Your option period may not be as long as you think

In brief - Buyers of property under an option deed should be aware that it might not be easy to determine the first and last day of a period of time stated in the deed. It may therefore be best to exercise an option at least a few days or more before you consider it likely to expire.

In Lioncrest Capital Holdings v O'Shaughnessy [2022] NSWSC 1410 (Lioncrest), a developer, as the holder of an option to purchase land, brought proceedings in the NSW Supreme Court against a landowner (defendant) who claimed the developer was too late in exercising an option to purchase land, such that the purported exercise of the option was ineffective.

The option was contained in a option deed signed and entered into by the developer and landowner on 22 January 2019. 

The Court closely examined the definitions used in the option deed to describe these three periods of time:

1. Due Diligence Period: "a period of 84 Business Days commencing on 22 January 2019";

2. Call Option Period: "a period beginning the day after the expiry of the Due Diligence Period and ending twenty four (24) months thereafter"; and

3. Extension of Time: "a further period of 6 (six) months commencing on the next date after the expiry of the Call Option Period".

The developer exercised the option on 24 November 2021. 

Unfortunately for the developer, they were one day late. 

Due Diligence Period - Court does not agree with developer's claims

The Due Diligence Period was held to be commencing on 22 January 2019 and ending on 23 May 2019. This is a period of 122 days, comprising 84 business days plus 17 Saturdays, 17 Sundays and four public holidays that were excluded.

The developer unsuccessfully claimed:

• the Due Diligence Period commended on 23 January 2019 (one day after the date of the option deed);

• a reasonable business person in the position of the parties would understand "84 Business Days" to refer only to "whole days" such that the first day (22 January 2019) is not counted.

• the above interpretation is consistent with the option deed that provided in:

"… calculating any period of time commencing from a particular day, the period commences on the following day and the following day counts as part of that period" (clause 1.2(b)).

The landowner denied this. The Court agreed with the landowner:

• the deed "plainly" says that it is to commence "on 22 January 2019"; and

• a reasonable business person in the position of the parties would understand the deed to commence on 22 January 2019, even though the deed was entered into "part … way through the day";

• in relation to the interpretive provision (clause 1.2(b)), the definition does not refer to a period from 22 January 2022 but instead refers to the period commencing on that date (the Court indicated the result would likely be different if the period was expressed in the option deed to be "commencing from 22 January 2019").

Call Option Period - Court agrees with landowner's assertion that Interpretation Act's definition of "calendar month" applied

There was no dispute that:

• the Call Option Period then commenced the day after the expiry of the Due Diligence Period, being 24 May 2019; 

• the Call Option Period was the period ending "twenty four (24) months thereafter"; and

• in the deed "month" means "calendar month" (see section 181(1) of the Conveyancing Act 1919 (NSW)). 

There was a dispute as to the meaning of "calendar month" (from section 21 of the Interpretation Act 1987 (NSW) (Section 21). The landowner asserted that the Interpretation Act applied, so that it meant:

... a period commencing at the beginning of a day of one of the 12 named months and ending - … (a) immediately before the beginning of the corresponding day of the next named month, or … (b) if there is no such corresponding day, at the end of the next named month.

The Court agreed with the landowner. 

No application of the "Corresponding Date Rule"

In relation to both the Due Diligence Period and the Extension of Time, the developer unsuccessfully argued that the "corresponding date rule" ought to apply. 

The rule generally provides that in calculating a relevant period, "the day on which the [relevant] event occurs is excluded from the reckoning" such that "the period ends upon the corresponding date in the appropriate subsequent month". In other words, applying the rule, a call option period that "commences on 24 May 2019" and expires "24 months thereafter", would expire on 24 May 2021. 

The Court determined the rule did not apply to both the Due Diligence Period and the Extension of Time as the periods to which they refer "are not expressed to be periods of a specified number of months after a particular event. They are expressed to be periods commencing on a particular day or dates."

It is then, though, hard to see from the Court's decision why the rule did not apply to the Call Option Period. It was in fact described as "a period beginning the day after the expiry of the Due Diligence Period and ending twenty four (24) months thereafter".

Despite the above, the Court determined that the Call Option Period commenced on 24 May 2019 and ended on 23 May 2021 (consistent with the Interpretation Act).

Extension of Time - Court's reasoning leaves uncertainty

The Extension of Time commenced one day after expiry of the Call Option Period (24 May 2021) so, being for a "further period" of 6 months, it ended on 23 November 2021. One day before the developer exercised its option.

If the Extension of Time was instead described in the option deed as "a period commencing on the next date after the expiry of the Call Option Period and expiring 6 months after", the corresponding date rule may have applied, and the developer may have exercised the option on time. However, as the Court didn’t appear to apply its own reasoning to the Call Option Period, uncertainty remains.

What the decision in Lioncrest means for holders of option deeds?

It is often not as easy as it seems to determine the first and last day of a period of time in a deed. 

The danger is that for all deeds, when dealing with periods of time, even apparently clear wording may be a mirage. 

Any proper determination of the start and end of any period of time needs to carefully take into consideration the play between the following, as well as perhaps other things:

• the operative language in the deed, such as definitions;

• the interpretation provisions in the deed, such as clause 1.2(b) referred to above;

• the general law that applies to the interpretation of contracts and deeds, including the corresponding date rule; and

• legislative provisions applying to the interpretation of the deed.

It can be very costly to play this interpretative game and lose. 

For the developer in Lioncrest it means having to renegotiate with the landowner. The property was only one of many that were important to a development site that the developer was buying.

For most persons, a much better and safer course is to exercise an option at least a few days or more before you consider it likely to expire. The significant costs of being (perhaps unexpectantly) late, with the exercise of the option then being ineffective, substantially outweigh what are usually relatively low costs of doing so.