licence and by the Seller’s large industrial boilers (the “Property”), for £1.2m to Pak Southern China Property Investment Limited (the “Buyer”).
- The sale contract required the Seller to provide vacant possession of the Property (“VP”) on completion, and incorporated the Standard Commercial Property Conditions 2nd edition (“SCPC”).
- An impasse arose with the Buyer insisting on VP before completion (in order to satisfy the Buyer’s lender) and the Seller insisting on confirmation that funds were in place before taking steps to procure VP, which would have involved terminating the various licences and incurring costs removing the boilers.
- The Seller served a notice to complete, and, following the requisite ten-working-day period without receipt of completion monies from the Buyer, served a notice of rescission of the contract.
The Buyer contended that:
- the notice to complete was invalid because the Seller was not ready, able and willing to complete as it had failed to provide VP at the date of service of the notice; and
- the Seller could not rescind the sale contract because the Seller was itself in breach of its obligation to provide VP on completion.
1. Validity of notice to complete
The contract was in pretty standard form and incorporated the SCPC which provided that:
“At any time on or after completion date, a party who is ready, able and willing to complete may give the other a notice to complete.”
The court held that the Seller need not have everything in place (in this case VP) at the date of service of the notice. Rather, the notice to complete was valid provided the Seller was capable of satisfying such conditions by the completion date specified in the notice. After hearing a significant amount of evidence from the various occupiers the court found that the Seller was both entitled and able to terminate the licences and clear the site in time for completion. It therefore held that the notice was valid when served.
Furthermore, the court found that the notice remained valid from the date of service to the completion date specified in it, even after the point in time at which the Seller could no longer procure VP by the date for completion. The subsequent repudiatory breach by failing to secure VP did not affect the validity of the notice to complete.
2. Can a party who is in repudiatory breach rescind the contract due to the other party’s repudiatory breach?
The court held that the effect of a valid notice to complete is that the parties must comply with their contractual obligations. Failure to do so will result in the defaulting party being in repudiatory breach of the contract. A repudiatory breach allows the innocent party to rescind the sale contract and, generally, recover the deposit it has paid (if the buyer rescinds) or keep the deposit for itself (if the seller rescinds).
In this case both parties were in repudiatory breach, the Buyer for failing to pay and the Seller for not providing VP. However it was the timing of those breaches that was important for the court in reaching its decision along with the specific evidence of the Seller’s solicitors in relation to the early suspicion that the Buyer would not be in a position to raise the loan required to complete and the resulting delays caused by that.
In essence the court held that the Seller’s failure to secure VP provided the Buyer with an opportunity to rescind the contract or to treat it as live and potentially claim damages for the Seller’s breach. The Buyer chose not to rescind and in doing so treated the contract as continuing. In the circumstances the Buyer was required to comply with its obligation to pay the completion monies.
The Buyers failure to make payment then gave rise to a breach which entitled the Seller to either rescind or treat the contract as continuing and claim damages. The Seller chose to rescind.
Property owners seeking to sell tenanted property may be reluctant to procure vacant possession and forgo rental income where they have suspicions that the prospective buyer may not be able to complete. Whilst this judgment provides some comfort in that situation care must be taken to evidence intention to comply with contractual obligations and there remains a risk that the buyer will rescind for any breach by the seller to provide VP if that is a condition of the sale. Rescission by the buyer would entitle it to recover the deposit and potentially claim damages.