McGahon v Crest Nicholson Regeneration Ltd

This appeal concerns an apartment in the development known as “The Atrium”, in Camberley, Surrey. The development is a mixed-use development which includes 214 residential units in a number of different blocks, one of which is called “Aspect”.

On 27^th October 2006 the claimants entered into a contract (“the Contract”) to purchase a long underlease of Apartment 39 (“the Property”) in Aspect for the price of £265,000. This was an “off-plan” purchase; that is to say that the block was at the time in the course of development. The claimants had received a modest lump sum payment from Mr McGahon’s pension and in common with a large number of people at the time decided to invest it in the property market, which in late 2006 was buoyant. They paid a deposit of 10 per cent and envisaged that they would complete with the benefit of a substantial mortgage, 85 per cent mortgages then being available. They bought the Property ‘off-plan’ as a buy-to-let investment for their retirement. For the transaction they instructed solicitors recommended by the developers.

The contract contained the following provision at clause 4:

On 20^th February 2008 the defendant wrote to the McGahons advising them that completion was anticipated for the autumn of 2008 and advising them to arrange their mortgage if they had not already done so. By this time the credit crunch was under way and the sort of mortgage deals which the claimants had believed would be available to them as buy-to-let investors were no longer available. At the same time the Property, which the claimants had agreed to buy for £265,000, was valued at the substantially reduced figure of £200,000. This resulted in an unbridgeable gulf between the purchase price due to be paid on completion and the total amount which the claimants could raise either from their own resources or by borrowing. At best it appears they could have obtained a mortgage of 75 per cent of the reduced value of £200,000.

1^st June 2008 came and went but (unknown to the claimants) the headlease referred to in clause 4 of the contract (“the headlease”) had not yet been granted. On 24^th July 2008 the claimants wrote to the defendant explaining their predicament. The material passage of the letter is in these terms:

The defendant’s parent company, Crest Nicholson plc, responded, expressing sympathy and offering as a goodwill gesture “a discount off the completion monies of £7,500”. This did not resolve the claimants’ predicament, and they did not respond.

The headlease was not in fact granted until 4^th September 2008 and it was registered on 17^th September 2008.

At some point in September the claimants instructed a new solicitor, Julie West. On 29^th September 2008 she purported to serve a formal notice under clause 4. The substantive part of her letter was in these terms:

The Contract is conditional on the grant of a head lease to you or to your nominee of the block of which the Property forms part by 1^st June 2008;

The said head lease was not granted in compliance with clause 4 of the Contract;

This notice is given pursuant to clause 4 of the Contract to which the Contract was made subject.

We give you notice on behalf of the Buyers that the Buyers rescind the Contract with immediate effect and require you to return to us on behalf of the Buyers without delay the deposit with interest.

The defendant’s solicitors responded arguing that because the headlease had been granted before the purported notice of rescission the contract had not been terminated and stating that the claimants would be required to complete once a completion notice had been served. The upshot was the issue of these proceedings by which the claimants seek the return of their deposit and interest.

At the contract date the defendant had not acquired a legal title to the development site but it had started to develop the site. The property had not yet been constructed. Against that background the commercial purpose of clause 4 is apparent. The McGahons could not be expected to take the Property if the defendant had not acquired the headlease. Until that happened the defendant could not give good title to the McGahons, so the Contract was conditional upon the grant of the headlease. Both parties needed a certain date by which, if the headlease had not been granted, they could get out of the Contract. The defendant would not wish to continue to develop the block if it could not obtain title so it could grant underleases of the apartments once developed. Equally the McGahons would not wish to continue to be bound indefinitely in circumstances where the defendant could not give them a good title to the apartment. Consequently clause 4 gave each party an option to rescind.

It is to be noted that there is no requirement on the defendant to notify the McGahons that the headlease had or had not been granted by 1^st June 2008. The defendant would, of course, know whether the headlease had been granted by that date; the McGahons would not know and would have, somehow, to discover the position. It would perhaps be unsatisfactory for the McGahons merely to ask the defendant because the defendant might not reply, but the McGahons could always check the register and, if they had done that in June, July or August, they would have learnt that no headlease had been registered; they might well be entitled to assume that no headlease had been granted and therefore that they were entitled to give notice of rescission. Any such notice of rescission would undoubtedly have been effective.

It is further to be noted that clause 4 says nothing on the question whether a notice of rescission is to be effective if served after a headlease has in fact been granted at the time of the notice but after 1^st June 2008. The clause could have made this clear by saying, in the second sentence, that either party should “have the right at any time to rescind this contract” or “have the right at any time before the headlease is granted to rescind the contract”. Since the contract has not made this clear, the court must decide which of these alternatives is intended. It can be said that this is a question of implication but I doubt if it is helpful for either party to assert that the other is seeking to imply a term into the contract. Something must be implied and the only question is what.

Mr Higgins for the McGahons submits that, in the absence of any term obliging the defendant to notify the McGahons whether the headlease had been granted on 1^st June 2008, the only reasonable implication is that the McGahons should be able to rescind at any time after 1^st June even if that is well after the headlease has been granted. Otherwise a valuable right would accrue to the McGahons and might be lost to them without their ever having been aware that they had had it, let alone that they had lost it.

The judge decided the case against the McGahons, and in favour of the defendant because he considered that McGahons’ argument led to a most uncommercial result. If the right to rescind subsisted after the grant of the headlease, it would have to subsist for the benefit of both parties. Could the defendant (in the knowledge that the headlease had not been granted on the due date) sit back and wait to see how the market moved and, if it moved in its favour, rescind the contract (perhaps many months later), return the deposit to the McGahons and sell elsewhere at a higher price? Conversely could the McGahons, suspecting (or even knowing) that the headlease had not been granted on the due date, sit back (similarly for many months) and wait to see if the property market fell and then rescind, claim back their deposit and buy a better apartment elsewhere?

The clause has three sentences. It is the first sentence which makes the contract conditional on the grant of a headlease. It is to be noted that, in this sentence at any rate, there is no time provision, let alone a provision making time of the essence of the contract. The contract can, therefore, become unconditional even if the headlease is granted after 1^st June. The second sentence then grants a right of rescission if the headlease is not granted by 1^st June 2008; this is an option exercisable in that event but the sentence does not (at any rate in terms) seek to prevent the contract from becoming unconditional if the headlease is only granted after 1^st June. The third sentence then spells out the consequence of the exercise of the option of rescission.

To my mind once one appreciates that the contract can still become unconditional even though the headlease is only granted after 1^st June it must follow that the right to rescind only exists up until the grant of the headlease and does not continue once the headlease has been granted. The picture (suggested by Mr Higgins) of the McGahons not being aware that they had lost a right which they may never have been aware they had is a little unreal. They always knew that they could rescind after 1^st June if no headlease had been granted by that date. They could, if they wished (or if they had been competently advised) have taken steps to discover whether the headlease had been granted. For whatever reason they did not do so until after the headlease had, in fact, been granted on 4^th September 2008. Even if they did not then know that they were losing a right which they had had, they at least had the means of discovering the existence of the right to rescind at a time when the right was there to be exercised.

I also agree with the judge that the result for which the McGahons contend is uncommercial for the reasons given in para 14 above. Mr Higgins accepted that if the right to rescind continued to exist after the headlease had been granted, it would have to exist in favour of either party. He could provide no satisfactory answer to the judge’s questions there set out beyond saying that the consequences of his argument were not so grave as the McGahons being deprived of their rights without their knowledge. For the reason given in the previous paragraph, the consequences for the McGahons, if the defendant’s construction is correct, are not as grave as all that; the uncommerciality of the appellants’ argument still remains.

It was suggested to Mr Higgins that the judge’s question could be answered by reference to the doctrine of waiver. But, as Mr Higgins accepted, the questions asked by the judge pre-supposed that neither party engaged in conduct and conduct would be needed for any such waiver.

Miller’s Wharf Partnership v Corinthia Column Ltd [1991] 1 EGLR 192 has a superficial resemblance to the present case in as much as there was likewise a conditional contract for a lease (the conditions in that case being more numerous) and a provision (absent in the present case) that the vendor was to use all reasonable endeavours to satisfy the conditions. The relevant clause continued:-

In granting permission to appeal Rix LJ referred the parties to Mardorf Peach & Co Ltd v Attica Sea Carriers (The Laconia) [1977] AC 850 where a right of withdrawal had been granted to a shipowner under a time charterparty if the charterer failed to make a punctual monthly payment of hire. The House of Lords held that if the monthly hire had not been punctually paid, the right of withdrawal remained even after the hire had been paid. The right to withdraw only ceased to exist, if it had been in some way waived. Mr Higgins did not, however, seek to rely on the time charterparty analogy provided by The Laconia (1) because charterparties are different from leases or agreements for a lease and (2) because The Laconia dealt with a contract breaker who had failed to make a punctual payment of hire. That breach of contract continued after (late) payment had been made and the shipowners were always entitled to rely on the breach of contract unless they waived the breach. There is, of course, no question of the defendant being in breach of contract in the present case.

For these reasons I would dismiss this appeal.

I agree.

I also agree.