Rights of Pre-Emption and the Rule Against Perpetuities 2 Comments

Rights of Pre-Emption and the Rule Against Perpetuities

Proposition:   (1)  A right of pre-emption (or “first refusal”) does not (unless granted in relation to registered land after 13th October 2003) create an immediate interest in land; and
(2)  in the case of rights of pre-emption created by instruments before the 6th April 2010, the perpetuity period of 21 years under S.9(2) will not (again except in the case of registered land where the right is granted after 13th October 2003) run from the date of the instrument creating the right, but only from the satisfaction of the condition which makes the right exercisable (usually the giving of notice by the landowner of his intention to sell the land), at which point the right matures into an option, which is an interest in land.

This subject may seem to be of limited importance given the abolition of the rule against perpetuities in relation to land transactions effected by the Perpetuities and Accumulations Act 2009.  However, there will still be many instances where the position will have to be considered in the light of the law before 6th April 2010; a recent example which supports the Proposition above is the decision of the High Court in Cosmichome Limited v Southampton City Council [2013]EWHC 1378(Ch).  The Cosmichome case is also of interest in relation to the law of restrictive covenants and I will deal with that in a separate post.Rights of First Refusal

First, some history.  There has never been any doubt that an option (as opposed to a right of pre-emption) creates an interest in land and was until the coming into force of the Perpetuities and Accumulations Act 2009 subject to the perpetuity period of 21 years under S.9(2) of the 1964 Act.  There was for some time a doubt as to whether a right of first refusal (in the sense of an obligation on the part of a landowner not to sell the affected land without first offering it to the grantee of the right) also created in an interest in land, but any doubts were put to rest by the Court of Appeal decision in Pritchard v Briggs and Others [1980] 1 All ER 294 where it was held that:-

A right of pre-emption, unlike an option to purchase, did not create an interest in land because it did not give the grantee a present right, or even a contingent right, to call for the conveyance of the legal estate.  It created a mere spes and could not become an interest in land until the condition on which it depended was satisfied (ie by the grantor offering the land to the grantee) and the right was converted into an option”.

S.9(2) of the Perpetuities and Accumulations Act 1964 is in these terms:-

In the case of a disposition consisting of the conferring of an option to acquire for valuable consideration an interest in land, the perpetuity period under the rule against perpetuity shall be twenty-one years, and S.1 of this Act shall not apply; Provided that this subsection shall not apply to a right of pre-emption conferred on a public or local authority in respect of land used or to be used for religious purposes where the right becomes exercisable only if the land ceases to be used for such purposes”.

The underlining is mine.  The underlined words suggest that parliament must have assumed that S.9 (2) did apply to rights of pre-emption other than those specifically excluded.  This issue was discussed at length in Cosmichome.  The claimant’s counsel, relying on the judgement in Taylor v Couch [2012] EWHC 1213 (Ch),argued that even though the right in question was a right of pre-emption it qualified from inception as an option within the meaning of S.9 (2).  The learned Judge rejected this submission; he quoted Goff LJ in Pritchard:Years Passing

The beliefs or assumptions of those who frame Acts of Parliament cannot make the law”. 

 The learned Judge continued:

“In the light of the decision in Pritchard v Briggs I am of the view, indeed in the light of the reasoning that underlies that decision I doubt that it is open to me to come to a different view, that Parliament proceeded on a wrong assumption (namely that a right of pre-emption did indeed give rise to an immediate interest in land) and that it would not therefore be right to regard the legislation as amending the law by treating rights of pre-emption exceptionally as if they give rise to an immediate interest in land.  Looking at the issue more generally, I can see no reason why, where the right in question sounds at the time of its creation only in contract and may never mature into a right which confers on the grantee an interest in land, Parliament would have wanted to single it out and treat it as if, from the moment of its creation, the right had this added proprietary effect”.

The other issue which needed to be decided (in relation to the right of pre-emption) in Cosmichome arose from the decision that a right of pre-emption is converted into an option by the seller’s offer to sell the land, thereby engaging s.9 (2).  This is undoubtedly the case but the issue which then arises is from what date the 21 year period under s.9(2) runs?  The Judge (in Cosmichome) at first instance decided:

that once the right of pre-emSand Timerption became an option the 21 year period should be calculated (and can only sensibly be calculated) from the date of the disposition which conferred the right of pre-emption.”

Blackburn J did not accept Judge Hodge QC’s conclusion.  He said:-

I regret I do not feel able to agree with this conclusion either.  Once it is accepted, as this alternative approach must do, that a right of pre-emption, so long as it has not matured into an option, is not within S.9 (2) but only comes within the purview of the subsection (so that consideration of the perpetuity periods becomes relevant) once it matures into an option when the offer to sell is made, it is difficult to see why the relevant date for the starting of the perpetuity period must nevertheless be taken to be some earlier date.  Clarity and the need for ease of application do not seem, with respect, to be a sufficient basis for doing so.  On the contrary, the statutory provisions seem to me to point to the date when the option comes into existence (and the interest in the land arises) as being the relevant start date”.

And later:-

It would seem reasonably clear therefore that the date for measuring the 21 year perpetuity period is the date when the option arises rather than the date when the right of pre-emption is conferred”.

I have set these words out in full because I think they have quite an important consequence in relation to rights of pre-emption conferred before the 6th April 2010 but maturing into options after that date.  In such cases, the logical conclusion seems to be that the perpetuity period will not start to run at all as the interest in land will have come into force after the 2009 Act had taken effect to abolish the perpetuity period altogether in relation to land transactions.

The above comments (as suggested by the Proposition at the beginning of this post) apply to unregistered land.  The position is different in the case of registered land where S.115 of the Land Registration Act 2002 applies.  The section provided that:-Perpetual Motion Machine

(1)  A right of pre-emption in relation to registered land has effect from the time of creation as an interest capable of binding successors in title (subject to the rules about the effect of dispositions on priority).

(2)   This section has effect in relation to rights of pre-emption created on or after the day on which this section comes into force”.

The section came into force on the 13th October 2003; from that date on any grant of right of pre-emption the right would take effect immediately as an interest in land which would be capable of binding successors in title in accordance with the rules of priority applicable to registered land.  This provision was intended to overcome precisely the difficulties referred to above.  Clearly, however, the position as outlined above would be the same for registered land as for unregistered land in the case of rights of pre-emption created before 13th October 2003 and again the question arises of the position where a right of pre-emption in relation to registered land is granted before the coming into force of the 2002 Act but is converted to an option after that.  The answer I think is that s.115 would not apply and that  the resulting option would be subject to the Land Registration Acts and Rules regarding registration and priorities.

ConcluTime Passingsion: 

(1)  Rights of pre-emption granted in relation to unregistered land created before 6th April 2010 will not immediately create an interest in land but will be converted into an interest in land when any condition is satisfied (usually when the owner gives notice of his wish to sell);

(2)  in relation to such rights, when they become options S.9 (2) of the 1964 Act will apply, but the perpetuity period will only run from the date of conversion into an option and not from the date of the instrument creating the original right of pre-emption;


(3)  where a right of pre-emption in relation to unregistered land is granted before 6th April 2010 and matures into an option at a later date, the perpetuities rule will not apply;


(4)  S.115 will not apply to a right of pre-emption granted before 13th October 2003, nor on such a right maturing into an option after that date; if the right matures between 13th October 2006 and 6th April 2010, the rule will in theory apply, but  only until 6th April 2010.

 

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This Post Has 2 Comments

  1. Hairyloon says:

    Looking at the judgment, it appears that the basis of the argument is that the judge assumes that parliament made an incorrect assumption when they passed the law…

  2. David says:

    Thanks Raymond
    I was doing some research and found that very helpful

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