Insubstantial Non-Compliance Cannot Block Contract

A sale and leaseback agreement between a landlord and tenant was the subject of a recent court case. The decision turned on whether it was reasonable to refuse to comply with the agreement if vacant possession of a very small portion of the property could not be given.

In the case in point, a developer entered into an agreement with a property owner under which the developer acquired an option to buy a freehold development of more than 80,000 square feet. If the option was exercised, the developer was required simultaneously to grant a leaseback of part of the development to the owner.

For reasons which are unclear, a very small part (180 square feet) of the development which it was anticipated was to be made available with vacant possession was not and therefore could not form part of the leaseback. An adjacent area of similar size with vacant possession was offered instead.

The owner refused to complete the sale when the developer sought to exercise the option, arguing that vacant possession of the premises as per the original plan was an essential term of the agreement between them. Since the developer’s proposal breached that essential term, the owner was not required to sell. The developer went to court to obtain an order for specific performance – a remedy which requires a party to a contract to perform its obligations under it.

The court looked at the agreement and concluded that the area which did not benefit from vacant possession was insignificant and did not prevent the substance of the bargain from being fulfilled: the property owner was quite capable of being compensated financially for the small extent to which the developer did not comply with the agreement.