An enforceable contract for the sale of property requires an intention to be bound and formal delivery of each party’s part of the contract to the other, the Upper Tribunal (Lands Chamber) has confirmed in allowing an appeal against a decision of the First-tier Tribunal in Aslam v Rehman [2022] UKUT 251 (LC); [2022] PLSCS 158.
Key points
- Parties can agree the manner of exchange of contracts
- Exchange requires an intention to be bound and the physical delivery or sending of each party’s signed contract to the other
Background
The proceedings concerned Hafiz Aslam’s application to HM Land Registry to cancel a unilateral notice entered by Abdul Rehman on the register of title to 189 Walton Road, Woking, to protect a contract for sale. Rehman objected and the matter was referred to the FTT under section 73 of the Land Registration Act 2002. It was for Rehman to prove the existence of the contract.
Aslam purchased the property in 2009 for £160,000. In 2013, he made a declaration of trust to the effect that he held it on trust for himself and Rehman in equal shares.
In 2017, Aslam obtained a bridging loan secured on 189 Walton Road to buy another property in Woking, owned by Rehman. He subsequently defaulted on the bridging loan, the lender appointed receivers and the property was put up for sale at auction.
Aslam sought Rehman’s advice. The parties met on 14 September 2018 and Rehman produced a contract in duplicate for the sale of the property by Aslam to him. Rehman argued that contracts were exchanged on that date and so a contract came into being. Aslam denied that contracts were exchanged.
The FTT found Aslam had signed his part of the contract at Rehman’s request and handed it to him, reposing in Rehman sufficient trust that he was acting as Aslam’s agent in respect of the impending sale. Subsequently, on 20 September 2018, the parties met with solicitors who later invoiced Aslam for “receiving contract documentation showing sale of property” to Rehman.
The FTT found that contracts were exchanged for the sale of the property on 14 September 2018. Aslam appealed on the ground that the FTT made an error of law in finding that contracts were exchanged as the facts could not justify such a conclusion.
The law
To achieve an exchange of contracts, each party has identical contracts or parts of the contract and each signs its own part. At the time of execution, neither party is bound by the terms of the document each has executed, it being their mutual intention that neither will be bound until the executed parts are exchanged. The act of exchange is a formal delivery by each party of its part into the actual or constructive possession of the other with the intention that the parties will be bound when exchange occurs but not before (Commission for New Towns v Cooper [1995] 2 EGLR 113).
The manner of exchange may be agreed by the parties but delivery is a formal act and each party must deliver its part. Delivery may be a physical handing over of the document or, as is commonly the case, an agreement to do so reached over the phone, a method which the Court of Appeal approved in Domb v Isoz [1978] 2 EGLR 162. Typically the parties are separately represented, each party signs their part of the contract and leaves it with their solicitor. The solicitors, having been authorised by their clients to exchange contracts, will speak on the phone and agree that contracts are exchanged, recording the date and time. In such circumstances, delivery is comprised in the fact that from that point on each solicitor holds their own client’s part of the contract to the order of the other. Each will then physically send or take their own client’s part to the other client’s solicitor.
A variation on this process is where one party – usually the seller – holds both signed parts of the contract prior to exchange. Delivery is a constructive event which takes place when the two solicitors agree on the phone that contracts are exchanged: from that time on the seller’s solicitor holds its client’s part to the order of the buyer’s solicitor and will send or take it to them.
The decision
The FTT had failed to explain how contracts had been exchanged at the meeting on 14 September 2018. There was no finding of fact that Aslam, in handing his part of the contract to Rehman, intended to deliver it so as to exchange contracts. Equally, there was no explanation as to why the fact of agency meant Rehman held his part of the contract on behalf of Aslam and why that constituted delivery. Such a finding was in any case insufficient to amount to a finding that there had been delivery. As with the situation where a seller’s solicitor holds both signed parts of the contract prior to exchange of contracts, the fact Rehman held both signed parts of the contract did not mean contracts had been exchanged.
On the facts, the FTT could not have justified a finding that exchange of contracts had taken place at the meeting on 14 September 2018. The FTT’s decision was set aside and the UT substituted its own decision that contracts were not exchanged. The registrar was directed to respond to Aslam’s application as if Rehman’s objection had not been made.
Louise Clark is a property law consultant and mediator
