256: Is time of the essence for payment of deposits when exercising options over land?

A warning to parties wishing to exercise an option to purchase land to carefully scrutinise the terms of the option before exercising it. The case of IAA Vehicle Services Ltd v HBC Ltd [2024] EWHC 1 (Ch) looked at whether time was of the essence for paying the deposit at the time of exercising the option to purchase commercial premises.

What were the facts?

• IAA Vehicles was tenant under three commercial leases and each lease contained an option for IAA to purchase the landlord’s freehold reversion for a price specified in the leases.
• Service of option notices created binding contracts. The standard conditions of sale required IAA to pay deposits of 10% of the agreed purchase prices no later than the date of the sale contracts ie on the date of service of the option notices.
• The options were validly exercised by IAA. However the landlord, HBC Limited, claimed the sale contracts were not binding because IAA had failed to pay the deposits at the same time as exercising the options.
• The High Court considered whether IAA was bound to pay the 10% deposits on or before the date of service of the option notices. It also considered whether failure to pay was a repudiatory breach of the sale contracts which would entitle HBC to treat the sale contracts as ended.

What did the High Court say?

• The High Court decided in favour of IAA Vehicles and held its failure to pay the deposits was not a repudiatory breach of contract. HBC was not entitled to treat the sale contracts as terminated.
• This was unusual as the payment of a deposit at the same time as service of an option is usually considered to be a condition of the contract. A breach of such timing requirements normally allows a common law right to terminate a contract.
• The High Court held this was not an ‘ordinary case’ of a sale contract as it was an option to purchase the reversionary interest. In addition, the contract did not expressly say the ‘time was of the essence.’
• The grant of the options several years ago had fixed the sale price of the land. It was in IAA’s commercial interests to exercise the options and in HBC’s interests to avoid them. Therefore, when IAA exercised the options it clearly signalled an intention to purchase the land, irrespective of payment of the 10% deposits.
• As IAA was in occupation of the three commercial leases, IBC was not hindered in its dealings with the properties by IAA’s failure to pay the deposits on time.

Conclusion

IAA was extremely fortunate in this case that the court decided in its favour. The court exercised its discretion to allow binding sale contracts to take effect without payment of the deposits on exercise of the options.

The clear message for parties is to carefully check the terms of an option before serving notice. This includes double checking the standard conditions of sale which require payments of deposits on or before the date each option is exercised.