The separate questions
12 The starting point is the option itself. There is no doubt that an option to purchase gives the optionee an equitable interest in the property. In fact the respondents concede that it is a prior equitable interest and that the answer to the first question is yes. There are many authorities on the point. It is sufficient for me to refer to the following: London and South Western Railway Co v Gomm (1882) 20 Ch D 562 at 580-581 per Jessel MR; Carter v Hyde (1923) 33 CLR 115; Commissioner of Taxes (Qld) v Camphin (1937) 57 CLR 127 at 132-134 per Latham CJ. Although Gibbs J (as he then was) in Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 59 ("Laybutt") at 75-76 identified the fact that an option to purchase gave rise to an equitable interest as a strong reason for characterising such an option as a conditional contract, rather than as an irrevocable offer, that 'standing controversy' as Sir Owen Dixon referred to it in Braham v Walker (1961) 104 CLR 366 at 376 has not been resolved and it is not necessary for me to take one view or the other for the purposes of answering the separate questions. It is to be noted that Gibbs J in Laybutt favoured the view that an option to purchase was a conditional contract to sell land which created a contingent equitable interest in the land.
13 The option to purchase in this case not only gives rise to a prior equitable interest in the property. It is contained in a registered lease and it is necessary to note the effect of s 117 of the Real Property Act 1886 (SA) ("RPA").
14 Section 117 of RPA is in the following terms:
Every such lease shall, for description of the land intended to be dealt with, refer to the certificate of the land, or shall give such other description as may be necessary to identify the land, and a right for or covenant by the lessee to purchase the land therein described may be stipulated in such lease, and shall be binding.
15 The significance of the fact that an option to purchase is in a registered instrument was considered by the High Court in Mercantile Credits Ltd v Shell Co of Australia Ltd (1976) 136 CLR 326 ("Mercantile Credits"). That case concerned an option to renew a lease but in the course of their reasons each Justice of the High Court referred to options to purchase in registered leases and the effect of s 117 of the RPA. Reference was also made to s 119 of the RPA and it is convenient to set out the terms of that section as well:
Every registered dealing with land shall be subject to any prior unregistered lease or any agreement for lease or for letting for a term not exceeding one year to a tenant in actual possession thereunder: Provided that no right or covenant to purchase the freehold contained in any such unregistered lease or agreement, nor any right or covenant for renewal of such lease or agreement shall be valid as against any subsequent purchaser of the reversion, lessee, mortgagee, or encumbrancee, unless such lease or agreement be registered or protected by caveat.
16 Barwick CJ defined the question before the Court in the following terms (at 336):
The question is whether by dint of the registration of the memorandum of lease containing the rights of renewal, the mortgagee under the subsequently registered memorandum of mortgage is bound by the unregistered extension of the lease effected in pursuance of the exercise of the rights in a registered memorandum of lease.
17 Barwick CJ first said that it was appropriate for a covenant conferring a right of renewal to appear in a registrable instrument being a lease of land, and that a covenant giving a right of renewal "forms part of the delineation of the lessor's total interest in the land" (at 338). The covenant created an interest in land and obtained the priority conferred by s 56 and the indefeasibility conferred by s 69. Section 56 of the RPA accords priority to registered instruments according to the time at which they are registered, and s 69 is the standard indefeasibility section.
18 Barwick CJ said that s 119, although not applicable on the facts, was confirmatory of the conclusions he had reached. The implication in the proviso was that a right of renewal in a registered lease was entitled to priority and indefeasibility. Barwick CJ said that no practical difficulties arose from his view of the operation of the Act and he concluded, referring to priority and indefeasibility (at 340) that while the right of renewal remained exercisable, the estate created by the subsequently registered memorandum was subject to the right of renewal.
19 Gibbs J referred to the issue as being one of priority (at 342 and 345). He said that the lease including the covenants for renewal was a registrable instrument. His Honour saw the question in the following terms (at 343):
If the right of renewal created by the covenant can rightly be said to be part of the estate or interest specified in the lease, or if it is a right whose registration is authorized by the Act, it will take priority over the mortgage which was subsequently registered, but otherwise it will not, unless, in either case, the Act contains a particular indication of intention to the contrary.
20 Gibbs J found that a right of renewal was in effect part of the estate or interest specified in the lease, and on registration was entitled to the same priority as the term itself. His Honour found support for that conclusion in s 119. An argument was put as to the inference which could be drawn from s 117 and the fact that the section referred to a right of purchase but not a right of renewal. As to that argument, Gibbs J said (at 346-347) (footnotes omitted):
On behalf of the appellant, reliance was placed on the express provision in s 117 of the Act that a right to purchase contained in a lease shall be binding, and it was submitted that this implies that it was intended that a right to renew should not be binding. However, a covenant giving a right to purchase is essentially different in character from a covenant for renewal. It is "not a covenant concerning the tenancy or its terms"; it does not "directly affect or concern the land" and it is "not a provision for the continuance of the term, like a covenant to renew": Woodall v Clifton. It is "a separate and independent contract": Sherwood v Tucker . Since such a covenant is collateral, and does not affect the estate or interest in land granted by the lease, the registration of the lease, in the absence of a provision such as that contained in s 117, would not (or at least might not) confer any priority or indefeasibility upon the covenant or the right which it creates. The provisions of s 117 were necessary to make it clear that the protection of the Act extends to a right for or covenant to purchase the land described in a lease but the same reason did not exist to make specific provision for the protection of covenants for renewal.
21 Stephen J referred to ss 116, 117 and 119 of the RPA and said that they recognised that rights of renewal may properly be entered in the register book in special covenants in registered leases, "but also that when registered they will confer the benefits of registration upon renewed terms resulting from their exercise".
22 His Honour then said as to ss 117 and 119 (351) (footnotes omitted):
The express references in s 117 and s 119 meet special needs which do not exist in the case of rights of renewal generally. Were it not for s 117 it would be doubtful whether an option to purchase might properly be included in a registered memorandum of lease and whether, if included, its registration would confer indefeasibility upon a renewed term arising from its exercise. Such an option is of its nature unrelated to the tenant's estate or interest under the lease; it has no closer connexion with that estate or interest than that the parties to it happen also to be in the relationship of lessor and lessee of the subject land. With it may be contrasted a right of renewal, which is intimately concerned with the existing relationship between lessor and lessee and which, as Finlay J. said in Pearson v Aotea District Maori Land Board, "is, in a sense, definitive of the term of a lease ... is adjectival in relation to the term granted". Hence, no doubt, the need felt for express reference if an option to purchase were to be permitted to appear on the Register Book and to receive the benefits conferred by registration.
A rather different reason accounts for the express provision in s 119. The ordinary rights of tenants under the short term leases to which the section applies are preserved, despite non-registration, by the opening words of s 119; but the proviso makes it clear that neither rights of renewal nor options to purchase, although terms of a lease, come within the scope of this particular concession to unregistered interests which is strictly confined to the leasehold estate or interest itself. However, the proviso recognizes that registration entirely alters the position. Section 116 permits of the registration of short term leases and if such a lease be registered both a right of renewal and an option to purchase contained in it will be "valid as against" those who subsequently deal with the registered proprietor.
23 His Honour concluded by saying that conferring indefeasibility upon rights of renewal did violence neither to the general scheme of the RPA, nor to the objects which it seeks to attain.
24 The effect of Mercantile Credits is that, in addition to being a prior equitable interest, the option or right to purchase, being in a registered instrument, has the benefits of indefeasibility or priority as against the Gunabee Lease. In view of the concession and indeed the effect of s 117 of the RPA, it is not necessary for me to consider the principles relating to priority between two equitable interests (as to which see, for example, Rice v Rice (1853) 2 Drew 73; 61 ER 646; Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265; RP Meagher, JD Heydon and MJ Leeming, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed, 2002) at [4.150]-[4.175]).
25 These conclusions leave for consideration the principal submission advanced by the respondents, that is to say, that the option to purchase by its terms did not preclude the first respondent from granting the Gunabee Lease and that the first respondent did not fail to comply with the terms of the option to purchase if it tendered a contract for the sale of the fee simple of the property subject to the Gunabee Lease.
26 The answer to the question posed by that submission depends on the terms of the option itself. In Commissioner of Taxes (QLD) v Camphin (1937) 57 CLR 127, Latham CJ said (at 134):
The equitable interest is measured by what a court of equity would decree in an action for specific performance. The right of the person who may be called the owner of the option is a right to prevent the owner of the property in question from disposing of it inconsistently with the option, together with a right, if he exercises the option, to compel the owner of the property to carry out the contract which has been made by the exercise of the option.
27 To similar effect are the words of Barwick CJ in Mercantile Credits as follows (at 338):
The interest in the land derived from the covenant will be coextensive with the extent to which the covenant could be ordered to be specifically performed.
28 I am not concerned here with an interest qualifying the owner's estate or interest at the time the option to purchase is granted (see, for example, Fowler v Willis [1922] Ch D 514). The only relevant interest in existence at the time the option was granted was the lease held by the applicant itself and it merges with the fee simple acquired by the applicant pursuant to the option and is extinguished.
29 In Re Crosby's Contract; Crosby v Houghton [1949] 1 All ER 830, an owner of premises granted a lease of the ground floor of the premises to a tenant and included in the lease was an option to purchase the whole premises. Before the option was exercised the owner, who occupied the upper part of the premises with her husband as a residence, leased the upper part of the premises to her husband. The tenant exercised the option to purchase the whole premises. The question was whether the lease between the owner and her husband was binding on the tenant and whether the owner made good title to the premises so long as the lease remained on foot. Romer J decided this question adversely to the owner. He said that where property is sold with an express or implied obligation to give vacant possession on settlement it is a prima facie term of the contract that the purchaser shall on settlement be put in actual (and not constructive) possession of the property. He said that whether property is sold with vacant possession to be given on settlement or subject to the terms of some tenancy or occupation is a question of the intention of the parties. Romer J referred with approval (at 833) to a statement by Simonds J in Cook v Taylor [1942] Ch 349. After referring to a statement in Williams on Vendor and Purchaser (4th ed) p 201, Simonds J said (at 352):
… in reference to that statement he cites a number of cases which appear to support the view that where a contract is silent as to vacant possession, and silent as to any tenancy to which the property is subject, there is impliedly a contract that vacant possession will be given on completion. I may add that that appears to me to be common sense, for it would be strange if, the vendor saying nothing about the matter which lay within his knowledge and not within the knowledge of the purchaser, the purchaser were to find himself purchasing a property subject to a tenancy of which he could know nothing. Therefore I hold that as a matter of law, on a contract of this character, there is the implied term that vacant possession shall be given on completion.
30 I turn then to the terms of the option to purchase in this case. In my opinion, the terms of the option are such that it is proper to conclude that the first respondent has agreed to transfer an unencumbered estate in fee simple to the applicant upon the applicant exercising the option. The terms of the option refer to the form of contract of sale approved from time to time by the Law Society of South Australia Inc. A copy of such a form of contract of sale is before me. There is in the form a clause (clause 9) requiring vacant possession to be given subject to tenancies and other interests referred to in Item 10. That item is in the Schedule to the contract and it makes provision for tenancies and other interests to be noted. Clause 5 makes it clear that other interests may include encumbrances, mortgages and the like. Clause 15 deals with the respective obligations of the vendor and purchaser in the event that there are lease or tenancy agreements.
31 The terms set out in the option to purchase (clause (e) A-F inclusive) are detailed and contain the main terms to be included in the standard form contract. They include a "subject to" provision in clause (e) C. In my opinion, there is no reason to think that the owner wished to reserve to itself a right to lease the property, particularly as the option to purchase was contained in an instrument granting a leasehold interest to the applicant. In my opinion, the intention of the parties, as revealed by the terms of the option, was that the holder of the option upon its exercise was to take an unencumbered fee simple in the property. The respondents referred to the fact that the previous option to purchase (that is, the option to purchase in the original lease between the owner of the property and Gunabee which had in fact expired) referred to the transfer, upon the option being exercised, of an unencumbered estate in fee simple. Had the option to purchase under consideration been worded in the same way that might have avoided the present dispute, but the contrast between the wording of the two options is no reason to construe the option to purchase other than in accordance with its terms. I mention only in passing because neither party referred to it that the contract for the sale and purchase of the business between the second respondent and the applicant also referred to an option to purchase to be granted in terms of an unencumbered estate in fee simple.
32 Both parties made submissions to the effect that the interpretation of the other party would lead to what was said to be an uncommercial result. For its part the applicant submitted that if the respondents are right the first respondent could enter into a totally uncommercial lease in terms of the rent to be paid thereunder (and they suggested that the Gunabee Lease was uncommercial in this sense) and yet the applicant, if he exercised the option, was required to purchase the property at the price fixed in the option to purchase. That might be so, but I prefer to base my decision in the applicant's favour on the terms of the option to purchase itself. For their part, the respondents referred to the fact that the option to purchase could (if the right of renewal were not exercised) extend beyond the term of the lease and if the applicant were right the first respondent would be required to hold the property for a time without being able to lease it other than on a very short-term basis or, alternatively, to lease it subject to a term that could defeat the interest. The option to purchase in this case was exercised before the term referred to in the lease and it does not seem to me that the respondents' submission is a reason not to give effect to the conclusion I have reached.
33 Both questions should be answered in the affirmative.