The question of whether there had been a valid exercise of an option for the purchase of certain real property was recently addressed by Slattery J of the Supreme Court of New South Wales in Hills Central Pty Limited v Hagerty & Ors [2018] NSWSC 789. The plaintiff 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 contract had not specified any completion date. The covering letter enclosing the documents had, however, requested that the defendants insert, on the front page of the contract, a completion date of 192 days from the date of the contract. There was a clause in the option deed containing a mechanism for the calculation of the completion date which provided that the completion date was to be specified on the front page of the contract. On a proper construction of this clause, the completion date should have been 42 days from the date of the contract and, accordingly, the date which the plaintiff had requested be inserted into the contract was an incorrect date. The defendants claimed that the option had not been exercised in accordance with the option deed and that the option had lapsed.
Slattery J observed that the applicable legal principles to determine whether there had been a valid exercise of an option had been summarised in Prudential Assurance Co Limited v Health Minders Pty Ltd (1987) 9 NSWLR 673 at 677 and that this summary had been widely adopted (at [34]). The summarised principles were as follows. References to the cases have been omitted.
- The primary rule was that the purported exercise of the option had to clearly and unequivocally express the fact that the intention was to exercise the option.
- It was not necessary for the effective exercise of an option that terminology conforming precisely to the terms of the option should be used.
- The appropriate question to be asked was what anybody who received the letter, subsequently said to amount to the exercise of the option, would fairly have understood to be the meaning of it, in all the circumstances of its receipt. Thus, the consideration which would govern the meaning to be ascribed to the letter was not to be judged in isolation, weighing only the words used, but was to be judged against the background of the dealings between the parties.
- A notice which misstated the terms of the option which it purported to exercise could amount, depending on the circumstances, to an unqualified and unconditional exercise of the option. However, if the grantee of the option set out an erroneous understanding of it and then purported to exercise the option as so understood, the exercise would, generally speaking, be ineffective.
- Every case depended ultimately upon its own facts and the proper construction of the document which was in dispute.
Slattery J went on to say that while some cases had stated that the effective exercise of an option required “strict” or “exact” adherence to the method prescribed in the instrument creating the option, other cases were authority for the proposition that only “compliance” was required, with a fair reading of the contractual requirement being understood and given effect. Nevertheless, his Honour said that the option needed always to be construed to identify what the requirements for compliance were in each case (at [35]-[37]).
His Honour also observed that the option deed was a commercial contract and that the approach to construing such a contract involved determining the meaning of the terms of the contract by having regard to what a reasonable businessperson would have understood the terms to mean, a task which required a consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract (at [38]-[40]).
After analysing the option deed, Slattery J found, in substance, as follows:
- 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 defendants 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 plaintiff 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 plaintiff as a whole made it clear that the plaintiff intended to exercise the option and this must have been clear to the defendants.
Accordingly, his Honour concluded that the option for the purchase of the property had been validly exercised.
