What are the legal requirements for making a contract for the sale of land?
Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (LPMPA) has tightened up the formalities for making a land contract. Such contracts must now be made in writing and incorporate all the agreed terms in one document – or, where contracts are exchanged, in each.
Previously, under section 40 of the Law of Property Act 1925, it was sufficient that the agreement, or a memorandum of it, was in writing and signed by or on behalf of the persons to be bound by it – a situation which had existed since the Statute of Frauds 1677. Unlike LPMPA, section 40 did not invalidate oral land contracts outright, but rendered them unenforceable through court proceedings.
Low v Fry (1935) 51 TLR 322 illustrates how this worked. Pursuant to an oral agreement, a purchaser had paid part of the purchase money by cheque. But before the cheque was banked he decided not to proceed with the transaction and stopped payment. The vendor sued on the cheque and obtained judgment. Similarly in Monnickendam v Leanse (1923) 39 TLR 445 a deposit paid under an oral contract was lawfully forfeited.
To comply with section 40 the terms of the contract did not have to be in one document. They could be scattered among several – provided that they could be read together without further evidence being needed to connect them. This might be so even if the defendant had signed only one of the documents so long as they cross-referred. Exceptionally, where there was no written agreement or memorandum to satisfy section 40, an oral contract might still be enforceable under the equitable doctrine of part performance. This situation arose when an oral contract had been partly performed and acts had been done which, from their nature, could have been attributable only to the contract in question. The court was then able to investigate the oral contract and enforce compliance. For contracts made on or after September 27 1989, when LPMPA came into force, the position is radically different.Contracts and the 1989 Act
A land contract which does not comply with section 2 LPMPA is not only unenforceable but also void. The doctrine of part performance is abolished. Although contracts can still be exchanged in the traditional way other problems may arise.
Suppose the parties wish to vary an existing contract. Can this still be done by correspondence or a supplemental agreement? Or does section 2 require the whole contract to be replaced so that all relevant terms are contained in one document?
In Tootall Clothing Ltd v Guinea Properties Management Ltd [2] 2 EGLR 80, the Court of Appeal held that a collateral agreement for the reimbursement of shopfitting costs was enforceable, even though its terms were not incorporated in the main agreement which related to the grant of a 25-year lease, a lease which had already been completed. It was decided that section 2 was relevant only to executory contracts, not those which had been performed. Equally a contract for reimbursement of shopfitting works was not, in isolation, a land contract.
Option agreements may present difficulties. Given that an option agreement has to comply with section 2, does the notice exercising the option also have to comply? In Spiro v Glencrown Properties [1] 1 EGLR 185 Hoffmann J decided that it did not.
There are also statutory exceptions to the general rule. These are listed in section 2(5) LPMPA and can be summarised as follows:
(a) The grant of a lease for three years or less without premium.
(b) A contract made in the course of a public auction.
(c) A contract regulated under the Financial Services Act 1986.
(d) Certain trusts.What should the contract contain?
In addition to the statutory formalities, the common law principles of offer, acceptance, consideration and certainty apply to land contracts as with any other formal agreement. An enforceable land contract must therefore:
(i) Identify the parties.
(ii) Accurately define the property to which it relates, stating also whether the interest to be sold is leasehold or freehold.
(iii) State the price or consideration, which must either be ascertained or ascertainable. But while “consideration” is an essential requirement for contracts made “under hand” – contracts made by deed can still be enforced even if no consideration is given in return.
(iv) If a lease is to be granted, the commencement and duration of the term must be defined.
Other matters which would normally be covered in a land contract are:
The capacity in which the property is sold: whether as “beneficial owner”, “trustee” or “personal representative”. This will affect the implied warranty which a seller gives to a buyer under section 76 of the Law of Property Act 1925. When conveying as “beneficial owner” a seller warrants:
- that the seller has the right to convey the property;
- the purchaser shall have quiet enjoyment and possession without lawful interruption;
- title is not subject to any undisclosed encumbrances, claims or demands;
- the seller will excuse any additional documents necessary to perfect the title.
These are warranties which do not apply where a seller sells as “trustee” or “personal representative”.
VAT
The contract should clarify whether the purchase price is VAT chargeable. No VAT is payable in domestic property transactions. However, new commercial developments are standard rated. In other situations a seller may have a choice as to whether VAT is charged.
Completion date
Generally a contractual completion date is not critical, but if the date slips by, either party being ready and willing to complete can serve a “completion notice” making time “of the essence”. A failure to meet this extended deadline is then a fundamental breach of the contract.
But contractual dates are more than targets. A buyer who wrongly delays completion will pay interest on the outstanding purchase money – modern sale conditions impose equivalent liabilities on defaulting sellers. In Raineri v Miles (Wiejski, third party) [0] 2 All ER 145 the House of Lords held that damages for late completion can also be awarded at common law.
Deposit
A purchaser’s deposit is not an essential requirement of a land contract, although most contracts make provision for this. Traditionally, deposits are 10% of an agreed purchase price.
The deposit is both part payment of the purchase price and security for the performance of the purchaser’s contractual obligations. However, while a seller may accept less than the customary 10%, there are dangers in demanding more.
Such deposits are an exception to the gen-eral common law rule making penalty clauses void. If a buyer defaults, the seller can still forfeit the entire deposit even if no loss has been suffered. However, in Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [3] EGCS 38 the Judicial Committee of the Privy Council disallowed forfeiture of a 25% deposit as being an unlawful penalty. A seller who sought to forfeit more than 10% must show special circumstances which justified it.
Contractual deposits are paid either as “agent” or “stakeholder”. Money paid as agent can be released to a seller straight away, but stakeholder money must be retained by a seller’s lawyer until completion. If there is a series of dependent transactions, arrangements may be made for a single deposit to be passed up the “chain”.
Title
The quality of the title offered must be specified: that is to say, whether it is absolute, possessory or otherwise qualified. The contract must also make it clear how this title is going to be proved.
Format
Conventional land contracts are split into three components:
(a) Essential subject-matter: parties; property; price; seller’s capacity; deposit; completion date.
(b) General conditions: Standard printed conditions applicable to property transactions within which they are incorporated. They deal with routine procedural matters and the rights and liabilities of each party between exchange of contracts and completion. For example: insurance risk; title investigation; completion arrangements; errors and omissions. Those currently recommended are the Standard Conditions of Sale, which are published by the Law Society and periodically revised.
(c) Special conditions: These are conditions which are negotiated by the parties and fulfil several functions:
(i) to tailor the general conditions to the circumstances of the transaction;
(ii) to set out matters affecting the property which are not mentioned elsewhere in the contract: eg occupational leases; restrictive cov enants; and other third-party rights;
(iii) to grant or to reserve any new rights, reservations or restrictions, particularly where an existing title is being “split”;
(iv) to sweep up miscellaneous matters.
Exchange
An exchange of contracts can be either physical or by telephone using one of three Law Society formulae. All pre-contract correspondence should be marked “subject to contract” so negativing any contractual relationship until there is formal exchange. Until there is such an exchange either party is free to withdraw, renegotiate the terms or to enter into competing negotiations with a third party without risk of damages. But there is one exception: where there has been a “lock-out” agreement as defined by the House of Lords in Walford v Miles [2] 1 EGLR 207.
A “lock-out” in this context is a relationship whereby A, for good consideration or by deed, achieves an enforceable agreement whereby B agrees (for a specified period of time) not to negotiate with anyone else except A in relation to the sale of his property. It is a negative agreement giving A an exclusive opportunity, for a fixed period, to try to come to terms with B. Such an agreement is not, in itself, a land contract to which LPMPA applies, so it can be made orally or through correspondence. Pitt v PHH Asset Management Ltd [3] 2 EGLR 217 is the first reported case of compensation being awarded for breach of a lock-out agreement. Mr Pitt offered to buy The Cottage, Parsonage Lane, Chelsworth, for £200,000. A third party, Miss Buckle, made a higher competing offer of £210,000. However, Mr Pitt secured an oral agreement with PHH that, provided he exchanged contracts within two weeks of receiving documentation, they would not consider any other offers on the property. But when Mr Pitt told PHH that he was ready to exchange, the sellers refused, saying that they now wished to sell to Miss Buckle. Mr Pitt sued for damages and won.
The Court of Appeal found that there had been a valid lock-out agreement. The plaintiff had provided consideration in not seeking a threatened injunction to stop the sale to Miss Buckle and by limiting himself to 14 days to agree the draft contract.
The law relating to land contracts has still to evolve following its overhaul by LPMPA; and there are still many unanswered questions surrounding the operation of section 2 and what constitutes a valid contract.
Scotland
The LPMPA applies only to property trans actions in England and Wales. In Scotland, formal letters are exchanged which together comprise the contract and are known as “missives”. For more information on the Scottish position see Ross Johnstone’s article “Investing in the Scottish property market”, Estates Gazette November 7 1992.
