Be careful when you sign that contract to grant option to purchase a property

Here's a case to teach you a lesson.

Most sellers and buyers of property are familiar with the requirement for the parties to sign some document before an agreement for the sale may be concluded. This is sometimes in the form of a sale and purchase agreement signed by both parties together with payment of a deposit by the buyer. In other cases, it is sometimes done through an option to purchase signed by the seller and given to the buyer in exchange for a cheque as consideration for the option. The agreement for the sale is subsequently concluded when the buyer exercises the option by signing its acceptance form and paying the balance of the deposit within the stipulated time.

It is also possible for a buyer of a property, in a bid to ‘entice’ the owner to sell the property, to make a offer to the owner to grant to the buyer an option to purchase, such offer being commonly backed by an option fee (usually amounting to 1% of the intended purchase price). We have seen an increasing number of cases adopting such arrangements but the lack of familiarity with how such arrangements work may cause problems. The recent case of Chew Ai Hua, Sandra v Woo Kah Wai and another (Chesney Real Estate Pte Ltd, third party) [2013] SGHC 120 is a good example of this.

CHEW AI HUA, SANDRA V WOO KAH WAI AND ANOTHER (CHESNEY REAL ESTATE PTE LTD, THIRD PARTY)

In the Chew Ai Hua case, the two defendants were joint owners of a condominium unit in Minbu Road (the Unit) that was under construction. They engaged Chesney Real Estate Pte Ltd (Chesney) to assist them in the sale.

After the parties verbally agreed to the price of $920,000 through their respective property agents, the plaintiff made a written offer to purchase the Unit at $920,000. She did it by way of a letter sent through her property agent. The letter gave the defendants 3 days to accept her offer by delivering a signed option to purchase (to be on the terms stated in the letter) to the purchaser. It also enclosed a cheque for the $9,200 option money.

The letter of offer from the plaintiff was conveyed to a director of Chesney and an option to purchase (the Option) was prepared by one of Chesney’s staff. However, the Option was not prepared in accordance with the requirements of the letter of offer. The first defendant subsequently signed the Option on behalf of both defendants and deposited the plaintiff’s cheque into his bank account. The Option was given to the plaintiff’s property agent the day before its expiry. Unfortunately, the day of expiry was a Saturday and also the eve of the Chinese New Year. At the trial, there were differing versions as to what actually happened around this time. In any event, the plaintiff was not able to exercise the Option before its expiry.

At the end of the trial, the judicial commissioner found that:

the plaintiff’s offer to buy the Unit was accepted by the defendants through their conduct of banking in the plaintiff’s cheque and in retaining the option money beyond the deadline of the offer; this resulted in a contract for the grant to the plaintiff of an option to purchase the Unit that should comply with the requirements of the plaintiff’s offer; the Option did not comply with the requirements of the plaintiff’s offer; and consequently, the defendants had breached the contract.

JOSEPH MATTHEW AND ANOTHER V SINGH CHIRANJEEV AND ANOTHER

One of the cases that the judicial commissioner relied on was Joseph Matthew and another v Singh Chiranjeev and another [2010] 1 SLR 338. In that case, the apartment owners had emailed their property agent to say they were "taking a decision to sell" their apartment at the offered price and instructed the agent to bank in the purchaser’s cheque for the option fee but they did not sign the option.

The High Court’s finding in that case that there was a binding agreement to grant an option for the sale of the apartment even though no option had been signed by the owners was upheld by the Court of Appeal. The Court of Appeal said that the contract to grant an option for the sale of the apartment was binding when (at the latest) the option fee had been deposited into a seller’s bank account and the signing of the option to purchase was "merely a necessary part of the process of giving effect to a binding agreement (to grant an option) that had already been entered into" by the parties.

OUTCOME OF THE CHEW AI HUA CASE

As the defendants had already sold the Unit by the time of the trial, the judicial commissioner did not grant an order of specific performance for the sale of the Unit to the plaintiff or the issuance of a fresh option to purchase. Instead, he ordered that the defendants should refund the option money of $9,200 and also pay the plaintiff damages assessed based on the difference between the original price of $920,000 and the market value of the Unit as at the intended date of completion of their contract. He also ordered pre-judgment interest to be paid by the defendants to the plaintiff.

COMMENTS

The Chew Ai Hua case highlights some of the problems that may arise when venturing into less common contractual arrangements. Neither the sellers nor the buyers appear to have consulted their lawyers until after the contract had been concluded and such an approach is risky. The case is also a timely reminder of the importance of having contractual documents properly drafted and of acting in a manner consistent with one’s legal position.

(Written by Joo Khin Ng and Richard Tan Ming Kirk, Stamford Law)