Poor drafting of agreements

Large sums of money can hinge on the interpretation of a very few words, which is why professional drafting of agreements is so important. That point was powerfully made in a High Court case concerning an option to purchase a commercial property.

In Helix 3D Limited v Dunedin Industrial Property Nominee Limited & Anr, the tenant of the property had paid £25,000 for the five-year option. It enabled the tenant to purchase the freehold for a fixed price of £1.5 million at any time during the first two years of the agreement.

In the following three years, the price payable was £1.5 million or the open market value, whichever was the greater.

In the fifth year of the option, shortly before it expired, the tenant purported to exercise it by offering £1.5 million and paying a £90,000 deposit. The landlord denied that the option had been validly exercised on the basis that there had been no agreement or determination of the open market value.

In ruling on the dispute, the Court noted that it was rooted in the poor drafting of the agreement. The landlord’s interpretation of the option was divorced from reality in that it would require the tenant to guess the open market value before seeking to exercise it. A reasonable person would not have expected the option to be modelled on a lottery. In finding that the option had been validly exercised, the Court concluded that the tenant’s interpretation made greater commercial sense.

--Rex Cowell Solicitors