Sudbrook Trading Estate Ltd v. Eggleton [1983] 1 AC 444, House of Lords

Lord Fraser of Tullybelton

My Lords, the appellants are the tenants in four leases, by each of which they were granted an option to purchase the freehold reversion of the leased premises at a valuation. The appellants have exercised the options, but the respondents, who are the landlords, contend that the options are unenforceable. The questions now to be determined, therefore, are whether the options are valid and enforceable, and, if so, how they should be enforced.

The leases relate to adjacent industrial premises in Gloucester. They were granted at different dates, but for terms which all expire on December 24, 1997, at yearly rents which are subject to periodical review. The leases are all in substantially the same form. . . . The clause in the 1949 lease, clause 11, has been taken as typical of them all. It entitled the appellants to purchase the reversion in fee simple, upon certain conditions which were all satisfied,

‘at such price not being less than £75,000 as may be agreed upon by two valuers one to be nominated by the lessor and the other by the lessee or in default of such agreement by an umpire appointed by the said valuers. . . . ’

The respondents contend that the options are void for uncertainty on the ground that they contain no formula by which the price can be fixed in the event of no agreement being reached, and that they are no more than agreements to agree. The respondents have therefore declined to appoint their valuer. The machinery provided in the leases has accordingly become inoperable.

In these proceedings the appellants seek a declaration that the options are valid, that they have been validly and effectively exercised, and that the contracts constituted by the exercise ought to be specifically performed. As regards the mode of performance, the main argument for the appellants is that the court should order such inquiries as are necessary to ascertain the value of each of the properties. Lawson J decided the question of principle in favour of the appellants, but his decision was reversed by the Court of Appeal which held that the options were unenforceable. Templeman LJ, who delivered the judgment of the Court of Appeal, made a full review of the English authorities and the conclusion which he drew from them was, in my opinion inevitably, adverse to the appellants’ contentions. The fundamental proposition upon which he relied was, in his own words:

 ‘that where the agreement on the face of it is incomplete until something else has been done, whether by further agreement between the parties or by the decision of an arbitrator or valuer, the court is powerless, because there is no complete agreement to enforce: . . . ’

I agree that that is the effect of the earlier decisions but, with the greatest respect, I am of opinion that it is wrong. It appears to me that, on the exercise of the option, the necessary preconditions having been satisfied, as they were in this case, a complete contract of sale and purchase of the freehold reversion was constituted. The price, which was of course an essential term of the contract, was for reasons which I shall explain, capable of being ascertained and was therefore certain. Certum est quod certum reddi potest: see May and Butcher Ltd v. The King (Note) [1934] 2 KB 17, 21, per Viscount Dunedin.

The courts have applied clauses such as those in the present case in a strictly literal way and have treated them as making the completion of a contract of sale conditional upon agreement between the valuers either on the value of the property, or failing that, on the choice of an umpire. They have further laid down the principle that where parties have agreed on a particular method of ascertaining the price, and that method has for any reason proved ineffective, the court will neither grant an order for specific performance to compel parties to operate the agreed machinery, nor substitute its own machinery to ascertain the price, because either of these clauses would be to impose upon parties an agreement that they had not made . . .

While that is the general principle it is equally well established that, where parties have agreed to sell ‘at a fair valuation’ or ‘at a reasonable price’ or according to some similar formula, without specifying any machinery for ascertaining the price, the position is different. . . . The court will order such inquiries as may be necessary to ascertain the fair price: see Talbot v. Talbot [1968] Ch 1.

I recognise the logic of the reasoning which has led to the courts’ refusing to substitute their own machinery for the machinery which has been agreed upon by the parties. But the result to which it leads is so remote from that which parties normally intend and expect, and is so inconvenient in practice, that there must in my opinion be some defect in the reasoning. I think the defect lies in construing the provisions for the mode of ascertaining the value as an essential part of the agreement. That may have been perfectly true early in the 19th century, when the valuer’s profession and the rules of valuation were less well established than they are now. But at the present day these provisions are only subsidiary to the main purpose of the agreement which is for sale and purchase of the property at a fair or reasonable value. In the ordinary case parties do not make any substantial distinction between an agreement to sell at a fair value, without specifying the mode of ascertaining the value, and an agreement to sell at a value to be ascertained by valuers appointed in the way provided in these leases. The true distinction is between those cases where the mode of ascertaining the price is an essential term of the contract, and those cases where the mode of ascertainment, though indicated in the contract, is subsidiary and non-essential. . . .

The present case falls, in my opinion, into the latter category. Accordingly when the option was exercised there was constituted a complete contract for sale, and the clause should be construed as meaning that the price was to be a fair price. On the other hand where an agreement is made to sell at a price to be fixed by a valuer who is named, or who, by reason of holding some office such as auditor of a company whose shares are to be valued, will have special knowledge relevant to the question of value, the prescribed mode may well be regarded as essential. Where, as here, the machinery consists of valuers and an umpire, none of whom is named or identified, it is in my opinion unrealistic to regard it as an essential term. If it breaks down there is no reason why the court should not substitute other machinery to carry out the main purpose of ascertaining the price in order that the agreement may be carried out.

In the present case the machinery provided for in the clause has broken down because the respondents have declined to appoint their valuer. In that sense the breakdown has been caused by their fault, in failing to implement an implied obligation to co-operate in making the machinery work. The case might be distinguishable in that respect from cases where the breakdown has occurred for some cause outside the control of either party, such as the death of an umpire, or his failure to complete the valuation by a stipulated date. But I do not rely on any such distinction. I prefer to rest my decision on the general principle that, where the machinery is not essential, if it breaks down for any reason the court will substitute its own machinery . . .

The appropriate means for the court to enforce the present agreements is in my opinion by ordering an inquiry into the fair value of the reversions. That was the method used in Talbot v. Talbot [1968] Ch 1. The alternative of ordering the respondents to appoint a valuer would not be suitable because in the event of the order not being obeyed, the only sanction would be imprisonment for contempt of court which would clearly be inappropriate.

Lord Russell of Killowen [dissenting]

My Lords, it appears to be generally accepted that the law as previously understood since at least the early 19th century is in favour of the respondents and of the decision of the Court of Appeal. It is proposed by the majority of your Lordships to assert that that previous understanding was erroneous. I cannot agree.

Basically the assumption is made that the parties intended that the exercise of the option should involve payment of a ‘fair price’ or a ‘fair value’. Of course parties to such a contract could in terms so agree, and I am not concerned to deny that in such a case a court could enforce the contract by ascertainment of a fair price or fair value, treating specific provisions in the contract for methods (which proved to be unworkable) of ascertaining that fair price or valuation as being inessential. But that is not this case. Why should it be thought that potential vendor and purchaser intended the price to be ‘fair’? The former would intend the price to be high, even though ‘unfairly’ so and the latter vice versa. Vendors and purchasers are normally greedy . . .

In my opinion this case is an example of the long established and quite sound principle that if A agrees to sell Blackacre to B the contract must provide for the price to be paid either in express terms or by the establishment of agreed machinery which is bound to work by which the price can be ascertained. If the machinery is not so bound to work the party taking ultimate advantage of its deficiencies is not to be castigated as having taken some unfair advantage, as though he had from the outset plotted to do so. If the tackle is not in order from the start it cannot be assumed that either party then knew it.