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Option to purchase: ensure legal documentation reflects parties' intentions

The recent case of Fresh Cut Ltd highlights that parties to an option to purchase must ensure that they fully understand the steps required to properly exercise the option and also must be clear from the outset exactly when the option has to be exercised.

In this case, the option to purchase the freehold was exercisable on written notice by the tenant by the "option date" which was "two years after the signing of this lease or upon the termination of the lease, whichever is the earlier."

The lease was for an initial term of six months, expiring on 18 October 2003, with rights of renewal. The tenant never formally renewed the lease (only indicated that it intended to renew), but remained in possession under a holding over clause in the lease. The parties did enter into further discussions but a new deed of lease was never signed.

The tenant then sought to exercise the option to purchase the property (still within the two year period). However the landlord refused on the basis that the option date had already passed. Both parties agreed that an option to purchase does not ordinarily survive the expiry of the lease, but the tenant argued that the holding over clause meant that the lease was not terminated on expiry of the initial six-month term because holding over represents a continuation of the landlord and tenant relationship.

The High Court disagreed – the holding over clause and the monthly tenancy it created was a new relationship between the landlord and tenant which began when the six-month lease expired. The option therefore terminated on 18 October 2003 due to the failure of the tenant to formally renew the lease.

Relying on assurances

The case of Juzwa v Hill is a reminder that despite the written terms of a contract a representation or assurance made and then relied upon by a party to enter into a contract, may be enforced by the court, even though it is not a term of the contract.

Mr Juzwa and Ms Rabinska entered into an agreement for the sale of their property to the Hills. The agreement stated the purchase price of the property would be paid by an initial deposit, followed by two six-monthly instalments of the purchase price. There was a proviso that if full payment and settlement had not occurred by 31 December 2003, the agreement was deemed to have been cancelled.

After the agreement was drawn up, but before it was signed, Mr Juzwa assured the Hills that he and Ms Rabinska would not insist on payment of the final instalment by a particular date. By 31 December 2003, the final instalment had not been paid and settlement had not occurred.

The sellers attempted to sell the property to another person, and the Hills sued for specific performance. The Court of Appeal found in favour of the Hills, upholding the decision of the trial judge, that the representation as to flexibility of payment had been made, that the buyers had relied upon that assurance and that it was reasonable for them to do so. The court commented on the informal environment that existed between the parties, such that there was no need to alter the wording of the contractual document. The document had been prepared and was in the parties' hands, although unsigned, when the assurance was given. That assurance was clearly of pivotal importance to the Hills when they subsequently signed the agreement.

The Court of Appeal held that the assurance was not to be viewed as a variation of the agreement and the fact that it was not in writing and signed by the parties was therefore immaterial. The case was decided on the basis of estoppel - the principle that when a person makes a promise or gives a representation causing another person to act relying on the promise, then it would be unconscionable for the person who made the promise to go back on it. In this case, estoppel operated to enforce the promise made by the sellers, even though it was not a term of the contract. The sellers were ordered to perform the agreement and transfer the property to the Hills.

Enquiries and information

For more information on any of the cases, articles and features in Property Update, please email Jane Holland or call on 64 9 916 8983.