Suzanne Gill and Julian Mathews consider lessons learned for developers and buyers when a contract is agreed at a sales fair
A case triggered by the 2008 credit crunch casts new light on how cash-strapped developers should forward-sell their schemes.
In 2005, Galliard Homes organised a sales fair to sell 999-year leases of rooms in the four-star Westminster Park Plaza Hotel in London, SE1. Some 225 individual hotel room units were pre-sold off plan. Solicitors were available at the launch date to represent buyers, and exchange of contracts often took place on the day.
Mr and Mrs Laditi attended the fair. Mr Laditi signed a one-page particulars of sale for room 687, which was the contract by which Mr and Mrs Laditi agreed to take a lease from Galliard. A sum of £1,000 was paid on the day by credit card; further deposits amounting to 25% of the £315,000 sale price were due in stages over the next two years. Mrs Laditi did not sign.
By 2010 the hotel was complete and the balance fell due. However, by then mortgages could not be obtained on the units and capital values had fallen. The Laditis were unable to complete. They, and a number of others, claimed that the single sheet of particulars did not create a binding contract.
The Court of Appeal considered two questions in the case, Marlbray Ltd v Laditi and another [2016] EWCA Civ 476; [2016] PLSCS 152.
First, was Mrs Laditi a party to the transaction, even though she had not signed anything? Second, was there a contract at all? If there was no contract, the Laditis were not in breach and indeed were entitled to the return of their deposit. If there was a contract, the developer kept the deposit because the buyers had not completed.
The parties
Mrs Laditi seems to have been an impressively honest witness. The trial judge concluded that she had not appreciated that she was a party to the contract even though she had been aware of the contract and of the need to pay the deposit by instalments.
This meant that Mr Laditi could not have had his wife’s authority to sign the contract on her behalf. It was possible, in theory, for Mrs Laditi to ratify the contract after exchange. However, nothing that she had done had had this effect. By contrast, Mr Laditi had signed the contract personally. The contract wording provided for joint and several liabilities if there were two buyers. This clause was critical to the case: Galliard did not care whether either or both of the Laditis exchanged or completed as long as at least one of them did. Mr Laditi did not have his wife’s authority to sign as agent on her behalf but he was certainly competent to act as principal on his own behalf.
The contract
Having established the parties, was there a contract at all? Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires that a contract for the sale of an interest in land must be in writing and must incorporate all the terms which the parties have agreed. The terms can be set out in the contract or incorporated in the contract by reference to some other document where they are contained. The Court of Appeal held that there was a valid contract.
The contract allowed for the lease to be granted jointly to Mr and Mrs Laditi – although the court had just decided that Mrs Laditi was not one of the parties to the contract. The contract also allowed Mr Laditi to call for the grant of the lease to his wife and himself on completion. This was consistent with a joint and several liability clause. The effect of the clause could mean a lease to Mr Laditi alone, to Mrs Laditi alone, or to Mr and Mrs Laditi together.
The deposit was forfeit to the developer, even though the hotel has been successful and it is not clear the developer suffered loss because Mr Laditi did not complete. Considered another way, it would be unjust for Mr Laditi to sign a contract, reportedly on behalf of himself and his wife, but without her authority – and then to get his deposit back in full because he had acted without authority.
The deposit amount
Interestingly, the court did not consider at this hearing the amount of the deposit. In previous cases, such as Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] 2 All ER 370; [1993] 1 EGLR 203, the courts have held that a deposit of more than 10% was a penalty rather than indication of ability to perform. A 10% deposit is sacrosanct, retainable by the seller even when the seller has resold the property at a profit. However, penalties are unenforceable, which means the whole deposit must be returned to the purchaser, not just the excess over 10%. Disappointed sellers can only sue for their actual loss, which they must prove.
Lessons for developers and buyers
- The single-page contracts often used at sales fairs are legally binding: buyer beware.
- It is important to make sure everyone signs the contract.
- Courts will respect the sanctity of a deposit as demonstration of a buyer’s intention to perform.
Leasing hotel rooms
Selling and financing hotel development by the grant of a long lease of each room, with a management contract for an operator, is an interesting piece in the hotel developer’s toolbox, although there have been issues following the financial crash. Deposits, paid in stages, can either be used to fund the development or as collateral for bank funding.
An established operator with a reputable hotel brand is often an attractive proposition for investors – and the ability to buy just one room opens up the investment class to private investors.
The clarity brought by this decision will be welcomed by investors and developers.
Suzanne Gill is a commercial property partner and Julian Mathews is head of the hotels sector at Wedlake Bell LLP