It is well known that contracts for the sale of an interest in land must be in writing if they are to be enforceable (Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989). In Yeoman's Row Management Ltd v Cobbe, the House of Lords had to consider the extent to which the courts should recognise exceptions to that rule.
The case concerned an oral agreement between Mr Cobbe, an experienced property developer, and a director of a management company which owned a block of flats. The substance of the agreement was that Mr Cobbe, at his own expense, would apply for planning permission to demolish the existing block of flats and to erect, in its place, a terrace of six houses. Upon the grant of planning permission and the obtaining of vacant possession, the property would be sold to Mr Cobbe, for an up-front payment of £12 million. Mr Cobbe would then develop the property in accordance with the planning permission, sell the six houses and pay to the management company 50 per cent of the amount, if any, by which the gross proceeds of sale exceeded £24 million.
Planning permission was duly granted. However, the management company then sought to re-open the terms of the agreement. It demanded an up-front price of £20 million in place of the originally agreed £12 million and a 40 per cent share in the proceeds of sale over £40 million.
Mr Cobbe insisted on adherence to the financial terms of the original agreement. He sought declarations that the management company held the property on constructive trust for itself and Mr Cobbe, and that the management company was estopped from denying that Mr Cobbe had an interest in the property. He conceded that the agreement did not comply with section 2 but argued that both parties had regarded themselves as "bound in honour".
The judge at first instance found that Mr Cobbe had shown the existence of a proprietary estoppel. A proprietary estoppel arises where:
- One person (A) causes (or encourages) another (B) to expect to have a certain interest in land; and
- On the strength of that expectation and with A's knowledge, B acts to his detriment.
The judge awarded Mr Cobbe one half of the increase in value of the property brought about by the grant of planning permission. This decision was upheld by the Court of Appeal. The management company appealed to the House of Lords.
The House of Lords drew a distinction between two basic kinds of remedies. Mr Cobbe had argued that he was entitled to an interest in the property by virtue of either a proprietary estoppel or a constructive trust. These remedies are proprietary and would be based on the extent of Mr Cobbe's disappointed expectations. On the other hand, the court considered personal remedies against the management company. These would be restitutionary; based on the value of Mr Cobbe's services to the management company.
The House of Lords held that the test for proprietary estoppel was not met. A person is "estopped" when they are barred from asserting a fact, or a mixture of fact and law, that stands in the way of a right claimed by the person entitled to the benefit of the estoppel. In this case the management company could not be said to be estopped from asserting that the agreement was unenforceable for non-compliance with section 2, since neither Mr Cobbe nor the management company thought that it was enforceable.
The court placed reliance on the fact that the oral agreement which had been reached in principle did not cover everything that would have been expected to be dealt with in a formal written contract. For example, the final contract could be expected to have included an obligation on Mr Cobbe to progress the development in accordance with a certain time frame, and some sort of security for the overage which was payable to the management company. Mr Cobbe would also have wanted some contractual assurance as to the timing of availability of vacant possession on the flats. Mr Cobbe's expectation was therefore dependent on a successful negotiation of the additional terms, and as such was not sufficiently certain to provide the basis for a proprietary estoppel. It was always contingent on the course of the further contractual negotiations and the conclusion of a formal written contract. The court would be unable to infer the missing terms. The fact that one or both parties may have expected that all outstanding points would be resolved does not mean that that outcome was certain or near-certain. This court said that this was reinforced by recent events in the mortgage lending and property sectors. Mr Cobbe was an experienced developer who had expended money in the knowledge that the agreement he had with the owner of the block of flats was not legally enforceable.
The court then turned to Mr Cobbe's claim to be entitled to an interest under a constructive trust. Section 2 of the 1989 Act specifically provides that it does not affect the creation of constructive trusts.
The House of Lords distinguished this case from other instances of joint venture arrangements where a constructive trust has been imposed. In the other cases, the property has been acquired by one of the parties to the joint venture, for the purposes of that venture. If the owner of the property subsequently reneges on their agreement and seeks to retain the land for his own benefit, a trust may be imposed. In this case, the property was already owned by the management company before it began discussions with Mr Cobbe. Although the director's behaviour in seeking to renegotiate the price had been unconscionable, Mr Cobbe never expected to acquire an interest in the property other than under a legally enforceable contract.
Having found that Mr Cobbe's claim to a proprietary remedy was not made out, the court turned to the personal remedies claimed against the management company. These were:
- That the management company had been unjustly enriched by the obtaining of planning permission at Mr Cobbe's expense
- That the consideration in return for which Mr Cobbe had applied for planning permission had failed
- A "quantum meruit" claim based on the value of services rendered by Mr Cobbe in applying for planning permission.
The court held that the result would be much the same under any of these claims and awarded Mr Cobbe a sum (to be determined) to reflect his time and expense in obtaining planning permission.
Things to consider
The scenario in this case is not uncommon. A property owner with valuable land but no development expertise appoints a professional to promote the land for planning purposes. If planning permission is obtained, the developer will buy the land and complete the development. The seller will receive an overage payment if the development is successful.
Usually either the developer will take an option over the land, or the parties will enter into a sale and purchase agreement which is conditional on planning permission being obtained. If either of these routes is followed, the developer has protection if the seller attempts to withdraw once planning permission has been obtained. In the current state of the market this is arguably less likely, but the outcome in this case is a salutary warning to developers who proceed without proper documentation in place.
The House of Lords was clearly of the view that the doctrine of proprietary estoppel had in the past been over-used, as a means of dispensing justice whenever the court was faced with litigants of whose conduct it disapproved but who appeared to have the law on their side. It held that the lower courts had stretched the boundaries of the concept too far, and that "conscious reliance on honour alone will not give rise to an estoppel".
One of their Lordships thought that there was a clear difference between domestic cases, where the parties did not have recourse to legal advice, and commercial situations, where parties were likely to appoint advisers and would expect a formal contract to be drawn up. Lord Walker said that the courts should be very slow to introduce uncertainty into commercial transactions by over-ready use of equitable concepts such as equitable estoppel. This indicates that it may now be increasingly difficult to establish a proprietary estoppel outside the domestic context. However, it is not impossible – as the case of Herbert v Doyle illustrates.