Contracts for the sale of land must include all the terms expressly agreed between the parties: section 2 Law of Property (Miscellaneous Provisions) Act 1989. None the less, early cases decided after the 1989 Act came into force suggested that section 2 did not prevent parties from entering into collateral contracts containing terms not relating to the land. However, the decision in Grossman v Hooper [2001] EWCA Civ 615; [2001] 2 EGLR 82 cast doubt on that approach.
The Court of Appeal has now revisited the issue. In Hanoman v Southwark London Borough Council [2008] EWCA Civ 624; [2008] PLSCS 135, the court ruled that a tenant who had exercised his right to buy the lease of his flat had entered into a collateral contract with the council. Under that contract, the tenant had preserved his right to ask the court to determine the amount payable for the lease, despite actually completing the lease and paying a premium of £17,000.
Contracts for the sale of land must include all the terms expressly agreed between the parties: section 2 Law of Property (Miscellaneous Provisions) Act 1989. None the less, early cases decided after the 1989 Act came into force suggested that section 2 did not prevent parties from entering into collateral contracts containing terms not relating to the land. However, the decision in Grossman v Hooper [2001] EWCA Civ 615; [2001] 2 EGLR 82 cast doubt on that approach.
The Court of Appeal has now revisited the issue. In Hanoman v Southwark London Borough Council [2008] EWCA Civ 624; [2008] PLSCS 135, the court ruled that a tenant who had exercised his right to buy the lease of his flat had entered into a collateral contract with the council. Under that contract, the tenant had preserved his right to ask the court to determine the amount payable for the lease, despite actually completing the lease and paying a premium of £17,000.
The tenant did subsequently ask the court to determine the premium. He claimed that the amount payable under the right to buy legislation was, in fact, nil. The council denied the existence of a collateral agreement. Alternatively, it relied upon section 2 and claimed that the contract was unenforceable on the ground that the terms of the collateral contract were neither included in the lease nor referred to. The lease provided for the payment of a premium of £17,000, with no provision for diminution or variation.
The Court of Appeal held that the parties had entered into a collateral agreement that was valid and enforceable. It ruled that the collateral contract was not an agreement as to the terms on which the lease would be granted. It operated in parallel with the lease, and conferred a personal remedy on the tenant against the council in respect of what the lease wrongly contained.
Arden LJ ruled that it was wrong to say that, because the tenant’s case (which he won) was that the premium should have been nil, and that this would amount to a substantial change to the position between the parties, the collateral contract was inconsistent with the terms of the lease. There were other options, and the contract should, so far as possible, be interpreted, in this situation, so as to avoid unenforceability under section 2. The court did not need to interpret a collateral contract in order to bring it within section 2 of the 1989 Act. On the contrary, on general principle the court should interpret it so that it could be enforced and party autonomy respected.
The decision may spark renewed interest in the concept of using collateral contracts to escape from the rigours of section 2. However, the facts of this case were unusual and practitioners would be well-advised to continue to ensure that side letters and supplemental agreements are incorporated by reference into contracts for the sale of land, to ensure that such agreements are valid.
llyson Colby is a property law consultant
