Pre-emptions and options to purchase

The drafting of a pre-emption clause and option to purchase in a lease was considered by the Court of Appeal. The tenant’s option to purchase had been exercised by Fitzroy Engineering Group Limited and Technix Group Limited was attempting to then exercise its right of pre-emption. The option to purchase contemplated a subdivision and the tenant taking only some of the land. The right of pre-emption related to the whole site. At stake was potentially a large difference in the purchase price too.

The right of pre-emption allowed the landlord to invoke it at “any time during the term of the lease”. Once invoked the tenant had 14 days to elect to complete the purchase of the underlying land.

The Court held that the right of pre-emption could not be invoked if the option to purchase had previously been exercised. Although the option was able to be exercised “at any time”, if those words were allowed their ordinary and plain meaning then the parties intention would not have been achieved. The Court looked at the wording of the whole clause and the background circumstances that gave rise to the deal in making its decision. These included the fact that the option would take time to work through as it included an investigation phase and a subdivision. The parties could not have intended that the pre-emption could be invoked after the option was exercised but before these phases had been completed.

The Court confirmed that the approach to be taken with these kinds of disputes is to establish the meaning that the parties intended their words to confer. The plain and ordinary meaning was not what the parties intended as it flouts business common sense.