by Lawrance Heller
Lawyers and agents beware! A new Act has crept on to the statute books, largely unnoticed and unappreciated. While simple in its requirements, it marks a radical departure from the former law relating to the formation of contracts for the sale or other disposition of interests in land, and if old practices continue — as undoubtedly they are at present — countless contracts will be void, to add to the large number already in existence. It will lead at best to embarrassment, and at worst to a spate of negligence claims. The new provisions are sensible, and to be welcomed: the eerie silence accompanying their introduction is not. The potential traps for the unwary should have been emblazoned well beforehand; instead, in most articles on the subject, the hazards of unchanged practice have for the most part gone unmentioned. The main culprits are the all-prevalent side letter, and the practice of using numerous contractual documents.
Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 came into force on September 27 1989, but does not affect any contracts made before then. The Act repeals the Law of Property Act 1925, section 40.
The old law
Section 40 provided that a contract for the sale or other disposition of land or an interest in land was unenforceable unless the agreement, or a memorandum of the agreed terms, was made in writing, and signed by the party against whom enforcement was sought or by his authorised agent. Not surprisingly, in a law almost unchanged since 1677, there were a large number of deficiencies. The contract itself, or a memorandum of the terms, could be comprised in numerous documents which did not have to refer to one another, but which could, if they had reference to another document or the transaction, be connected by oral evidence. Contracts in correspondence, or other papers connected by a receipt for a deposit, and the signature of the relevant party on a cheque or otherwise frequently were tested for enforceability before the courts. An unenforceable contract might become enforceable by part performance. Contracts could unintentionally be made, or become enforceable, by correspondence. Litigation was often brought to determine whether contracts already made but unenforceable were avoided by “subject to contract” rules, or had become enforceable notwithstanding. Reform was clearly necessary.
The new rules
The principal new rules introduced by section 2 of the Act are that:
- A contract for the sale or other disposition of an interest in land can only be made in writing. (There are minor exceptions, referred to below.) An “interest in land” means any estate, interest, or charge in or over land, or over the proceeds of sale of land. A “disposition” has the same meaning as the definition of “conveyance” in the Law of Property Act 1925, section 205. It includes a mortgage, charge, lease, release, and every other assurance of property or an interest in property. The definition is very wide; it will catch options and rights of pre-emption.
- The contract must incorporate all the terms expressly agreed by the parties in one document or, in the case of an exchange of documents, in each such document. Incorporation of terms can be by way of reference to some other document.
- The document incorporating the terms must be signed by each of the parties, or on behalf of them. In the case of an exchange, one document (but not necessarily the same one) must be signed by each of the parties.
The new rules do not apply to auction contracts. The “under the hammer” rules continue unaffected. Likewise they do not apply to contracts regulated by the Financial Services Act 1986. Agreements for leases of three years or less may still be made orally, and are not within the section. The new rules do not affect the operation of resulting, implied or constructive trusts. Special rules apply in the case of rectification of contracts by the court.
Some effects of the new rules
A contract which does not comply with the new rules never comes into being; the document or documents have no effect. The doctrine of part performance no longer applies.
Side letters incorporating terms expressly agreed by the parties, and being part of those relating to the sale or disposition of an interest in land, would without incorporation by reference prevent the principal “contract” being made. Reference to the side letter must be incorporated in the contract itself, or, alternatively, the side letter should be treated as the contract, clearly identify itself as such, incorporate the provisions of the main document, and be signed by both parties. Other more complicated measures can be adopted to keep certain provisions secret, at least until terms have to be litigated. In general, side letters, secret or otherwise, should be avoided, either because they will render the “contract” ineffective and so invalidate it, or because they require cumbersome procedures in order to comply with the Act. The widespread practice that has grown up of incorporating terms in side letters is usually unnecessary and sloppy. General statements in the “contract” that it incorporates the terms of any side letters or other documents that may exist do not, it is submitted, meet the requirements of the Act; there must be reference to specific documents.
Side letters dealing with procedural matters or waiver of certain terms are unlikely to infringe the formal requirements of the section. Care must be exercised even in these circumstances to ensure that such letters do not amount to terms expressly agreed in a contract for the sale or disposition of an interest in land. They must clearly be recognisable as limited to arrangements which encompass non-contractual understandings only.
Transactions involving the use of more than one contractual document must be linked by one such document, which becomes the sole or “master” contract, and which incorporates by specific reference the terms in the other documents. Failure to do so will render them all ineffective; no contract will have been made.
Documents hitherto often signed or executed by or on behalf of one party only (eg options) must now be signed or executed by or on behalf of all parties. The Act does, of course, maintain the practice of exchanges of contracts.
Contracts in correspondence will seldom come about, and then only if intended by both parties. Therefore it is superfluous to use the expression “subject to contract”. However, the use of the expression is a good cautious habit, and as a routine it is prudent to continue to use it. The expression “contract denied” can safely be consigned to the rubbish heap. Heads of terms containing all the terms expressly agreed which are signed by all parties or their agents, and which are not intended to be binding, should contain the expression “subject to contract”.
Agreements by way of variation should incorporate by reference, at least, the provisions of the original agreement as varied.
Acceptance of offers must be framed so as to comply with the new rules. A letter of acceptance is not sufficient. A contract in one document must be signed by or on behalf of all parties. The offer should be drawn in the form of the intended contractual document, and a duplicate of the signed offer should be signed by the offeree or his agent, and sent to the other party, or the offer itself should bear the signature of both parties, or of agents on their behalf. This is of particular importance to agents in the case of tenders.
Although conveyances, leases and mortgages are dispositions themselves, and not usually contracts for dispositions, sometimes they may be. For example, in mortgages there are frequently agreements for the giving of further security subsequently, which makes them contracts in that respect for a disposition of an interest in land. The disposition in any such case must be signed or executed by all parties, otherwise the agreement in the mortgage for the further disposition will be ineffective. It is frequently the current practice of mortgagees not to execute mortgages.
Equitable estoppel
Nothing in the Act affects the operation of the doctrine of equitable estoppel. This may apply where a person has incurred expenditure, or otherwise prejudiced himself, in the mistaken belief that he has an interest in land, or that he would obtain such an interest, and has been actively or passively encouraged in that belief by the owner or intended grantor of the relevant interest in land. In those circumstances, equity will act to restrain unfairness, sometimes to the extent of conferring title. Until the courts are confronted with a claim for proprietary estoppel, and the enforcement of the terms of an ineffective “contract” for the sale or other disposition of an interest in land, opinion must be reserved. The likelihood is that, if the doctrine were applied, it would not necessarily be upon the terms which were expressly agreed by the parties, but contained in the void “contract”. The operation of the doctrine may offer some comfort, but the disappointed party may well be scraping at the bottom of the barrel.
A parting comment
The new rules are sensible, and well thought out. The need for certainty is paramount. A contract in one definitive document is desirable. Signature by all parties seems apposite. They should not slip by accident into contracts relating to land. Once practitioners realise that the methods of operating in this area have fundamentally changed, and that they fail to comply at their peril, the new rules will be simple to operate.
But what a pity no one saw the need to warn practitioners of the pitfalls in the changes! Would it not have been preferable to have commenced the operation of the section by statutory instrument after time had been allowed for the assimilation of the new rules, and the preparation of practising techniques so different in their operation from those formerly employed?
