Coaten v PBS Corporation

A contractual right arising automatically on a specified event may be an option rather than a right of pre-emption. The distinction turns on substance and commercial intention. A right of pre-emption ordinarily requires an offer followed by acceptance, whereas an option involves unilateral exercise of an existing contractual right. Where the grantor is already bound to sell if a specified condition occurs, the arrangement may constitute an option even though a further offer letter calculates the price.

The claimant and defendant entered into a written agreement concerning a lease of a valuable flat. The agreement separately required the defendant to offer the lease to the claimant if a named individual died within a specified period. The price was to be calculated by reference to specified sums and costs, and the claimant had four weeks to respond.

After the individual’s death, correspondence passed between the parties. The claimant argued that the clause created an immediate conditional option. The defendant argued that it created only a right of pre-emption, so that the correspondence had to create the contract and failed to comply with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. The issue was whether the agreement conferred an option.

1. Construction. Clause 1(a)(ii) created an option, not a right of pre-emption. Unlike clause 1(a)(i), it obliged the defendant to make the offer on the specified death, provided the contractual machinery was followed.
2. Effect of the machinery. The offer letter operated as machinery for determining the price and identifying the terms on which the claimant could exercise the option. The claimant was not obliged to buy. The substance of the arrangement, rather than its form, was decisive.
3. Distinction from pre-emption. A right of pre-emption generally requires two steps: an offer and acceptance. An option requires only the grantee’s exercise to create the buyer-and-seller relationship. The reasoning was consistent with Spiro v Glentrown Properties Ltd [1991] Ch 537, approved in Bircham & Co Nominees No 2 Ltd v Worral Holdings Ltd [2001] 3 EGLR 83, and with Pritchard v Briggs [1980] Ch 338.
4. Disposition. The issue was determined for the claimant. Specific performance was ordered, with the parties to settle the minute of order.