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Lawbite: Wording Not Optional

  • United Kingdom
  • Litigation and dispute management
  • Real estate dispute resolution

13-02-2017

Helix 3D Ltd v (1) Dunedin Industrial Property Nominee Ltd (2) Dunedin Industrial Property Nominee 2 Ltd [2016] EWHC 3012 (Ch)

Helix, a tenant, was held to have validly exercised an option to purchase freehold property, but only after words had to be read into (and amended in) what was agreed to be a badly drafted option agreement.

Helix was granted a 5 year option to purchase the freehold of commercial premises by its landlord, Dunedin’s predecessors in title. The agreement provided that, if exercised, the purchase price was the greater of £1.5m or the open market value (the procedure for determining the latter was triggered by the service of the option notice). Payment of a deposit (5% of the purchase price) was a condition precedent for effective exercise of the option. On the same date it entered into a lease of the same premises.

Helix sought to exercise the option by serving a prescribed form of option notice and paying a deposit calculated as 5% of £1.5m. The Landlord argued, however, that the option had not been properly exercised on the basis that the incorrect deposit had been paid. It said that the open market value may be greater than £1.5m.

The Claimant accordingly asked to Court to declare that it had validly exercised the option.

The issue turned on the correct construction of the agreement. It was agreed that to reach the correct interpretation one should ask “what a reasonable person having all the background knowledge that would have been available to the parties would have understood them to be using the language in the contract to mean” (applying Chartbrook v Persimmon Homes Ltd).

It was held that in order to correctly construe the agreement it was necessary to read words into, or alter them, somewhere. Both parties agreed that the agreement had been badly drafted and the question was which provision(s) should be corrected.

Dunedin tried to argue that either the agreement required the parties to agree the purchase price before a valid option could be served or alternatively it had the consequence that it was not possible for the validity of the notice to be known until the open market valuation was undertaken.

Favouring one of Helix’s more practical arguments, the Court held that the parties must have intended that the figure on which the 5% deposit was based was a figure ascertainable at the time the deposit was to be paid i.e. the £1.5m as stated in the Agreement, and that this is what a reasonable person would have understood the agreement to require.

KEY POINTS

Poorly drafted agreements can lead to unintended consequences. Clarity is therefore key. Whilst the Court agreed with the Claimant on the outcome it sought it did not agree with all of the arguments presented by the claimant on construction. Clearly, there is, therefore, scope for findings on construction and interpretation which may not accord with what the parties originally envisaged. This can be even more difficult to ascertain where one or more of the parties enforcing the agreement in question was not an original party.