When is an Option validly exercised?

by Greg Carter, Fixed-Fee Litigation Lawyer

Options are common in relation to the acquisition of land, new leases, shares, intellectual property rights and the grant of other property and contractual rights.

However the exercise of an option can easily fail, as the following NSW Court of Appeal case demonstrates.

Facts

A deed granted an option to B to acquire land owned by A, provided B delivered two executed contracts for the sale of land which specified a completion date of 42 days on the front page of each contract.

In purporting to exercise the option, B left the completion date in the executed contracts blank, and requested in a covering letter that the date of completion be 192 days from the date of the contract, citing an irrelevant clause in the deed.

The deed provided that the option may be accepted ‘strictly’ in accordance with the terms of the deed.

Was the option was validly exercised?

Legal principles

  1. The first question is, as a matter of construction, what have the parties agreed as to the requirements for the valid exercise of the rights created by the option.
  1. The second question is whether the conduct of the person purporting to exercise the option satisfies what is required.
  1. It is generally accepted that the effectual exercise of an option requires strict adherence to the method prescribed in the instrument creating the option. However this general proposition is one of fact, not of law, which reflects the fact that most professionally drafted deeds granting options specify with precision what is required for their exercise.
  1. If the grantee of an option misstates the terms of the option, but is objectively regarded as being willing to perform the contract to which the option gives rise, the option may nevertheless have been properly exercised.
  1. On the other hand, if the grantee of an option misstates the terms of the option, but is objectively regarded as not being willing to perform the contract to which the option gives rise, there will, generally speaking, be no effective exercise of the option.
  1. It is inherently likely that requirements for a written notice of exercise of option and for its exercise within defined periods are essential conditions of compliance. However references to means of communication and matters of details are unlikely to be intended to be essential - but will be essential if it clearly appears that they are intended to be.
  1. For example, if an option provides that it must be exercised by a written notice on blue paper, it will be no good serving a written notice on green paper, however clear it is that the grantee wants to exercise the option.

The result

The Court of Appeal held that the option was not validly exercised, because it was not accepted strictly in accordance with its terms, as required by the deed.

The Court of Appeal found that the covering letter was determinative, because it showed that the grantee of the option had not clearly and unequivocally accepted the sale contract contemplated by the deed.  The grantee was proposing to be bound to a different sale contract, involving a completion date of 192 days rather than 42 days.

Comment

It is critical to properly interpret the contractual requirements for the valid exercise of an option, and then to scrupulously carry out those terms.

Legal advice should be obtained on both counts, in order to minimise the risk of failure of the exercise of an option.

Case citation

Hagerty v Hills Central Pty Ltd [2018] NSWCA 200



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