In the case of Rennie v Westbury Homes (Holdings) Ltd [2007] the court considered an option agreement that contained a developer’s right to extend an option period upon serving written notice and paying an additional premium.

The question before the court was whether the option period had been validly extended. The High Court held that a letter from the developer’s solicitor, simply requesting the landowner’s solicitor’s bank details, was a valid notice extending the option period by a further five years. This was even though:

(1) the developer’s solicitors did not intend the letter to be a notice extending the option period;

(2) formal board authority for the extension was yet to be given by the developer; and

(3) payment of the additional premium of £20,000 due to the landowner was not made before the expiry of the initial option period.

The High Court, in reaching its decision, applied the well known House of Lords case of Mannai Investment Co Ltd v Eagle Star Assurance [1997] in a generous manner.

The facts

On 17 September 1992 a landowner granted a ten-year option over 21.53 acres of agricultural land on the outskirts of Coleford, Gloucestershire to Westbury Homes (Holdings) Ltd, a developer and housebuilder. The option period was defined (subject to certain provisions that were immaterial to the issue in hand) as:

… the period expiring on the date 10 years from and including [17 September 1992] or (if [Westbury] shall have exercised its rights contained in clause 9.1) the period expiring on the date 15 years from and including [17 September 1992].

It was accepted at trial that the option period (unextended) expired at midnight on 16 September 2002. However, the developer’s solicitors wrongly believed the option agreement expired on 17 September 2002.

Clause 9.1 of the option agreement provided for the extension of the option period in the following terms:

At any time during the last year of the option period… [Westbury] may by notice in writing served upon [the landowner] require such period to be extended by five years and upon service of such notice and upon payment to [the landowner] of the additional sum of £20,000, this Agreement shall be construed as if the option period was 15 years.

The option agreement provided that notices would be sufficiently served by or on the parties’ respective solicitors. On 12 September 2002, a few days before the expiry of the option period, Westbury’s solicitors wrote to the landowner’s solicitors stating that:

We shall very shortly be placed in funds for the extension of the option for a further five years upon payment of £20,000 by Westbury (clause 9.1 of the option agreement refers).

The letter went on to request that the landowner’s solicitor’s fax their bank details so that there could be a chaps transfer. The letter was received by the landowner’s solicitors on Friday 13 September 2002. They did not respond to the letter. On 17 September 2002 Westbury’s solicitors rang the landowner’s solicitors and asked for details of their client account, which were given to them by a secretary. Later that day, the developer’s solicitors transferred the £20,000 and faxed the landowner’s solicitors confirming this had been done.

The landowner’s solicitors replied on 17 September 2002 simply stating that they acknowledged receipt of the £20,000 ‘relating to the extension of the option…’. They then wrote again two days later and contended for the first time that the option period ran until and included 16 September 2002 but not the following day. Therefore, they alleged that the option had not been validly extended and sought to return the £20,000.

Following this, the developer’s solicitors alleged that their letter of 12 September 2002 was in fact a valid notice under clause 9.1 and that it was perfectly in order for the £20,000 to be paid within a reasonable time even if this was after the initial 10-year option period. In June 2006 the landowners issued proceedings for a declaration that the option agreement had ceased and determined.

The issues

The first issue was whether the letter of 12 September from Westbury’s solicitors was a valid notice to extend the option period, and in particular:

• Whether the letter of 12 September 2002 ‘required’ an extension of the option or whether it was simply a statement of future intent?

• Would a reasonable recipient of the letter of 12 September 2002 (with knowledge of the factual and contextual background) be left in no doubt that the developer was exercising its right to extend, thereby satisfying the House of Lords test in Mannai?

• Did it matter that the developer’s solicitors never intended the letter of 12 September 2002 to be a notice under clause 9.1?

• Did it matter that the developer’s formal board approval for the extension was only given some days after the letter of 12 September 2002? The second issue was whether – if the 12 September 2002 letter did validly extend the option period – the £20,000 was paid in time, and if not, what the consequences were of the failure to pay in good time.

The decision

The landowner’s main contention was that clause 9.1, on its true construction, required that prescribed information had to be given for the valid exercise of the option, ie that the written notice must ‘require’ that the option period be extended, and therefore, fell outside the test in Mannai. In other words, it was not a question of how a reasonable recipient would have understood the notice in its context.

The landowner contended that the case was of a type described in Mannai as being:

… a case of a contractual right… which prescribes as an indispensable condition for its effective exercise that the notice must contain specific information.

It was argued that the 12 September 2002 letter did not comply with the prescribed requirements and, therefore, was not a valid notice under clause 9.1.

Henderson J held that clause 9.1 only required that two conditions be satisfied. First, the notice had to be in writing. Secondly, the notice had to be served on the landowner or its solicitors during the last year of the option period. Failure to comply with either of those conditions would have been fatal. However, the judge found that the provision that the notice had to ‘require such period to be extended by five years’ did not prescribe any particular form of words but, rather, was a statement of the meaning which the notice had to convey to the recipient. The judge held that such a statement fell squarely within the Mannai test and the question was simply how the 12 September 2002 letter would have been understood by the reasonable recipient.

The next question therefore, was how, on an objective appraisal, a reasonable recipient with knowledge of the terms of the option agreement would have understood the 12 September 2002 letter, taking into account the relevant objective contextual scene. The judge held that the letter conveyed unambiguously to any reasonable recipient that Westbury did require the option period be extended by five years, and therefore satisfied the Mannai test of leaving the reasonable recipient in no doubt that the right reserved is being exercised. In reaching this decision, the judge took into account the following points:

• The letter referred in terms to the extension of the option and the payment of the £20,000, so the reasonable recipient could not have been in doubt that the letter was concerned somehow with the right to extend the option.

• The reasonable recipient would have appreciated that the last few days of the ten-year option (and therefore the last few days of the option to renew) was upon them.

• The reasonable recipient would have appreciated that clause 9.1 conferred a unilateral right on Westbury and did not require any action by the reasonable recipient.

• The additional requirement to pay the £20,000 pre-supposes that a valid extension notice has been served. The reasonable recipient would have noted that there was nothing uncertain or tentative about the proposals for the payment of the £20,000, as the letter states that the solicitors ‘shall’ be in funds, and that the payment ‘will’ be handled by the Birmingham office.

The landowner had sought to argue that in considering the relevant contextual scene, the Court should not construe the 12 September 2002 letter as valid notice because it was never meant by those who sent it to be a valid notice. The landowner argued that the letter which was intended to be the notice was the one sent out of time on 17 September 2002. Furthermore, formal board authority to instruct solicitors to serve notice was not obtained until 16 September. Therefore, there was no intention to serve notice before that date.

The judge held that in carrying out the objective analysis of how the reasonable recipient would have understood the notice, the subjective intentions and understandings of Westbury as of 12 September 2002 were irrelevant. The judge made the bold statement that it is inherent in the objective nature of the Mannai test that a document that was never intended by its sender to be a valid notice may nevertheless operate as one, and vice versa.

In addition, the judge held that there was no timing requirement in respect of payment. It was therefore to be implied that the £20,000 had to be paid within a reasonable period of time of the end of the ten-year option period. The developer had done this.

Analysis

The most obvious point that the case highlights (which hardly needs to be stated) is that practitioners gravitate towards serving notices at the last available opportunity. The misunderstanding in this case about the date the option period expired is perhaps understandable. The interpretation of when an agreement intends a particular period of time to expire comes up time and time again. However, the possibility of ambiguity was all the more reason to serve a proper notice a good few days beforehand, which would have avoided the sleepless nights this case must have caused Westbury’s solicitors.

It must be remembered that although Mannai provided practitioners with some comfort it did not go as far as many thought, that is, to hold that so long as the intention of the notice is valid, then a departure from the precise terms of the clause will not prevent it from being valid. This is not the case. It remains the case that if a clause prescribes steps a party must take to serve a valid notice, then those steps must be followed, irrespective of whether the intention of the notice is otherwise clear. The example given in Mannai is that if the clause requires that the notice must be served on pink paper, serving it on blue paper will mean that the notice is invalid.

Clearly, what is and is not a prescribed condition to the operation of a notice will depend on the interpretation of the precise words used in each case. Here, some observers may think that the judge was a little generous in finding that it was not an indispensable condition that the notice specifically ‘require’ an extension of the option period by five years. This may feel to some as extending Mannai from curing defects in notices, to curing ambiguities. The judge in justifying this decision relied on Lancecrest Ltd v Asiwaju [2005]. In that case, a tenant under a lease was required to give counter-notice to a trigger notice stating that the tenant ‘does not accept the annual amount proposed by the landlord’. The tenant replied to the trigger notice stating that the trigger notice was invalid, but not stating in terms that the annual amount proposed was not accepted. The Court of Appeal considered whether the letter informed the landlord that the tenant did not accept the proposed amount and held that it was clear from the letter that was headed ‘Rent increase’ that its purpose was to dispute the rent increase.

The other interesting point to arise from this case was the point made by the landowner that Westbury had not intended to serve a notice extending the option period on 12 September 2002 (bearing in mind that there was not board authority to do so). The judge in this instance (again relying on the fact that in Lancecrest the tenant had not intended to serve counter notice to the trigger notice, but rather to dispute the validity of the trigger notice) did not find that this was part of the objective context known to both parties and therefore was not to be taken into account.

Practitioners should beware however, that where an option requires that a party must intend or desire to do something (for example, serve notice to terminate a lease), this will be construed as a prescribed pre-condition to the exercise of a break and, therefore, it is wise to check that the party wishing to serve the notice has gone through the appropriate internal processes to authorise this step.  © Property Law Journal