Rescission of Conditional Contract – McGahon v Crest Nicholson Regeneration Limited

Facts

A buyer was contracted to purchase an underlease of a flat off-plan from a developer. The contract was conditional upon the grant to the developer of a headlease by the longstop date of 1 June 2008. In the event that the headlease was not granted by the longstop date, either party could rescind the contract. The conditional clause did not make provision for the developer to advise the buyer if the condition had been fulfilled. As a result of the credit crunch, the value of the property dropped and the buyer could no longer obtain a mortgage for the amount required to complete the purchase. The buyer advised the developer of their situation but had not realised that the headlease had not been granted and so could have exercised their right to rescind the agreement. The seller agreed to reduce the purchase price. The headlease was eventually granted on 4 September 2008. The buyer purported to rescind the agreement on 29 September 2008 because the headlease had not been granted by the longstop date.

Decision

The Court of Appeal held that the agreement was conditional on the grant of the headlease, although time was not of the essence, and as such the agreement could become unconditional if the headlease were granted after the longstop date. The right of rescission could only be exercised before the agreement had become unconditional and therefore the right to rescind existed only until the headlease had been granted and did not continue beyond that point.

The Court of Appeal stated that the buyer knew that they could rescind after the longstop date, provided no headlease had been granted, and could have taken steps to establish if the headlease had been granted by checking with the Land Registry. The Court of Appeal went on to say that if the right to rescind continued after the grant of the headlease, then the right would have to exist in favour of both parties, as it could be unfavourable to either party, depending on the market conditions.    

Comment

Both developers and buyers should check that they understand the terms of any conditional clause and longstop dates in their agreements and that such clauses are drafted as tightly as required. A buyer would also wish to ensure that any similar clause includes an obligation on the developer to advise the seller whether the condition has been satisfied or not.