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Poor drafting in leases

In Helix 3D Ltd v Dunedin Industrial Property, the High Court decided that something had gone wrong with the drafting of an option agreement, interpreting it in the tenant’s favour on the basis that it was otherwise unlikely that the tenant would be able to exercise the option and that such an outcome could not have been what the parties intended when the option was originally drafted.

The landlord and tenant entered into an option agreement for the purchase of the freehold for a sum of not less than £1.5m. In the first two years of the 5-year option period the purchase price was set at £1.5m but the price in years 3-5 was not fixed and instead set at the greater of £1.5m and the Open Market Value (as determined after the service of an option notice). A 5% deposit was also required to be paid as at the date of service of the option notice.

In year four the tenant served the notice and paid a deposit of 5% of the £1.5m purchase price. The notice was rejected by the landlord who argued that the tenant had not paid the correct deposit, which was a condition for the proper exercise of the option. In year four the purchase price was the open market value (or £1.5m if that was greater) which was yet to be determined and would not be until the notice was served. It was therefore, impossible to say that the amount paid constituted 5% of the purchase price (the open market value) as required by the agreement although it was likely to be less.

Consequently, the tenant sought declarations from the court on the following basis:

on a true construction of the express and/or implied terms of the option
agreement, the option notice was valid and the option had been validly exercised; and

the tenant was entitled under the terms of the option agreement to seek the appointment of an independent valuer to determine the purchase price payable under the option agreement.

Court Decision
The parties were agreed that the option was badly drafted and that, to make the agreement work at all in years 3-5, it was necessary to read words in, or alter them, somewhere. The court was therefore required to correct the words of the option to give a practical effect to the agreement. The court held that the parties must have contemplated that the figure on which the 5% deposit was based was a figure that could be worked out at the time the deposit was to be paid. The only ascertainable figure at that time was therefore the £1.5m purchase price and although the agreement was a formal document, something had gone wrong. It was clear that a reasonable person would have understood that, the parties meant that in years 3-5 the requisite deposit was 5% of the £1.5m. Accordingly, the judge granted the declarations the tenant sought.

These cases are always difficult as the court must guess what a reasonable party would have wanted to achieve. But this guess work may not in fact be what the parties intended at all. It is therefore, always better to ensure that leases are drafted carefully and properly to reflect the intention of the parties.

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