Posts Tagged ‘options’

Mortgage or not: look at the substance of the transaction

April 7, 2016

In Warnborough Ltd v Garmite Ltd ([2003] EWCA Civ 1544, CA (Eng)) W sold property to G but the entire purchase price was left oustanding. G granted W a legal charge to secure the outstanding balance of the purchase price. G also granted W an option to re-purchase the property for the same price as that paid by G less the amount of the purchase price unpaid by G at the relevant time. The option could only be exercised if certain conditions were met. One of these conditions was that a specified amount of the purchase price was still outstanding. The effect of the exercise of the option would be to restore the parties to their original positions. W exercised the option and then sought specific performance of the contract. G argued that the option was a clog on the equity of redemption and so void (Samuel v Jarrah).

Jonathan Parker LJ reviewed the authorities. The court had to look at the substance of the transaction. If the true nature of the transaction was that it was a mortgage then the option was void ([73]). Here, it was more likely that the substance of the transaction was a contract for sale and purchase and not a mortgage ([76]). The option would then be perfectly valid:

‘Although it would clearly not be appropriate to attempt to lay down any absolute rule, it does seem to me that where the option to purchase which is sought to be challenged as a “clog” is granted against the background of a sale of the property by the grantee of the option, as owner of the property, to the grantor for a price which is to be left outstanding on mortgage, there must be a very strong likelihood that, on an examination of all the circumstances, the court will conclude, as it did in Davies v Chamberlain, that the substance of the transaction is one of sale and purchase and not one of mortgage.’ ([76])

Michael Lower



Sale and option to re-purchase: does the option terminate the original buyer’s rights?

May 20, 2015

In Siu Kai Ming v Lau Sai Hing ([2015] HKEC 211, CFA) D owned a village house. D entered into two contracts with P (a developer). Under the terms of the first contract, P agreed to build a three-storey village house on land owned by D in consideration of the assignment of the second floor and roof of the house (the Property) to P. The second contract granted D an option to purchase the Property from P. P built the house but D did not assign the title to the Property to P. D validly exercised the option but then gave notice that he did not intend to honour the contract thereby created. P accepted this repudiation and now sought transfer of the Property to him. D argued that the exercise of the option brought P’s rights to the Property to an end and that P was only entitled to damages for breach of the contract arising from the exercise of the option.

P succeeded. The first contract gave P an equitable interest in the property. Neither the option nor its exercise brought this to an end; they simply gave rise to another contract. In respect of the first contract, P could elect for specific performance or damages and he had chosen specific performance. He was also entitled to damages for breach of the contract arising from the option but he had suffered no loss in this respect since the market price exceeded the option price.

Michael Lower

Break clauses: the conditions for valid exercise of a break right must be complied with

April 28, 2014

In Friends Life Limited v Siemens Hearing Instruments Limited ([2014] EWCA Civ 382, CA (Eng)) S were tenants and the lease contained a break clause giving them the right to determine the lease before the end of the term on serving a notice exercising the right on the landlord. The break clause clause required the tenant’s break notice to be ‘be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954’ (in fact this section makes no reference to the service of any notice). The tenants served a break notice that complied with the requirements of the clause in every respect except that it was not expressed to be given under section 24(2) of the Landlord and Tenant Act 1954. The question was whether the notice was valid. The English Court of Appeal (Lewison LJ giving the main judgment) held that the notice was not valid; it had failed to comply with one of the conditions for its exercise.

Break clauses are a form of option. The conditions for the exercise of an option must be fully complied with; there is no concept of substantial compliance. In failing to be expressed in the manner required, the notice failed to comply with one of the conditions for its valid exercise.

‘Where an option prescribes substantive conditions that must be fulfilled by the promisee before the promisor’s obligations are triggered, those conditions must be completely fulfilled. Substantial fulfilment is not enough.’ ([27])

‘Here there was no compliance with the formal requirement of clause 19.2 that the notice be “expressed” in a particular way. There was quite simply no reference in the notice to section 24 (2) at all.’ ([65]).

Michael Lower