In McGahon v Crest Nicholson Regeneration Limited [2010] EWCA Civ 842, the Court of Appeal held that buyers who had exchanged an agreement for underlease (agreement) were not entitled to rescind the agreement even though a condition had not been fulfilled by the date specified for it.

The seller was developing the site without a legal interest in the land. It was due to take a headlease of the land (headlease), but the headlease had not been granted when it exchanged contracts with the buyers.

The relevant clause in agreement provided that, if the headlease were not granted to the seller prior to the longstop date contained in the agreement (longstop date), either party could rescind the agreement. The clause did not specify whether the parties retained the right to rescind the agreement if the headlease were granted after the longstop date.

The seller did not get the headlease by the longstop date. By the time the buyers tried to rescind the agreement, the headlease had been granted, and the seller insisted that the buyers complete the purchase. When the buyers did not complete, the seller forfeited the deposit. The buyers sued for the return of the deposit plus interest.

The Court of Appeal held that, if the right to rescind continued to exist after the headlease had been granted, then it would have had to exist in favour of both parties. This could have had unfavourable consequences for the buyer, for example, in a rising market.

The decision is a useful illustration for those advising on development agreements for lease and sale contracts.

When considering similarly drafted clauses, it is good practice to amend them so that it is clear that the right to rescind is exercisable after the longstop date, but ceases to be exercisable once the condition is satisfied.