Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989

The legal principles that apply to contracts for the sale or other disposition of interests in land have become the focus of judicial debate and commentary.  

Two recent cases reveal the difficulties that can be faced when a dispute arises and the contract does not meet the criteria required by the legislation.

Legal background

Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (“the Act”) sets out the requirements that must be complied with before a contract “for the sale or other disposition of an interest in land” is created. Particularly, it stipulates that the contract must be in writing, it must incorporate (or refer to a document that incorporates) all the agreed terms and it must be signed by or on behalf of the parties.  

The background to the legislation was the need to achieve certainty in relation to contracts for land transactions and to reduce as far as possible the need for extrinsic evidence to interpret the terms agreed between the contracting parties.  

The requirements not only ensure certainty as to the terms, they also protect parties from inadvertently contracting to more than they envisaged.  The need for formality means that negotiations to transact with land will not bind the parties before they are ready to commit fully to what is agreed between them.

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Law of Property (Miscellaneous Provisions) Act 1989

2. Contractors for sale etc. of land to be made by signed writing

(1) A contract for the sale or other disposition of interest in land can only beam de in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.
(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.
(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract
[…]
(6)
“disposition” has the same meaning as in the Law of Property Act 1925 [namely, a conveyance [a mortgage, charge, lease …] and also a demise, request or an appointment of property contained in a will;]
“interest in land” means any estate, interest or charge in or over land

Contract formation

Contracts can be oral or written and if written can be informal or informal.  The essential component parts of a contract are an offer, an acceptance, consideration and an intention on the part of the parties to enter into a legal arrangement.  This matter of intention is reviewed objectively when in dispute, with reference made to the reasonable interpretation of the contractual terms.  

Even in the case of an oral contract, a binding agreement can exist if the intentions of the parties are clear to each other.

Sale and purchase contracts are most obviously subject to the rules of section 2 of the Act.  However, there are many other transactions involving land that require the same level of formality.  For example option agreements and pre-emption agreements relating to land both fall within the category of agreements to which section 2 of the Act applies.  The application of section 2 of the Act for option agreement relating to land is quite certain.  

So far as pre emption agreements are concerned, there is a view that there is no need to comply with the formalities set out in section 2 of the Act.  In the case of Pritchard v Briggs [1980] Ch 338, the Court of Appeal ruled that a right of pre-emption in itself did not create an interest in land, it was the crystallization of the right that was the interest in land.  

As such, the suggestion is a pre-emption agreement does not need to comply with section 2 of the Act.  However, the contract for disposal of land following from a right of pre-emption must comply with section 2 of the Act and the terms of the disposal are often contained in the same document as the pre-emption right itself.  

In addition subsequent case law indicates that in some contracts the terms of the right pre emption and the offer from that, may be expressed as to be similar in form to an option.  

With the possibility of such interpretation, pre-emption agreements generally comply with the requirements of section 2 of the Act.  This avoids a contract being rendered invalid and unenforceable.

Sharma v Simposh Limited (2011) EWCA Civ 1383

In this case, a prospective buyer reached an oral agreement with a developer regarding the acquisition of a future development.  

The agreement was that the developer would complete the first phase of a proposed development of a block of flats but would not market the property, giving the buyer the option to purchase the first phase of the development for £1.1 million at any time prior to completion of the development.  

At an early stage, the buyer paid a non-refundable sum of £1,600 to the developer to have time to investigate its ability to acquire funding for the purchase and then paid the balance in instalments up to the total of £55,000 to the developer to secure the option.  

The developer completed phase one of the development and did not market it externally for sale during that time, in keeping with the agreement.

Notwithstanding the developer keeping to his side of the bargain, due to the decline in property values, the buyer decided not to proceed with the purchase.  The buyer sought to reclaim the payment of £55,000 (less the £1,600), arguing that it had been agreed that the balance of the deposit was refundable, and even if this were not the case, as the agreement had been made orally and not in writing, the contract for the sale of land was ineffective being non-compliant with the requirements of the section 2 of the Act.  

The buyer contested that the developer had no contractual right to the money and so, was not entitled to retain it. 

In the Court of first instance, the judge decided the buyer was entitled to the return of the money (less the initial £1,600) on the basis that the money had been paid under a void contract.  The main argument of the developer was that the buyer was estopped from claiming the money back since the agreement was a representation upon which the developer acted to its detriment.  The buyer’s counter argument was that this approach was an attempt to escape from the impact of section 2 of the Act which was not permissible.

On appeal, the Court did not approach the facts of the case from the position of section 2 of the Act once it had concluded the agreement was void for not following the requirements of the Act.  

The Court agreed that the lack of formality meant there was not an enforceable contract.  Referring to the explanatory notes to section 2 of the Act, the Court referred to the change section 2 of the Act made when it replaced the original legislation on the point (section 40 of the Law of Property Act 1925).  Under section 40 of the 1925 Act the vendor may be entitled to retain a deposit paid under an oral contract that did not progress to a sale and purchase, on the basis that “an oral contract for the sale or other disposition of land was unenforceable by action but was not void.”  Section 2 of the Act declares the contract void.

The Act entitles a party to seek restitution.  The judge quoted from the Law Commission explanatory notes at paragraph 5.2 “either of the parties would where appropriate be able to seek restitution… recovery would general be permitted because there would be a total failure of consideration.”   The judge considered a series of cases that analysed contractual arrangements both in relation to whether contracts were effective and the impact on deposits paid in the event of transactions not progressing to completion.  The point was clearly made that a void contract did not always result in a repayment of a deposit.  It is still necessary in a case for restitution to establish that a party has become unjustly enriched at the expense of another.

Applying this reasoning to the facts of the case, the judge referred to the use of the words “where appropriate” and “generally”.  The judge concluded that the developer had completed its obligations under the terms of the agreement.  As to whether the money could pass to the developer, the Court decided this on the basis of what the payment was intended for.  The Court established that the buyer had obtained benefit from the payment in the performance by the developer of the criteria agreed verbally.  This left no reason for the developer not to be entitled to retain the money and there were no grounds in the case to justifying the return of the money to the buyer.

Francis v F Berndes Limited (2011) EWHC 3377 (Ch)

In this case, a prospective buyer had an oral agreement to purchase property from a vendor and the terms of this were then set out in a letter.  The events took place in 2004.  In 2009 the prospective buyer raised an action for damages when the vendor sold the property to a third party.  The price specified in the original letter was £50,000 albeit the value of the property specified had been over £300,000 and in 2009 was stated to be in the region of £1 million.  The claim for damages was for £1.4 million, including a sum for interest.

The form of contract came under criticism and it was ruled that the contract was void as it did not comply with the provisions of section 2 of the Act.  In the court of first instance, the judge appears to have been of the view that the letter did not identify who the buyer was to be and did not include an obligation to purchase the property.  The judge quoted from the earlier case of Firstpost Homes Ltd v Johnson [1995] 1 WLR 1567 at 1571E-H.  Great emphasis was given to the fact that section 2 of the Act replaced section 40 of the Law of Property Act 1925 and section 2 of the Act means “a contract for the sale of an interest in land can only be made in writing and in conformity with the other provisions of section 2” of the Act.

On appeal the Court agreed in the main with the decision at first instance.  He emphasised that the letter failed to contain evidence of essential obligations, including an obligation to purchase the property.

The judge set out his reasoning based on the literal interpretation of section 2 of the Act.  The straight forward clause intends to eliminate reliance on extrinsic evidence for the interpretation of a contract and the written agreement on its own fell short of the necessary formalities for a contract for the sale of an interest in land.  

The prospective buyer also sought permission to amend its claim to raise an action of rectification or restitution.  As regards raising a claim for rectification, this was dismissed.  The purpose of such a remedy is for correcting a common mistake in a document, in the main, this is not used to change the outcome of a contractual situation.  The appeal was allowed to the limited extent that it gave permission to amend the claim to include an action for restitution.  This was qualified by the judge, being subject to the buyer satisfying the court that there was a reasonable chance of success in that action.  The principles of what could amount to such a claim were to be carefully considered before such an action was to be raised, indicating that the Court did not foresee an automatic success from the facts before it.

Conclusion

In the Sharma v Simposh Limited case, from the point of view of the developer it would be interesting to know whether the amount paid for the option included an element dealing with the potential financial costs of not publicly marketing the development for sale, during the building phase.  The developer was entitled to the option sum but with no formally written contract, limited its options to recover losses incurred when the buyer decided to proceed with the purchase of phase one of the development.

In the case of Francis v F Berndes Limited the Court set out the parties’ possibilities of a claim for restitution, but clearly expects the parties to be confident of a successful outcome before raising such an action.  Once again, rights are limited by the lack of formality in the contract between the parties.  The clear application by the Courts of the plain meaning of section 2 of the Act highlights how the Courts will enforce this legislation relating to contracts for land.  Our legal system enjoys a commercial advantage, owing to this consistency of approach.  The robust attitude of the Courts to the formality of such contracts offers certainty and predictability of outcome in the realms of contractual interpretation.  

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