Sale of land — Whether contract formed — Whether ‘lock-out agreement’
On September
30 1991 the plaintiff made an offer to purchase The Cottage, Parsonage Lane,
Chelsworth, Suffolk, a property belonging to the defendant, for £200,000. On October
1 Miss Buckle made a higher offer of £210,000. On October 3, and following an
oral agreement with the defendant’s agent, the plaintiff confirmed that
agreement in writing stating that it had been agreed that ‘the vendor will not
consider any further offers for the property on the basis that I will exchange
contracts within a period of two weeks of the receipt of the contract’. On
November 7 a draft contract was sent to the plaintiff’s solicitors and on
November 15 the plaintiff indicated that he was ready to exchange. The
defendant’s principals then indicated that they would proceed with a sale to
Miss Buckle and on November 18 the draft contract was withdrawn. At the trial
of a preliminary issue, Judge Brandt held that the parties entered into a contractual
relationship on October 3 1991 and gave judgment for the plaintiff for damages
to be assessed. The defendant appealed, contending: (1) any agreement on
October 3 was part of continuing negotiations which were subject to contract
and not a separate contract; (2) there was no consideration moving from the
plaintiff or, if that was satisfied, it was a contract for the sale of land and
did not comply with section 2 of the Law of Property (Miscellaneous Provisions)
Act 1989.
‘lock-out agreement’ by which the defendant was locked out from negotiating
with other purchasers and there was no reason why it should be considered to be
subject to contract. The plaintiff provided consideration in not proceeding to
obtain a threatened injunction to stop the sale to Miss Buckle and by limiting
himself to 14 days to agree the draft contract. The contract was not one which
needed to comply with section 2 of the 1989 Act.
The following
case is referred to in this report.
Walford v Miles [1992] 2 AC 128; [1992] 2 WLR 174; [1992] 1 All ER
453; [1992] 1 EGLR 207; [1992] 11 EG 115, HL
This was an
appeal by the defendant, PHH Asset Management Ltd, from the judgment of Judge
Brandt in favour of the plaintiff, Timothy Pitt, on the trial of a preliminary
issue in proceedings by the plaintiff alleging breach of contract.
Richard Payne
(instructed by Townsends, of Swindon) appeared for the appellant; David Pugh
(instructed by Steed & Steed, of Sudbury) represented the respondent.
Giving the
first judgment at the invitation of Sir Thomas Bingham MR, PETER GIBSON J
said: This is an appeal by the defendant, PHH Asset Management Ltd, from the
order of Judge Brandt with his leave, the order having been made on October 2
1992 at the trial of an agreed preliminary issue. That preliminary issue was
whether the defendant and Mr Timothy Pitt, the plaintiff, entered into a
contractual relationship on October 3 1991. The judge held that they did and he
gave judgment for the plaintiff for damages for breach of contract to be
assessed in default of agreement.
The facts are
these. In August 1991 the defendant, acting as the undisclosed agent on behalf
of mortgagees in possession of property known as The Cottage, Parsonage Lane,
Chelsworth, Suffolk, placed the property on the market at an asking price of
£205,000. Mr Piers Roberts of G A Property Services acted as the selling agent
of the defendant. There were two contenders who were interested in purchasing
the property. On September 11 1991 a written offer of £185,000 was made on
behalf of one of the contenders, Miss Buckle. On September 23 the plaintiff
submitted an offer of £190,000 and that was accepted by Mr Roberts subject to
contract. The memorandum of sale showed the vendor to be the defendant.
On September
24 Miss Buckle increased her offer to £195,000. The acceptance of the
plaintiff’s offer was withdrawn in the light of that. On September 30, in
response to encouragement to make a full and final offer, the plaintiff
increased his offer to £200,000. Miss Buckle promptly matched that offer, but
the plaintiff’s offer was the one accepted, subject to contract.
On October 1
Miss Buckle increased her offer to £210,000. The next day Mr Roberts told the
plaintiff that the acceptance of the plaintiff’s offer was again withdrawn. Not
surprisingly the plaintiff was annoyed.
The next day,
on October 3, he spoke on the telephone to Mr Roberts. He made three points. He
said that he would seek an injunction to prevent the sale to Miss Buckle. He
said that he would go to Miss Buckle, tell her that he was withdrawing and that
would leave her alone in the field and she should then lower her offer in the
absence of a rival. He also said that he was in a position to exchange as
quickly as Mr Roberts wanted. Mr Roberts then spoke to his principals and
reached an oral agreement with the plaintiff. That oral agreement is reflected
in a letter from the plaintiff to Mr Roberts of the same day. That reads as
follows:
Following our
telephone conversation of today, I write to confirm the main points discussed.
(1) Your client has decided it is in his best
interest to stay with my offer of £200,000 (Two hundred thousand pounds),
subject to contract for the above property.
(2) The vendor will not consider any further
offers for the property on the basis that I will exchange contracts within a
period of two weeks of the receipt of that contract.
(3) The vendor will be writing to me to confirm
the above.
That same day
the defendant wrote to Mr Roberts in the following terms:
Further to our
recent telephone conversation, we confirm our instructions to continue with the
sale to Mr Pitt, for the sum of £200,000, subject to exchange of contracts
within fourteen days of receipt of draft contracts.
We would be
grateful if you could inform both parties of our decision and if exchange of
contracts do not take place within the required time, we will then reconsider
the second offer.
That is a
reference to the offer of Miss Buckle.
That letter to
Mr Roberts was copied to the plaintiff in compliance with what is recorded in
para (3) of the letter from the plaintiff to Mr Roberts.
The
understanding of the defendant in this matter is shown from a letter which Mr
Roberts wrote the next day, October 4, to agents acting on behalf of Miss
Buckle. In it Mr Roberts said:
We are sorry
to have to advise you that our clients have chosen to continue negotiations
with the other prospective purchasers and will only consider issuing a contract
to your clients if exchange does not take place within 14 days of receipt of
the draft.
There then
occurred a delay before the defendant or its principals issued a draft
contract. On November 7 a draft contract was sent to the plaintiff’s solicitor,
thus starting the 14-day period.
On November 12
the plaintiff raised two queries. One of them was answered two days later. On
November 15 the plaintiff indicated that he was ready to exchange immediately.
This was prompted by the plaintiff learning that there might be a problem over
the prospective sale to him. That day the defendant’s principals wrote to the
plaintiff’s solicitors, expressing their intention to proceed with Miss
Buckle’s offer of £210,000, but they gave the plaintiff the opportunity to
exchange contracts that day at the increased price. The plaintiff refused and
on November 18 1991 the draft contract with the plaintiff was withdrawn and the
property was subsequently sold to Miss Buckle for £210,000.
On March 30
1992 these proceedings commenced. The plaintiff sued for breach of the
agreement, which he said was reached on October 3 1991 and he claimed damages.
At the trial of the preliminary issue before Judge Brandt the plaintiff gave
oral evidence. Three points were argued by Mr Richard Payne, on behalf of the
defendant. The first was that what was agreed on October 3 1991 was subject to
contract, being part and parcel of the subject to contract negotiations for the
sale of the land. Therefore, it was said that there was no enforceable agreement.
The second point taken was that no consideration was given by the plaintiff for
the agreement. The third point was that the agreement was one to which section
2 of the Law of Property (Miscellaneous Provisions) Act 1989 applied and was
unenforceable. The learned judge rejected all three points, holding that there
was a valid enforceable contract.
Before us the
same three points are put forward by Mr Payne, for the defendant. It is common
ground that if there was a contract for the sale of an interest in land then
the correspondence of October 3 1991 does not satisfy the terms of section 2
and accordingly such a contract would be unenforceable. Section 2, as is well
known, is the section that implemented the recommendations by the Law
Commission in its 1987 report Transfer of Land: Formalities for Contracts
for Sale etc of Land (Law Com No 164), although the section enacted did not
follow precisely the form of the clause appended to the report. In short, what
it did was to replace the requirement of section 40 of the Law of Property Act
1925 that a contract for the sale of land must be evidenced by a memorandum in
writing by the requirement that a contract for the sale of an interest in land
must be made in writing and by incorporating all its terms in one document or,
where contracts are exchanged in each, must be signed by or on behalf of each
party.
Mr Payne
argued that if one looked at what was agreed on October 3 1991 it was plain
that this was simply part of the continuing negotiations between the plaintiff
and the defendant, and he stressed the word ‘continue’ in the sentence which I
have read from the letter from the defendant to Mr Roberts:
We confirm
our instructions to continue with the sale to Mr Pitt.
It is quite
clear that the negotiations for the sale of the land were subject to contract
and that would continue until there was an exchange. So, he submitted, this was
simply an incident in the course of those negotiations.
The learned
judge rejected that argument when it was put to him and said that there was
nothing else to decide on what was argued. He held that what was argued on the
telephone was capable of subsisting as a collateral contract on its own.
It seems to
me, too, that there was nothing further to decide in relation to what was
agreed on October 3 if what was agreed was what is often called a ‘lock-out
agreement’. To my mind, that is the crucial question in this case. One has to
look at what was agreed to see whether there was something that was capable of
subsisting as a binding contract independently of the continuing negotiations
for the sale of the land. In my opinion, the crucial paragraph is para (2) of
the letter from the plaintiff to Mr Roberts:
The vendor
will not consider any further offers for the property on the basis that I will
exchange contracts within a period of two weeks of the receipt of that
contract.
As the learned
judge put it in his judgment, there was a clear acceptance that Mr Pitt, the
plaintiff, should have a clear run of achieving an exchange of contracts which
was to be within two weeks after receipt of the draft. The defendant was
agreeing that it would not consider further offers. That was its plain
understanding and that is reflected in the letters from the defendant to Mr
Roberts and from Mr Roberts to Miss Buckle’s agents to the effect that only if
the exchange of contracts did not take place within the required time would the
defendant reconsider the second offer from Miss Buckle. I can see no reason why
that agreement, whereby the defendant was locking itself out from negotiating
with other prospective purchasers for a limited period, should be considered to
be subject to contract, there being nothing further to agree. Accordingly, I
would reject Mr Payne’s argument on the first point.
On the second
point, the consideration moving from the plaintiff, Mr Payne submitted that in
reality there was no consideration provided by the plaintiff. The plaintiff was
expressing himself to be ready, willing and able to proceed to exchange
contracts, which was, he submitted, simply what he would have to do in any
case. Further, he said that the learned judge rightly described the threat by
the plaintiff to issue an injunction as rapid, that is to say of no substance.
He accordingly submitted that there was nothing by way of valuable
consideration which the defendant received. I cannot accept these submissions
either. I accept that the threat of an injunction had a nuisance value only in
that I cannot see how the plaintiff could have succeeded in any claim. Nevertheless,
that nuisance was something from which the defendant was freed by the plaintiff
agreeing to the lock-out agreement. Further, the threat of causing trouble with
Miss Buckle was again a matter which could have been a nuisance to the
defendant and again removal of that threat provided some consideration. But I
also believe that the promise by the plaintiff to get on by limiting himself to
just two weeks, if he were to exchange contracts, was of some value to the
defendant. The defendant had the benefit of knowing that, if it chose to give
the plaintiff a draft contract to agree, there would be no delay on the
plaintiff’s part beyond a maximum of two weeks thereafter. The learned judge
held that these three items constituted valuable consideration sufficient to
support the lock-out agreement and I respectfully agree with him.
The third
question is whether there was a contract for the sale of an interest in the
land. Mr Payne described the agreement as being:
if exchange
is effected within the stated time the vendor will sell the property to the
purchaser.
I do not think
that can be what the parties agreed. Of course, if there is an exchange then
the vendor is bound to sell to the purchaser. It is plain that the defendant
was not committing itself to a sale to the plaintiff at this preliminary stage.
The terms of the contract had not been agreed, nor even put to the plaintiff.
It seems to me obvious that there was no contract for the sale of land as at
October 3, nor was there any option for the sale of land, that being another
way in which Mr Payne put the matter. It is quite impossible to say on the
documents before us and the evidence that was received that there was any
interest in the land created in favour of the plaintiff at October 3.
It seems to me
that what was agreed was a lock-out agreement. In Walford v Miles
[1992] 2 AC 128*, Lord Ackner at p139 said:
There is
clearly no reason in English contract law why A, for good consideration, should
not achieve an enforceable agreement whereby B, agrees for a specified period
of time, not to negotiate with anyone except A in relation to the sale of his
property.
*Editor’s
note: Also reported at [1992] 1 EGLR 207.
He identified
the negative element in such an agreement as being the characteristic of a
lock-out agreement.
B, by
agreeing not to negotiate for this fixed period with a third party, locks
himself out of such negotiations. He has in no legal sense locked himself into
negotiations with A. What A has achieved is an exclusive opportunity, for a
fixed period, to try and come to terms with B, an opportunity for which he has,
unless he makes his agreement under seal, to give good consideration.
In the present
case it was not incumbent on the defendant to proffer a contract. It did not
bind itself to do so, but once it did it was bound, in my judgment, by the
terms of the lock-out agreement for the 14-day period that followed.
It seems plain
to me that the agreement reached on October 3 was not a contract for the sale
of any interest in land and therefore section 2 has no application to that
contract.
In my
judgment, the learned judge reached the right decision in holding that this was
a contract which was enforceable in law. For my part I would dismiss this
appeal.
MANN LJ agreed and did not add anything.
Also agreeing,
SIR THOMAS BINGHAM MR said: This appeal should be dismissed for the
reasons given by Peter Gibson J.
For very many
people their first and closest contact with the law is when they come to buy or
sell a house. They frequently find it a profoundly depressing and frustrating
experience. The vendor puts his house on the market. He receives an offer which
is probably less than his asking price. He agonises over whether to accept or
hold out for more. He decides to accept, perhaps after negotiating some
increase. A deal is struck. Hands are shaken. The vendor celebrates, relaxes,
makes plans for his own move and takes his house off the market. Then he hears
that the purchaser who was formerly pleading with him to accept his offer has
decided not to proceed. No explanation is given, no apology made. The vendor
has to embark on the whole dreary process of putting his house on the market
all over again.
For the purchaser
the process is, if anything, worse. After a series of futile visits to
unsuitable houses he eventually finds the house of his dreams. He makes an
offer, perhaps at the asking price, perhaps at what the agent tells him the
vendor is likely to accept. The offer is accepted. A deal is done. The
purchaser instructs solicitors to act. He perhaps commissions an architect to
plan alterations. He makes arrangements to borrow money. He puts his own house
on the market. He makes arrangements to move. He then learns that the vendor
has decided to sell to someone else, perhaps for the price already offered and
accepted, perhaps for an increased price achieved by a covert, unofficial
auction. Again, no explanation, no apology. The vendor is able to indulge his
self-interest, even his whims, without exposing himself to any legal penalty.
The reasons
why purchaser and vendor can act in this apparently unprincipled manner are to
be found in two legal rules of long standing: first, the rule that contracts
for the sale and purchase of land must be evidenced (or now made) in writing;
second, the rule that terms agreed subject to contract do not give rise to a
binding contract. These rules are deeply imbedded in statute and authority.
They make possible the behaviour I have described, but the validity and merits
of those rules are not, and could not be, the subject of challenge in this
appeal.
For the
purchaser there is, however, one means of protection: to make an independent
agreement by which the vendor agrees for a clear specified period not to deal
with anyone other than that purchaser. The effect is to give that purchaser a
clear run for the period in question. The vendor does not agree to sell to that
purchaser — such an agreement would be covered by section 2 of the 1989 Act —
but he does give a negative undertaking that he will not for the given period
deal with anyone else. That, I am quite satisfied, is what happened here, as
the judge rightly held. The vendor and the prospective purchaser made what has
come to be called a ‘lock-out agreement’. That was a contract binding on them
both. The vendor broke it. He is liable to the prospective purchaser for
damages, which remain to be assessed. I would dismiss the appeal.
Appeal
dismissed with costs. Leave to appeal to the House of Lords refused.
