Conditions to the exercise of an option will normally be construed strictly. The party seeking to exercise the option should adhere precisely to the terms which are laid down in the document conferring the option. It is therefore interesting to see how the court is able to adopt a more pragmatic approach without undermining this basic principle.

In William Page & Company Ltd v BNP Paribas Securities Services Custody Bank Ltd the tenant (William Page) had the benefit in its lease of an option to renew the lease. There were a number of conditions to the exercise of the option. The two in issue in the case were (i) that the option was only exercisable so long as the original lease was vested in William Page and (ii) the tenant had to have paid the rent and substantially performed its covenants under the lease.

William Page was a shell company with no assets to speak of. The lease was guaranteed by a company called CCL. The lease had replaced an earlier agreement for lease under which William Page was to be the tenant and CCL was to be the guarantor. While the lease was being negotiated, William Page had requested that the lease be taken in the name of its parent company, CCG, since CCL was soon to leave the group. However, the landlord was not happy with the covenant strength of CCG and insisted on the original arrangement in the agreement for lease being replicated in the new lease.

The practical situation was, however, that William Page was a dormant company. The premises had in fact been occupied, and rent had been paid, by CCG.

The landlord argued that the conditions for the exercise of the option had not been met, since the rent had been paid not by the tenant, but by CCG. The landlord also alleged that CCG's occupation was in breach of covenant under the lease.

The court found that the parties were aware, at the time the lease was taken, that the premises would be occupied by CCG. It held that CCG occupied the premises as licensee. The lease prohibited the tenant from sharing or parting with possession of part of the premises. However, somewhat unusually there was no prohibition on parting with possession of the whole of the premises. Since CCG had been in occupation of the entire property, the court ruled that there was no breach of the alienation covenant.

As for the payment of rent, the court held that the landlord's argument was "excessively legalistic". It said that strict construction of the option conditions did not involve ignoring either common sense or commercial purpose.

A repairing covenant can be complied with by the tenant employing a contractor to do the works for it. The court reasoned that the same logic could be applied where rent is paid by a third party as agent for the tenant.

The tenant's option notice was therefore valid.

Things to consider

Two questions need to be considered when deciding what has to be done in order for the right to exercise an option to arise. The first is whether the steps required by the option agreement are "indispensable conditions". In other words, is the matter in question a condition precedent to the exercise of the option, non-satisfaction of which will mean that any purported exercise will be void? Not all of the terms of an option agreement will necessarily be construed in this way. See for example the decision in Rennie v Westbury Homes.

In the present case the court did not question the status of the conditions in the lease as being anything other than indispensable. However, it allowed some latitude in how those conditions could be complied with.

Notwithstanding the decisions in Rennie and William Page, the safest course of action for a party seeking to exercise an option is to ensure that it complies with the provisions of the option agreement to the letter.