It is essential that experienced property developers are aware of the Law of Property Act which sets out rules relating to the requirement in a property transaction for a written contact.
This edition of Property Matters examines two real cases which highlight the need for all those involved in property related transactions to be mindful of this piece of legislation.
Section 2 of the 1989 Law of Property Act states that:
- A contract for the sale or other disposition of an interest in land can only bemade 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.
- The terms may be incorporated in a document either by being set out in it or by reference to some other document.
- A document incorporating the terms or, where contract 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.
These requirements are fulfilled in a standard conveyancing transaction on "exchange of contracts". By this process one form of contract signed by the seller is "exchanged" for another form of the same contract signed by the buyer and the legally binding contract comes into existence. The same legally binding contract can, of course, come into existence if one document is signed by both by the seller and the buyer although that tends to be less common these days.
Developers should appreciate that this rule applies to all land contracts including conditional contracts options and pre-emption agreements.
Part performance now cannot be used to save a contract which does not comply with s2. One recent case shows the importance of proceeding with a property deal only after exchange of contracts. Another indicates the inherent risk in certain property developments where considerable costs may have to be incurred by a potential developer at that developer's risk.
One case which concluded in the House of Lords, Yeomans Row Management Limited and Another -v- Cobbe (Yeoman), relates to what appears to be a property developer's attempt to create a deal where it was actually acknowledged that legally binding contracts did not exist. At first instance the case of Chilli Developments Limited -v- Commission for the New Towns (known as English Partnerships) and Another (Chilli) relates to a developer's attempt to seek damages where the developer's efforts to conclude negotiations satisfactorily were thwarted.
Case 1 - Yeoman
Following the judgment in Yeoman the developer had received £2 million on account of monies due. Further to the House of Lord's decision in Yeoman the developer was required to pay back that amount, plus interest from the date of receipt, and was held to be entitled to a 'quantum meruit' - a payment compensating the developer for the reasonable value of his services. The House of Lords decision does not indicate what payment was to be made, but there was a suggestion that it might be in the region of £150,000.
The essence of the problem to be resolved in Yeoman, as provided by Lord Scott who gave the principal judgment, with which three of the four other Law Lords simply agreed, was as follows:
A is the owner of land with potential for residential development and enters into negotiations with B for the sale of the land to B. They reach an oral "agreement in principle" on the core terms of the sale but no written contract, or even a draft contract for discussion, is produced. There remain some terms still to be agreed. The structure of the agreement in principle that A and B have reached is that B, at his own expense, will make and prosecute an application for the desired residential development and that, if the desired planning permission is obtained, A will sell the land to B or more probably to a company nominated by B, for an agreed upfront price, £x. B will then, again at his own expense, develop the land in accordance with the planning permission, sell off the residential units, and when the gross proceeds of sale received by B equals £2x, any further gross proceeds of sale will be divided equally between A and B. With this agreement in principle B applies for planning permission for the residential development A and he have agreed upon and as encouraged by A to do so.
Consequently B spends a considerable sum of money as well, of course, as a considerable amount of time. The application is successful and the desired planning permission is obtained. A then seeks to renegotiate the core financial terms of the sale, asking, in particular, for a substantial increase in the sum of money that would represent £x. B is unwilling to commit himself to the proposed new financial terms and A is unwilling to proceed on the basis of the originally agreed financial terms. So B commences legal proceedings. The question for the Court is what relief, in the circumstances described, B should be granted.
Without going into more detail, that sets out the essential facts of the case where Yeoman's Row Management Limited (represented by a Mrs Lisle-Mainwaring (Mrs L-M)) is A and Mr Cobbe is B. The developer was endeavouring to claim an interest in property where he did not have a signed contract. The court held that as the developer could not prove what specific interest inland he was going to obtain and he could not prove what the land owner was to be estopped from doing or failing to do, then he could not have an interest in land under the principle of proprietary estoppel.
In legal terms this means:
"If A, under an expectation created or encouraged by B that A shall have a certain interest in land, thereafter, on the faith of such expectation and with the knowledge of B and without objection by him, acts to his detriment in connection with such land, a Court of Equity will compel B to give effect to such expectation".
The court also decided that the developer could not prove a joint venture between developer and land owner where a constructive trust might be found to exist so as to give the developer a share in the property or its value ("nothing in [section 2] affects the creation or operation of resulting implied or constructive trusts").
The court awarded a quantum meruit only.
Case 2 - Chilli
In Yeoman, Mr Cobbe was described as an experienced property developer. However, in Chilli the claimant/developer was a company with no assets of any substance and no track record and the driving force behind that company did not have any direct experience as a developer in a substantial development.
The developer was given the opportunity to negotiate in order to acquire and develop the land. This required the developer to design his proposed development, obtain finance and to persuade the owner of the land of the viability of the developer's scheme. The parties did not reach the point of discussing an intended contract for sale which complied with section 2. However, there was a lockout agreement which existed for one period of time which was then extended for a further period. After many months of negotiating the seller chose to pursue a development through a third party. The developer claimed that the land owner had broken the terms of the lockout agreement and was in breach of its duty of good faith.
There is no universally agreed form of lockout agreement. The principal purpose of such an agreement normally is to give a prospective purchaser an exclusivity period within which it has the opportunity of investigating title, effecting surveys, obtaining finance and concluding all appropriate steps so as to be able to proceed to an exchange of contracts. During this period the seller agrees, in essence, not to negotiate with anyone else. Some agreements - and in particular the one in this case - provide that each party "owes the other a duty of good faith".
Including such a provision in a lockout or exclusivity agreement is problematic. In the House of Lords case, Walford -v Miles, one Law Lord said "... the concept of a duty to carry on negotiations in good faith is inherently repugnant to the universal position of the parties when involved in negotiations". Each party to the negotiations is entitled to pursue his (or her) own interests, so long as he avoids making misrepresentations. ... a duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party".
The developer in Chilli, however, managed to obtain such a provision.
Many specific claims were made by the developer and the Judge dismissed them one by one. He concluded that the seller acted in good faith throughout the negotiations and that there were no breaches of the lockout agreement. He further concluded that the main allegation about the seller and so also against the seller's representatives was of serious misconduct and that allegation was not supported by the documentary evidence. He concluded that the allegation should not have been made. The result was that the developer got nothing.
Lessons to be learnt
- When dealing with complex property matters ensure negotiations lead to the exchange of legal and binding contracts containing all agreed terms.
- Do not assume that the other party will continue negotiations or ultimately conclude a satisfactory contract.
- Do not rely on verbal assurances or passive encouragement from the other party and incur or continue to incur costs in pursuing what is not an agreed deal.
- Do not assume that the court will under the doctrine of proprietary estoppel or other equitable remedy ensure substantial or even any payment for work done or expertise applied.
- A developer has to accept a certain element of risk in certain transactions and has to ensure that the risk is kept to a minimum and commensurate with the anticipated rewards.