The Option To Purchase And Why Certainty Of Price Is Important

When does the option to purchase property become binding? Can the grantee of an option to purchase, name his own price, and expect the law to enforce the sale? These are the questions at the heart of the recent decision in Downtown Investments v Muwema & Co Advocates. The court found that the option to purchase without a set price was not enforceable.

A partner in the defendant, published an article contending that the Commercial Court missed the bus in its treatment of the option to purchase. With respect, it is that response that misses the mark. For an option to purchase to be binding, the price must be clear and certain. In this case, the price was anything but certain, and the offer made by the tenant was anything but sincere.

We have since engaged with the defendant firm on this and thank them for providing their reasoning with us in this critique and for providing their materials.

The requirement of certainty of price

The article correctly states the general law. An option to purchase gives the option-holder a recognized legal interest in the property and can be enforced by a court. The article further acknowledges that an option to purchase must make a clear and irrevocable offer to the tenant to purchase the property at a specified price within a defined period and that, where the price is not specified in the contract, a mechanism for determining the price must be given. This is a correct statement of the law, and it is precisely where the defendant's case falls apart.

The lease agreement gave the tenant the first option to purchase the leased premises at USD2,000,000 if the purchase transaction was concluded within twelve months upon commencement of the lease and thereafter the sale price was to be determined by the Market. The clause created two different scenarios. During the first twelve months of the lease, the price was fixed at a clear and certain figure. After that twelve-month window closed, the price was to be "determined by the Market." But the clause did not say how the market price would be worked out. No independent valuer was named, no formula was given, and no process was set out for resolving any disagreement. The clause simply left the price to future negotiation between the parties.

The tenant waited nearly seven years after the lease commenced, to make its offer. By that date, the fixed-price window had long closed. The tenant was therefore operating under the second part of the clause, where no specified price existed. Without a fixed price or a workable way of determining one, the option lacked the certainty needed to form a binding contract. It was no more than a right of first refusal, an entitlement to be considered first, but not a right to force a sale.

The authorities cited involved certainty of price

Each of the cases relied upon in the tenant's article involved an option where the price was either clearly stated or could be worked out using an agreed method. In London & Southwestern Railway Company v Gomm, the leading case on which the article relies heavily, the option was granted at a defined price, of GBP 100. In Petrolink Inc. v Lantel Enterprises, the option was exercised at fair market as determined by a valuation. Indeed, at that trial, three valuation reports were considered. In Saafin Constructions v Vidak, defines an option to purchase as an option that gives the grantee the right if he performs the stipulated conditions, to become purchaser. In Myers v Stone, also cited, the option to purchase was defined as “a contract by which the owner agrees with another person that he shall have the privilege of buying his property as a fixed price within a limited time.”

None of these cases supports the idea that an option with no specified or ascertainable price can be used to force a sale.

What about options at "Market Value"?

Some courts, particularly in the United States, have upheld options to purchase at "market value" or "fair market value" as sufficiently certain to be enforceable. In Goodwest Rubber Corp v Munoz, cited in the defendant’s submissions, the US courts held that an option to purchase at market value could still create a binding contract if accepted, on the basis that market value is an objective standard capable of determination by expert evidence or judicial appraisal.

However, the Goodwest approach does not rescue the defendant in this case, for three reasons. First, the specific wording of the Downtown clause is weaker than a straightforward "at fair market value" option. The clause states that the price "shall be determined by the Market", an ambiguous phrase that arguably contemplates a process of market engagement, such as offers, negotiations, or competing bids, rather than a single expert valuation of the kind envisaged in Goodwest. Unlike the options in Goodwest and Petrolink, the Downtown option contains no built-in mechanism, no independent valuer, no appraisal process, no arbitration procedure, for resolving any disagreement as to what the market price is. Second, and more fundamentally, even if the option were valid, it would still need to be accepted to form a binding contract. As the Court found, the landlord never accepted the tenant's offer. Goodwest does not stand for the proposition that a tenant can name any price he likes and compel a sale without the landlord's agreement. Third, the tenant's own offer of USD 1,050,000, barely half of the 2014 floor price for prime Kololo property does not look like a credible market-value offer.

It might be argued in the defendant's favour that the 2014 floor price of USD 2,000,000 was itself above market value at the time, and that the tenant's offer of USD 1,050,000 was not a lowball figure but rather a genuine adjustment to reflect the true market value of the property. If that were so, the gap between the two figures would not represent depreciation but a correction from an inflated starting point. This argument deserves consideration, but it ultimately fails on the evidence. If the tenant genuinely believed the property was worth USD 1,050,000 at market value in 2021, it had every opportunity to commission an independent valuation to support that figure. He did not. It simply named a price without any supporting evidence and expected the landlord to accept it. A tenant who invokes the market as the price-setting mechanism cannot then ignore the discipline the market demands: objective evidence of value.

The Court's findings: No contract was formed

The Court found that, since the offer was made well after the first twelve months, the parties were free to negotiate the terms of any sale, and the tenant's offer could only have created a binding contract if the landlord had accepted it. The landlord never accepted it. As the Court reminded us, one of the most basic principles of contract law is that an offer only becomes a binding contract when the other party accepts it, and silence does not count as acceptance under the Contracts Act. The Court accordingly held that the landlord did not sell the property to the tenant, and that the parties remained landlord and tenant at all material times.

It is telling that the article does not engage with these findings. It does not explain how an offer at a price the landlord never agreed to can be said to have become a binding contract.

Conclusion

An option must be certain as to price or must contain a workable mechanism for determining if it is to be capable of acceptance so as to form a binding contract. The lease agreement met this requirement only during the first twelve months. After that, the price was left entirely to negotiation. The tenant's offer seven years on was never accepted, and no contract of sale was ever formed. The Court's findings on this point are solid. The cases cited in the article, far from undermining the judgment, reinforce the very principle upon which it rests: without certainty of price, there is no option capable of enforcement.

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