The New South Wales Court of Appeal in Hagerty v Hills Central Pty Ltd [2018] NSWCA 200 has overturned Slattery J’s decision that an option for the purchase of land was validly exercised in circumstances where the grantee of the option left the completion date in the contract for the sale of land blank and requested that an incorrect completion date be inserted in the contract. The Court of Appeal described the position as “quite finely balanced” but concluded that there had been no valid exercise of the option.
Background
The respondent had purported to exercise the option by delivering option exercise documents which had included a notice of exercise of the option and copies of the contract but the contracts had not specified any completion date although the option deed had provided that the completion date should be specified on the front page of the contract. Instead, the covering letter enclosing the documents had stated that “[w]e request … that [the appellants] enter the Completion Date on the front of the contract to be 192 days from the date of the contract”, citing a particular clause of the option deed. The cited clause, however, was inapplicable and the clause which was applicable in the circumstances required a completion date 42 days from the date of the contract. The appellants claimed that the option had not been exercised in accordance with the option deed and that the option had lapsed.
At first instance, Slattery J found that the option had been validly exercised for, in substance, the following reasons:
- As a matter of construction of the option deed, the requirements for the valid exercise of the option did not include the requirement for the completion date to be specified on the front page of the contract. The specification of the completion date did not have to occur upon the exercise of the option but could take place later.
- The request in the covering letter to insert an incorrect date into the contract did not amount to a counter-offer because the option could be exercised without the completion date being specified in the contract and the request was just that, a request which could be ignored by the appellants without offence or adverse legal consequences. The request did not contradict the validity of the mechanism to find the correct completion date as there was no insistence by the respondent upon an incorrect date as a condition of acceptance of its offer.
- Although there was a request to insert an incorrect date, the conduct of the respondent as a whole made it clear that the respondent intended to exercise the option and this must have been clear to the appellants.
Slattery J’s decision was summarised in K Ottesen, “Principles governing the valid exercise of an option”, 14 June 2018.
The appellants appealed and the Court of Appeal allowed the appeal.
Applicable principles
Leeming JA (McColl and Macfarlan JJA agreeing) made the following points about the principles which were to be applied to determine whether there had been a valid exercise of an option (at [36]-[47]).
- The exercise of an option, to be valid, must have been absolute and unqualified and must have bound the grantee of the option to perform the very terms set out in the option. However, it was not always easy to determine whether the purported exercise of an option should be regarded as an attempt to vary the terms of the option or as an intention to accept its terms without change, notwithstanding that they might have been misdescribed or that the grantee of the option might have indicated that he or she intended to perform the contract in a way for which the terms of the option did not provide. Therefore, although a notice might misstate the terms of the option which it purported to exercise, it could nevertheless amount to an unqualified and unconditional exercise of the option. However, if the grantee of an option set out his or her own erroneous understanding of the option, and then purported to exercise the option as so understood, there would (generally speaking) be no valid exercise of the option (see Quadling v Robinson [1976] HCA 31 at [3]; (1979) 137 CLR 192 at 200-201 per Gibbs J).
- There were relatively few rules of general application in determining whether an option had validly been exercised. While it had been said that it was generally accepted that a valid exercise of an option required strict adherence to the method prescribed in the instrument creating the option, such a general proposition was one of fact and not law, and reflected the fact that most professionally drafted option deeds specified with precision what was required for their exercise.
- The questions which needed to be addressed to determine whether there had been a valid exercise of an option were:
- first, as a matter of construction, what had the parties agreed as to the requirements of the valid exercise of the rights created; and
- secondly, did the conduct of the person purporting to exercise the option satisfy what was required?
- Nothing much turned on whether the subject of the option was land or a grant of some other type of property or contractual right. Both questions needed to be addressed, and they were distinct questions. The difficulty which had arisen in some cases had been one primarily of construing the document creating the option while, in other cases, the problem had arisen from qualifications in the purported exercise of the option. In the present case, both questions were problematic.
First question: construction of the option deed
Leeming JA found that the trial judge had not brought to bear the fact that the parties had expressly agreed that strict compliance with all of the conditions of the option deed was required to exercise the option. His Honour said that cl 1.2 of the deed, which provided that the option constituted an irrevocable offer “which may be accepted strictly in accordance with the provisions of this Deed”, required compliance not merely with the clause in the deed which set out the manner of exercise of the option but with other provisions of the deed and also provided that it was to be accepted “strictly” in accordance with its provisions. His Honour further said that, while there could be difficulty in some cases identifying the full legal effect of the term “strictly” as used in such clauses, the term at least was an indication that the documents purporting to exercise the option had to be clear, unambiguous and incapable of misleading, and that a non-compliance should not be considered as immaterial (at [48]).
His Honour rejected the trial judge’s construction of the option deed that the completion date did not need to be specified on the front page of the contract when the option was exercised but inclined to the view that a mere leaving of the completion date blank, while complying in all other respects with the deed, would only have been an immaterial non-compliance, notwithstanding cl 1.2’s requirement of “strict” acceptance. However, his Honour did not find it necessary to reach any final conclusion about this given the facts of the case. As to the time of completion of the contract, his Honour indicated that this would have been regarded by the parties as an important part of their bargain (at [49]-[52]).
Second question: whether the exercise documents satisfied what was required
As to whether the exercise documents satisfied what was required, Leeming JA said as follows:
- Care had to be taken in relying on passages taken from other decisions in other cases as one could be led into error if sentences taken from individual cases were transplanted into a new and different context and applied as if they were propositions of law (at [53]).
- While the covering letter was expressed in the language of a polite request, it was clear that the recipient would understand the respondent to be saying that it would pay the balance of the purchase price, and would obtain title to the land, not in 42 days, but in 192 days. The covering letter had to be read with the documents it enclosed and the request was prominent. Moreover, the covering letter made it clear that the omission to specify the completion date in the contract was deliberate (at [58]).
- Contrary to the reasons of the trial judge, it did not follow, either as a matter of ordinary English, or as a matter of law, that in all cases a request could be ignored without offence or adverse legal consequences (at [60]).
- The politely worded language of the covering letter which, given its placement and content could not be overlooked by the recipient, was important for what it was proposing, namely, a regime which was materially different from that in the option deed. It was also significant for what was left unsaid, namely, the absence of any suggestion that the unpaid balance of the purchase price would be provided within 42 days on settlement (at [61]).
- The covering letter read together with the documents provided with it fell short of a clear and unequivocal acceptance to be bound by the contract contemplated by the option deed. Contrary to cl 1.2 of the deed, the irrevocable offer contained in it had not been accepted strictly in accordance with its provisions. Instead, the documents had made it clear that the respondent was intending to be bound to a different contract, one which provided for settlement to be delayed for 192 days (at [62]).
- The parties clearly regarded the time for completion as material. The fact that the respondent was departing from the terms of the deed was not an immaterial non-compliance (at [63]).
Accordingly, his Honour concluded that the respondent had not complied with the option deed and that the option had not been validly exercised.
