Keeping the options open

The decision of the High Court in Alchemy Estates Limited v Astor [2008] EWHC 2675 (Ch) highlights a number of practical and legal points that conveyancers dealing with the sale of leasehold properties should be aware of.

On 15 January 2008, Alchemy exchanged contracts to buy a leasehold property from the Astors. The contract provided for completion on 13 March 2008, but this was delayed as landlord's consent had not been obtained. The parties continued to act as if the contract was still in existence and were preparing for completion. Alchemy served the notice, without prior warning, to rescind the contract on 19 May 2008. Alchemy's legal ground for rescinding the contract was the seller's failure to obtain the licence to assign by the contractual completion date '“ although its real reason for seeking to withdraw was due to the market downturn.

The Astors denied that Alchemy had a right to rescind, further claiming that if there was any such right it had been lost by its delay and affirmation of the contract.

Confusing terms

The terms of the contract relating to the landlord's consent were contained by reference to standard condition 8.3. This stated that the seller would apply for the consent at its expense and use all reasonable endeavours to obtain it; that the buyer would provide all information and references reasonably required; and that if, three working days before completion, consent had not been given, either party could rescind the contract provided they were not in breach of their obligations above.

The contract also contained special condition 16, which stated that the buyer was to enter into all documents required by the landlord relating to the assignment; and that the seller would not be required to take any actions in this regard, other than where a licence to assign was required.

Although the Astors argued that the special condition effectively displaced the standard conditions, Sales J stated that, in the absence of inconsistency between the two sets of conditions, express exclusion of the standard conditions is required.

It therefore follows that, if the intention of the drafter is to exclude the application of the standard conditions, this must be set out expressly in clear, contractual language. Where, on the other hand, it is not the intention to exclude the application of the standard conditions, drafters should take care that any special conditions are not inconsistent with the standard conditions so as to exclude their application.

Parties' obligations

At the time the right to rescind arose the buyer had not complied with its obligation to provide the information required and this breach, it was argued, led to its loss of right to rescind under the standard condition. Sales J, however, stated that the relevant point in time to consider any potential breach is at the time the rescission notice is served. If, at that point, the serving party is either currently in breach of its obligations or has committed an earlier breach which is continuing to have a detrimental effect on the progress of the application for consent, its right to rescind will be lost.

Prudent conveyancers will be aware of each party's separate obligations in the process of obtaining the landlord's consent to assign '“ which, in practice, are often loosely adhered to. The standard conditions have set out guidelines as to how a licence to assign should be obtained. If a party rests on its laurels, in the event of any difficulty in obtaining consent by the contractual completion date, not only may it lose the contract where the other party may choose to exercise its right to rescind, but it may also lose any such right for itself.

Alchemy was not, at the time of service of its rescission notice, in breach of its obligation to provide information and an earlier failure to do so was no longer the cause of the continuing delay to progress the application. Alchemy, however, lost its right to rescind for two reasons:

First, Alchemy's actions, in pursuing until just days before serving the notice to rescind an enfranchisement claim instigated by the Astors under the terms of the contract gave clear indication that it regarded the contract as being on course, according to Sales J. Conveyancers who wish to keep the option open to rescind under standard condition 8.3 should avoid any actions that could be seen as affirming the contract.

Secondly, Alchemy did not exercise its right to rescind sufficiently promptly. Sales J seemed concerned to prevent a situation where this standard condition could be an ongoing option to be ready for use, without prior warning, by a party simply wishing to opt out of a contract if it no longer suits them. A party must exercise this right either at the specified time of three working days before the contractual completion date or within a reasonable time thereafter (one or two days later).

Where there is a material gap between exchange and completion, the matter of obtaining landlord's consent is often easily left to one side. However, the courts will penalise parties who are in default of their obligations and will also scrutinise the parties' conduct once the contractual completion date has passed.