Property – Option to purchase – Void contract – Respondents paying deposit for option to purchase property under void oral contract – Respondents deciding not to proceed and claiming repayment of deposit – Judge finding deposit refundable as paid under void contract – Whether failure of consideration entitling respondents to restitution – Appeal allowed
The appellant company was a property developer that acquired a site with a view to its redevelopment in phases. Phase one was to be the conversion of an existing building into eight flats. The respondents paid money to the appellant under an oral agreement giving them an option to purchase the whole of phase one (the property) then under construction at an agreed valuation of £1.1m. Under the agreement, the appellant was to complete the construction within an agreed timescale and in the meantime was not to market the property elsewhere.
Since the agreement was not in writing, it was void by operation of section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989. However, the appellant honoured it by proceedings to complete the construction and refraining from attempting to market the property elsewhere.
In the event, the respondents decided not to proceed because of turmoil in the financial markets and they reclaimed the money paid under the agreement. The county court found that the respondents were entitled to the return of their deposit as money paid under a void contract.
The appellant appealed. The question for the court was whether there had been a failure of consideration entitling the claimants to restitution on the facts found by the judge.
Held: The appeal was allowed.
The agreement lacked formal validity and so had no contractual effect. It was no more than a mutual declaration of intent. However, an important part of the law of restitution was concerned with money paid or benefits conferred in respect of legally ineffective transactions. In the present case, the judge had found that the respondents got what they paid for; as agreed, the appellant had taken the property off the market pending completion and kept open its offer to sell it to the respondents at a fixed price. The agreement did not amount to a legally binding contract but was nevertheless highly relevant as a matter of fact to the question whether there had been a failure in the fulfilment of the parties’ expectations such that denial of repayment would leave the appellant unjustly enriched. There was no suggestion of any inequality of bargaining power or overbearing behaviour that might be relevant when considering the justice of the appellant’s position; it was a commercial transaction between people able to look after themselves.
Property might pass between parties who were involved in a purchase transaction that was contractually ineffective. Property might pass by delivery with the necessary intention, even in the context of a contract that was void for illegality. In the present case, the agreement was void for failure to comply with the formal requirements of section 2 of the 1989 Act. As in the case of a contract void for illegality, it did not follow that property in the deposit could not pass to the appellant. That depended on the intention with which the payment was made. If it was intended to be conditional on the respondents completing the transaction, the appellant would have obtained only a conditional title to the money and would have been bound to return it if the transaction fell through. If the property passed unconditionally, the appellant was prima facie entitled to retain it. In many cases where a deposit was paid under a contract for the purchase of land that was void under section 2, and the transaction did not materialise, the purchaser would be entitled to the return of the deposit because the expectation that provided the reason for the payment would have failed. But that was a question of fact in each case: Chillingworth v Esche (1924) 1 Ch 97 applied; Gribbon v Lutton [2002] QB 902 and Singh v Ali [1960] AC 167 considered.
The fact that property was intended to pass and did pass did not exclude the possibility of a claim for restitution, but such a claim depended on the claimant being able to establish a recognised ground of restitution. In this case, the only suggested ground was failure of consideration. Since the respondents had obtained the benefit for which the payment was made, there was no merit in their claim and no injustice in the appellant retaining the deposit: Robinson v Lane [2010] EWCA Civ 384 considered.
Stephen Taylor (instructed by Frisby & Small LLP) appeared for the appellant; John Small (instructed by Bond Adams LLP) appeared for the respondents.
Eileen O’Grady, barrister
