- A contract for the sale of land must incorporate all the terms of that sale which have been expressly agreed between the parties
- If it does not, then the contract may be void
- Any 'side agreements' may also be void
Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides that a contract for the sale or other disposition of an interest in land must:
- be in writing;
- be signed by or on behalf of both parties; and
- incorporate all the terms that the parties have agreed in one document (or, where contracts are exchanged, in each).
Section 2 applies, not just to a contract for the sale of land, but also to any document which varies such a contract. It can be seen that, in order to comply with section 2, all the terms which the parties have expressly agreed must be incorporated into one document. If this test is not met, the so-called contract will be void (not just the missing term). Facts of
Keay v Morris Homes (West Midlands) Limited
The parties in Keay v Morris Homes (West Midlands) Limited had exchanged contracts on 2 April 2004 for the sale of six parcels of land by the claimants to the defendants. The agreement also provided for a leaseback to the claimants of a medical centre, which it was to be the defendant's obligation to build. The sale agreement was conditional on planning and, as a result of difficulties over a section 106 agreement, the parties entered into a supplemental agreement on 14 March 2005 to reduce the purchase price for the property. The sale was completed on 11 April 2006, and the leaseback was completed on 14 January 2011.
The claimants argued that the agreement to reduce the price was made on the basis that, in return, the defendant would promptly get on with building the medical centre following completion. However, no reference to the obligation to progress the building works promptly was included in the supplemental agreement. The claimants sought damages of £2.7m for the alleged breach of this obligation.
Did section 2 apply to the works obligation?
The claimants argued that the obligation to progress the building works was a collateral agreement. In other words, it was a separate freestanding agreement which was not a term of the supplemental agreement, nor was it an agreement for the sale or other disposition of an interest in land. The claimants therefore argued that section 2 did not apply to the obligation to progress the building works.
The Court of Appeal noted that the question which had to be answered in such a case was whether the written document the parties signed as recording the terms of the sale included all the terms of the sale that they had expressly agreed. That was a question of fact. In any particular case it may be that the disputed term was not a term of the relevant sale or other disposition but was part of a strictly unrelated transaction. In another case it may be clear that it was such a term.
In the present case, which was an appeal against a summary judgment application (as opposed to a full trial), the court thought that it was not possible on the evidence provided to determine the question one way or the other, and that this could only be done at trial.
Did it make a difference that the sale agreement had been completed?
In case they lost on the first question of whether section 2 could in theory apply to the works obligation, the claimants also argued that, since the sale of the land had been completed and the transfer to the defendants had taken place, there was no contract left to which section 2 could apply. This argument was based on a case called Tootal Clothing Ltd v Guinea Properties Ltd (1992).
The claimants contended that, while the omission to include the works obligation as a term of the supplemental agreement meant that that agreement was void from the outset, once all the land elements of the original sale agreement were completed, all the other obligations under the void agreement that remained outstanding then became enforceable (including the oral works obligation).
In Tootal, the parties were negotiating for the grant of a shop lease. Part of the deal was that the landlord would pay the tenant a contribution towards the cost of the tenant's fit-out works. Two separate agreements were exchanged: an agreement for lease, and an agreement relating to the contribution towards fit-out. The works agreement stated that it was supplemental to the agreement for lease, but the agreement for lease made no reference to the works agreement.
The lease was granted and the tenant sought to enforce the obligation on the landlord in the supplemental agreement to contribute towards the cost of the works. The landlord pleaded section 2.
The Court of Appeal in Tootal ruled in favour of the tenant. Part of the court's reasoning was that section 2 was only relevant to executory (i.e. uncompleted) contracts. Section 2 had no application to contracts which had been completed. If parties choose to complete an unenforceable contract, they are at liberty to do so, and once they have done so it becomes irrelevant that the contract did not comply with section 2.
The court in Tootal thought that the supplemental agreement was not a land contract. On the basis that it was not a land contract, then following completion of the agreement for lease there was no longer any executory land contract in existence to which section 2 could apply. Alternatively, if the supplemental agreement was a land contract, then it would comply with section 2, because it incorporated the agreement for lease by reference.
The Court of Appeal in Keay picked up on this second point and noted that, by expressly referring to the agreement for lease, the supplemental agreement in Tootal independently satisfied the requirements of section 2 in any event. It thought that Tootal could have been decided on that ground alone. On that basis, it ruled that Tootal did not decide that, where a purported contract does not comply with section 2, once the land elements of that contract have been completed then either side can then enforce any non-land terms that either were or should have been included in it. A void contract cannot mature into a valid one simply by virtue of it having been partly performed.
The court in Keay therefore concluded that the omission from the supplemental agreement of the building works agreement meant that the supplemental agreement was void. As the supplemental agreement was a nullity, no claim could be brought in respect of the works obligation either. It was at most a proposed contractual term that was never incorporated into any valid contract. It was not capable of being independently enforced.
One side effect of the supplemental agreement being void was that the original sale contract remained unvaried, and in particular, the price reduction did not take effect. The claimants then argued that the defendant owed them the balance of the purchase price. The price reduction was however only £700,000, so not as much as the claimants had been seeking in damages. There was also a technical issue that not all of this was payable to the claimants anyway as there was another seller who was a party to the agreement who was entitled to some of the completion monies.
Things to consider
The case law on section 2 is complex and not always that easy to understand. The only safe course of action is to ensure that property contracts are always unquestionably section 2 compliant.