Pre-emption agreements are a common feature of commercial property transactions, but it is nigh on impossible to draft them in a wholly watertight fashion without the assistance of a specialist lawyer. An Upper Tribunal (UT) ruling powerfully made the point.
A businessman sold his 50 per cent shareholding in a company that was the proprietor of a commercial property to a couple who owned the other 50 per cent. A pre-emption agreement was at the same time entered into which conferred on the businessman, for a 15-year period, an entitlement to share in the proceeds of any valuable development of the property. The agreement provided that, if the company wished to dispose of the property or any part of it, the businessman would have a right of first refusal.
A restriction was registered against the property’s title at the Land Registry in order to protect the businessman’s rights under the agreement. However, a dispute developed after the company transferred the property to a purchaser who agreed to pay £4 million on being registered as the property’s owner. With a view to enabling that step, the company applied to the First-tier Tribunal (FTT) to lift the restriction.
Prior to the transfer, the company offered to sell the property to the businessman for £4 million. The company argued that the pre-emption agreement thereafter expired because he did not accept that offer within eight weeks and the property was then disposed of within six months on terms that were no less favourable to the company than those offered to the businessman. That argument, however, did not persuade the FTT, which found that the agreement remained on foot.
Ruling on the company’s appeal against that outcome, the UT noted that the agreement was not a model of drafting or perfect syntax. Because of the complexity of the proprietary interests involved, the drafting of a wholly watertight contract presented a demanding task. Given the ambiguities in the agreement, it was appropriate to consider its true interpretation in the light of the transaction’s context and the commercial purpose it was meant to serve.
Notwithstanding that the corporate purchaser of the property was under the same control as the company, and the businessman’s argument that it was thus not an arm’s length transaction, the UT found that the transfer amounted to a disposition of the property within the meaning of the agreement.
Rejecting the appeal, however, it found that the transfer was not a disposal on terms that were no less favourable to the company than those which the businessman had previously been offered. That was because the purchaser was not required to pay any part of the £4 million until after it had been formally registered as the property’s owner. The businessman’s pre-emption right was therefore not extinguished and the Land Registry restriction that protected it would remain in place.