Conditional Contracts and the Right to Terminate

Conditional Contracts and the Right to Terminate

Extra MSA Services Cobham Limited (“Extra”) v Accor UK Economy Hotels Limited (“Accor”) [2011] EWHC 775 (Ch)

The case concerned a conditional agreement for lease between Extra (a developer and landlord) and Accor (a future tenant of Extra’s development).

In 2005, Extra had obtained planning permission to construct a new motorway service area and entered into an agreement with Accor to grant a 15 year lease with an 85 bedroom hotel being constructed as a term of the agreement. The key provisions under the agreement were:

1. Extra had to obtain specific consents, licences and permissions etc (the “Consents”) for the development to proceed
2. Extra had to use its reasonable endeavours to obtain the Consents as soon as possible after the date of the agreement
3. if the Consents were not obtained by the “long stop date”, the agreement would be rescinded providing that the rescinding party gave 10 working days’ notice.

The long stop date was extended by agreement between the parties twice and on both occasions when the long stop date was reached, Extra argued that the Consents had not been obtained. In December 2010, Extra served notice on Accor to terminate the agreement on the basis that the Consents had not been obtained.

Accor argued that the notice was ineffective as the right to terminate was conditional on Extra satisfying the second condition outlined above and contended that Extra had not done so. Extra sought a negative declaration from the court that on its true construction, the right to terminate the agreement was not conditional on its performance of its own obligations. Accor however argued that neither party should be permitted to terminate the contract by relying on its own breaches.

The High Court agreed with Accor on the basis that a party should not be able to benefit from its own wrongdoing. It was noted that this principle is not absolute and may be varied if the parties agree to include express provisions to the contrary in their contract or if the parties’ intention was such. The court stated that it would be wrong to suggest that the parties had intended that either of them could bring the agreement to an end to its own advantage by relying on its own breaches; such that the termination right had to be conditional on the proper performance of all obligations owed by the party wishing to exercise that right. 

The court noted that the purpose of the termination right in the agreement was to enable the parties to end the agreement if the consents were impossible to obtain. The court stated that in conditional agreements such as between the parties, commercial parties would be very aware that in certain circumstances it would be impossible to obtain the necessary consents within the timeframe laid down in the agreement and that neither party would be at fault. In these circumstances the court accepted that the parties should be able to exercise their right to terminate the agreement.

If you would like to know more, please contact Vanessa Joll, Head of Property Disputes, by emailing Vanessa or by calling her on 08450 990045, or speak to your usual contact in the Property Disputes Team.

This document is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this document.

19 August 2011