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How might someone attempt to get out of a conditional contract for the sale of land?

15/07/2011

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United Kingdom

Chris Hill discusses some practical questions that arise and highlights some recent cases.

This article was included in the summer 2011 issue of Informer - the real estate newsletter.

Recent cases highlight some possible issues.

Contracts for the sale of land usually involve a two stage process. Firstly, an exchange of contracts when the parties commit to the deal, with completion coming some time later. Some contracts are conditional, meaning that after exchange, the parties take on various obligations (e.g. getting planning permission or securing vacant possession), with completion only taking place if those conditions are satisfied.  
 
Sometimes, between exchange and completion, parties want to escape conditional contracts (e.g. if their finance has dried up or market conditions have worsened).  Several recent cases have highlighted how parties to a contract might try to do this. Chris Hill discusses below some practical questions which often arise. 
 
Q.  We have not completed because the other side are in breach of their obligations. Can the other side still terminate the contract?
 
A.  As a starting point – no. There is a general contractual principle that if a party is in breach of its obligations, it cannot rely on those breaches in order to terminate a contract. The recent case of Extra MSA v Accor UK Hotels confirmed this principle. If your contract does not expressly provide otherwise, this general contractual principle may provide the answer (but see below).

In Extra MSA v Accor UK Hotels (2011), the parties entered into an agreement to construct hotel premises, which was conditional upon the landlord obtaining various consents before a certain date.  The landlord failed to do so and then sought to terminate after the long stop date. The Court held that (if it was in breach) it would not be able to rely on its own breach and terminate the contract. 


Q.  Does that mean that a party can never terminate an uncompleted contract if it is in breach?
 
A.  No.  If the parties have specified when they cannot rely on their own breach, then a party might otherwise be able to validly terminate - even if it is itself in breach. See BDW Trading v JM Rowe (2011).  When drafting contracts, think very carefully about when the entitlement to terminate will arise.

BDW Trading v JM Rowe (2011) involved a contract for the sale of land subject to each party complying with various obligations, including the removal of a tenant.  The long stop date came and went, but the parties continued with the contract. Some months later, the buyer terminated, as the tenant had not vacated. The Court upheld the termination.  It held that it did not matter than the buyer had not terminated immediately, as it had not elected to waive compliance with the conditions of the contract through its conduct. Further, the Court held that a list of provisions dealing with when a party could not terminate the contract were exhaustive – otherwise leaving the buyer free to terminate.

Q.  If a contract is conditional on a party performing an obligation and it fails to do so, can I waive compliance with that obligation and still insist on completion?
 
A.  Potentially yes.  It is always better to include wording to make clear when a party can waive compliance with a condition.  However, if no such wording exists, if that condition is obviously for the other party’s exclusive benefit (and that obligation is severable from the remainder of the contract) then that party may still be able to waive compliance with that obligation – see Irwin v Wilson.  Ideally, however, parties should always make clear in the contract when conditions are capable of being waived.

Irwin v Wilson (2011) involved the sale of a leasehold flat.  The seller was obliged to use reasonable endeavours to rectify some incorrect plans attached to the title. It did use its reasonable endeavours to do this, but was unable to rectify the plans.  Even though there was no express entitlement as to waiver of this condition, the Court held that the buyer was able to waive compliance with it (and thereby force the sale) because the condition was for its exclusive benefit.  However, before it had the chance to do so, the seller terminated the contract.  The termination was held to be effective as it took place before any attempt to waive compliance with the condition.


Q.  Can I waive compliance with that condition at any time?
 
A.  Not necessarily - be careful on timing.  If the parties can terminate after a long stop date and you intend to waive compliance with a condition (and seek to complete the contract) make sure you 'get in first'.  In Irwin v Wilson, the buyer wanted to waive a condition and complete the contract, but the seller 'got in first' and validly terminated it. Always carefully monitor your rights.
 
Q.  But does that mean I have to exercise my entitlement to terminate immediately?
 
A.  No, you probably will not need to terminate immediately.  On the face of it, your ability to terminate the contract will remain.  Do be careful not to lose your right to terminate by ‘electing’ to continue the contract ('waiver by election').  This election (which can be through conduct) would have to be unequivocal and a contractual entitlement to terminate is not lost simply because you do not use it straight away - see BDW Trading v JM Rowe. Do therefore always make clear whether you are waiving any right to terminate.

Conclusion

It is not always clear on the face of a document whether a party is or is not entitled to terminate.  However, sometimes it might only appear to be clear.  As with the cases referred to above, many of the relevant principles or remedies are found outside the express wording of the contract.  Many potential uncertainties can be resolved through well thought through drafting within the contract.

Don’t forget:

  • To continue to monitor your rights and entitlements
  • That you may need to act quickly if you wish to exercise them (particularly if that right is mutual)
  • To be clear about whether you are waiving any rights (or if you are electing to continue) and a failure to exercise rights immediately does not, by itself, mean you cannot rely on them at a later stage.

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