The protection of pre-emption rights

A recent Upper Tribunal decision sheds light not only on the importance of the specificity of the drafting of the pre-emption right, but also the steps which may be taken post contract to protect it.

The pre-emption right in Law v Haider [2017] UKUT 212 (TCC) was contained in a Tomlin order arising out of the settlement of a boundary dispute. It provided: ‘In the event of the Claimants or their estates selling any or all of the remaining land currently comprised in title number NK 171471 and/or Sovereign Meadows they shall give the Defendants the first option to purchase that land.’ Unilateral notices were registered over the respective titles but the grantees also applied to register restrictions as against the grantors’ titles.

Mr Justice Morgan, sitting in the Upper Tribunal (Tax Chamber), had to determine: (1) the meaning of ‘sell’ and ‘first option’ and whether the right was void for uncertainty; (2) whether the right had been lost as the grantees had failed to ‘make an offer’ when invited; (3) whether the right could be protected by a restriction; and (4) if so, how such a restriction ought to be worded.

First, the provision was not void for uncertainty; the trigger event of ‘selling’ was interpreted as meaning a formed intention to sell (but before the entry into an incompatible contract with a third party). Similarly, the ‘first option’ was the offer by the intended donor to the beneficiary of the right to purchase at a certain price. The right was sufficiently certain so as to be exercisable.

Second, while the grantors had not breached the right as they had not yet entered into an incompatible contract for sale, equally the grantees had not lost the right of pre-emption by failing to take up the grantors’ calculated invitation to ‘make an offer’. The ‘first option’ required an offer by the grantor to the grantees at a certain price; a mere invitation to the grantees to ‘make an offer’ was insufficient and so the right remained extant. The unilateral notices therefore remained.

This led to the question: was protection by notice sufficient? It was not in this case, as (on its wording) the pre-emption right was only exercisable against the grantors irrespective of priority.

Third, Morgan J held that, while such a pre-emption right could not be protected by a restriction pursuant to section 42(1)(c) of the Land Registration Act 2002 (LRA), given the prior protection by the unilateral notices (section 42(2) LRA), nevertheless it may be protected by a restriction pursuant to section 42(1)(a), as it was necessary or desirable for the purpose of preventing invalidity or unlawfulness, which covers a case where a disposition is in breach of a contractual restriction on making such a disposition. In this case, without such a restriction, the grantors could sell to third parties who would practically take free irrespective of the registered notices, given the limited scope of the pre-emption wording.

Fourth, given the very limited wording in the grant, the usual Form L restriction would have to be amended to take account of other dispositions which do not amount to a sale – namely, a gift or lease. The use of ‘event of selling’ meant that the grantors would not be in breach upon (and hence there would be no restriction to prevent) a gift or grant of a lease, neither being a ‘sale’ of the freehold title (or within its ordinary meaning).

Following this guidance, when drafting pre-emption agreements you are well advised to consider including the following:

• A precisely defined trigger event, both in terms of timing and substance. For example, if it is intended to bite upon gifts or grants of leases then it must make clear it applies to all dispositions;

• A mechanism for calculating the price;

• Clear identification of those to be bound by the agreement; in Law it was agreed that the identification of the grantors precluded any assignees of their estate;

• An express provision prohibiting a transfer of the estate prior to the pre-emption right;

• An express agreement to register a restriction on the title, to avoid any argument about whether such protection is necessary; and

• Custom wording of that restriction which precisely identifies the trigger event to ensure that the restriction has teeth.

Conveyancers and litigators alike will welcome the possibility of protection of pre-emption rights by restrictions on the Register as the surest way of preventing third-party dispositions in breach of the agreement. They provide real teeth to the contract and ensure that the aggrieved party can obtain that about which it cares most: the land.

Similarly, the decision serves as a welcome reminder that one only gets what one contracts for, especially to those of us who have to draft in the heat of the moment on the court steps.

Martin Dray and Kester Lees are barristers at Falcon Chambers

@FalconChambers1 www.falcon-chambers.com