Matt Stokes takes a look at oral agreements and their enforceability
A landlord and tenant meet to discuss the future. The landlord wants the tenant to exit its lease early and, as part of the deal, agrees to relocate it to another unit within its estate. During the meeting, the landlord and tenant identify a suitable property and agree the principal terms.
Neither party is legally represented. There is a substantial exchange of correspondence identifying the terms, but the agreement is not formally reduced to writing as there are time constraints.
The tenant incurs significant costs in preparation for relocating, shortly after which the landlord announces that the tenant will need to move to a different unit. The tenant disagrees, the alternative unit being unsuitable, and informs the landlord that it will enforce the terms of the oral agreement.
The landlord claims that, as the deal has not been documented properly, there is no agreement.
Section 2
The general law governing creation of contracts is reasonably flexible. There is no reason why an oral agreement cannot arise if the parties comply with certain rules.
However, the Law Commission recognised the need for consumer protection when dealing with property interests.
Additional statutory formalities (ie the contract must be in writing, contain all the terms and be signed by the parties) were introduced by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 to ensure that parties were not inadvertently committed to property transactions.
The trade-off for flexibility was certainty. Those dealing with property know they must operate within this statutory framework or run the risk that their agreements will be unenforceable.
As Arden LJ said in Herbert v Doyle and another [2010] EWCA Civ 1095; [2011] 1 EGLR 119, this rule admits “few exceptions”.
Statutory exception
Certainty can operate in capricious ways and result in bad law. The risk of section 2 being used in circumstances where “one party will seek to take advantage of the sanction… when it is unconscionable for him to do so” was mitigated by a statutory exception that softened the effect of the rule. The exception applies where, through conduct of the parties, there is a constructive trust.
In broad terms, this is an agreement between the parties that a property is to be shared beneficially. The party asserting the claim must show it has acted to its detriment relying on the agreement.
A constructive trust enables a party to argue that it is entitled to a transfer of property and, critically, focuses on the conduct of the parties.
It is the “go to” statutory exception where a party, having failed to document its deal satisfactorily, wants to enforce the terms.
And, for a piece of legislation with certainty as its touchstone, it is a fertile source of litigation.
In a commercial deal, the parties usually have access to legal advice so should be aware of the statutory constraints.
This is not to say that the courts will not find constructive trusts in a commercial context (and certainly does not stop an aggrieved party arguing that there is a constructive trust).
Commercial context
In Dowding and another v Matchmove Ltd [2016] EWCA Civ 1233; [2016] PLSCS 341, a property developer and builder agreed that the builder could acquire a plot for an agreed sum. The property would also include an area of meadow.
The agreement was not documented. The builder was allowed access to construct the dwelling and paid a sizeable deposit after which the landowner said it would not transfer title to the meadow.
The court held that the conduct of the parties created a constructive trust as they had intended their (unwritten) agreement to be binding immediately. Compliance with section 2 was considered a “technicality”.
Herbert was another commercial case. The Court of Appeal held that a constructive trust had arisen following an oral agreement relating to the transfer of various parking spaces. Evidence allowed the court to identify the terms agreed and enabled it to conclude that a constructive trust existed.
An important exception but not a panacea
The limitations of the statutory exception were explored by the High Court in Pinisetty v Manikonda and another [2017] EWHC 838 (QB). In this case, the parties struck a sequence of complicated, oral bargains.
A failure to honour the bargains resulted in an argument that a constructive trust required the transfer of the legal title.
The court applied the Court of Appeal’s decision in Herbert where Arden LJ held that if one party intends to make a formal agreement, or the parties did not intend their agreement to be immediately binding, or further terms required agreement so the property was not readily identifiable, “[a party] cannot utilise the doctrine… of constructive trust to make their agreement binding on the other party.”
Not only did the agreement in Pinisetty fail to meet the statutory formalities but the terms (as evidenced by the conduct of the parties) were not sufficiently certain.
The court agreed that the defendant had acted in an unconscionable way but there was simply not enough contractual material that could be inferred from the conduct of the parties to enable it to “fill in the gaps” of the agreement to make it workable.
Constructive trusts, like any other contractual arrangement, require sufficient certainty to be enforceable. Where the agreement is inchoate, the court cannot fill in the gaps.
Guidance
The frequency with which section 2 is litigated means that there is some useful practical guidance available.
Written agreement, containing all the terms, signed by the parties
As Langstaff J observed in Pinisetty, section 2 is “trite” law. It is such a well-known piece of legislation that compliance should be easy. This should – theoretically, at least – limit the practical application of the statutory exception.
The enthusiasm with which section 2 is litigated, however, points to a relaxed attitude by some with regard to its technical requirements.
The easiest way to avoid an argument about the existence of a constructive trust is to document the deal properly. In other words, lawyer up.
Section 2 applies to all contracts?
It might not always be easy to spot where a section 2 compliant agreement is required. A contract for the sale of a freehold or an agreement for a lease are obvious examples but options, agreements to surrender, equitable charges and equitable leases, a contract for sale under a pre-emption agreement (among others) must all comply with section 2.
Conversely, section 2 does not apply to certain interests including contracts to grant some short leases, exclusivity agreements and guarantees.
Variations
Where a primary agreement must comply with section 2 then any variation to it must also comply with section 2. This can be easy to miss. For example, the parties orally agree some minor amendments to works obligations in an agreement for lease that are not subsequently documented.
Unconscionable behaviour
A party might not cover itself in glory during a deal but poor behaviour is not the sole criterion to determine whether there is a constructive trust. There must be sufficient certainty around terms to show that an agreement has been reached and relied upon. Unconscionable behaviour is not enough.
Evidence
However, the conduct of the parties is critical.
The quality and credibility of the evidence available (eg extent of property, consideration, and any conditions) is what the court uses to determine the terms of any agreement.
Memoranda of meetings and telephone calls, e-mail and correspondence exchanges will all help the court to reduce the gaps it has to fill to conclude there is a workable agreement.
This is no small task. The “evidence of express discussions between the parties, however imperfectly remembered and however imprecise their terms may have been” does not make for risk-free or inexpensive litigation.
“Subject to contract”
Making negotiations expressly “subject to contract” offers protection against constructive trusts.
It is difficult to argue that the parties intended to reach an immediately binding agreement where it is evidentially clear that their pre-contractual negotiations were conducted subject to contract.
Sucking eggs
Constructive trusts occur when things go wrong. Something has gone wrong in the example outlined in the introduction and, absent section 2-compliant documents and depending on extent of loss, the tenant may have little option but to pursue a remedy based on the existence of a constructive trust. Irrespective of chances of success, this will result in unwanted hassle.
Success will depend on a number of factors, not least evidence of conduct, which renders the outcome unpredictable.
As Arden LJ said in Herbert: “All this could have been saved if a written agreement had been made in the first place or at least if the parties had made their arrangements subject to contract.”
Matt Stokes is a professional support lawyer in the real estate group at DAC Beachcroft
