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When is a Land Contract not a Land Contract? s2 LPMPA 1989 in practice

It is a more or less universal rule that all reforms which are intended to simplify the law have unintended consequences.  Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 came into force on 27th September 1989 – 23 years later, lawyers are still arguing about what contracts it does and does not affect, most recently in Keay v Morris Homes (West Midlands) Ltd [2012] EWCA Civ 900.

The statute is deceptively simply. It says (relevantly) that:

“2. Contracts for sale etc of land to be made by signed writing
(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed and 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 ….”

A contract to which section 2 applies can conveniently be described as a ‘land contract’.

It is sometimes forgotten that section 2 is concerned not with documents that transfer estates or interests in land, but with contracts for the creation or sale of such legal estates or interests. In Helden v Strathmore Ltd [2011] 2 EGLR 39, Lord Neuberger MR explained that:

“[27] …  a contract to transfer a freehold or a lease in the future, a contract to grant a lease in the future or a contract for a mortgage in the future are all within the reach of the section, provided of course that the ultimate subject matter is land. However, an actual transfer, conveyance or assignment, an actual lease, or an actual mortgage are not within the scope of section 2 at all.
[28] …[Section 2] was directed to tightening up the formalities required for contracts for the creation or transfer of interests or estates in land and it was not concerned with documents that actually create or transfer legal estates or interests in land ….”

Unfortunately, as Rimer LJ said in Keay:

“[9] … [i]ts effect is merciless. An appropriately signed document purporting to amount to a contract for the sale or other disposition of an interest in land will not in fact create a valid contract unless it includes all the expressly agreed terms of the sale or other disposition.”

The consequence of this is that, as Briggs J observed in an earlier decision, North Eastern Properties Ltd v Coleman [2010] 1 WLR 2715, CA:

“[43] …It enables parties to land contracts who have changed their minds to look around for expressly agreed terms which have not found their way into the final form of the land contract which they signed, for the precise purpose of avoiding their obligations, on the ground that the lack of discipline of their counterparty, or even their own lack of discipline, has rendered the contract void.”

In that case, the defendants had agreed to buy a portfolio of buy to let properties at a discount of 10% off the list price, 8% being disclosed on the contract as a builder’s incentive and a further 2% to be invoiced as a finders’ fee. The properties were built out just as the market crashed; when defendants failed to complete they were sued for specific performance. The claim was defended on the ground that because the written agreement did not include the 2% finders’ fee the contracts fell foul of section 2 and were void.  This was not, on the face of it, an attractive argument, but it is precisely the kind of argument that section 2 lays itself open to.

Giving the lead judgment in the Court of Appeal Briggs J explained that a party seeking to avoid a land contract under section 2 must identify a term which the parties have expressly agreed, which is not to be found in the single, or exchanged, signed document. He suggested the following approach:

(i) Nothing in section 2 prevents parties to a composite transaction which includes a land contract from structuring their bargain so that the land contract is genuinely separated from the rest of the transaction in the sense that its performance is not made conditional upon the performance of some other expressly agreed part of the bargain.

(ii) However, in a composite transaction, if performance of the land sale is conditional upon a sale of chattels or a provision of services, the parties are not free to separate into a separate document expressly agreed terms.

In that particular case, Briggs J concluded that the land contracts were not conditional upon performance of the finders’ fee agreement.

In Keay, the claimant Mr and Mrs Keay agreed to sell land for development to Morris Homes Ltd (MHL) in April 2004 subject to planning conditions. Part of the consideration was the grant of a lease of a building known as the Medical Centre which MHL agreed to build. A supplemental agreement in March 2005 reduced the purchase price from £4.5m to £3.8m. The claimants pleaded case was that at the meeting when the supplemental agreement was made, a director of MHL orally agreed that the defendant would get on with the building works so as to enable shell of the Medical Centre to be completed (‘the works obligation’).  The Keays claimed damages of £2.7m for breach of this agreement. MHL alleged that it was void for non-compliance with section 2 and claimed summary judgment.

The obvious problem for Keay was that since the works obligation came into being as part of the varied agreement, which was itself a land contract, this was not genuinely a separate bargain but a condition of the composite transaction.

To get round the problem of the fact that the agreement (if made) was not written down they said that it was a collateral agreement. At first instance, the judge said that there was simply insufficient material for him to decide whether it was a true collateral contract or not, so refused summary judgment. The Court of Appeal, after a closer examination of the Particulars of Claim than the draftsman no doubt would have liked, agreed – and sent the matter back for trial.

We do not of course, yet, know the ultimate result of that case. But as in Coleman it seems that parties who – rightly or wrongly – want to get out of agreements involving the sale of land which no longer seem attractive to them, can still look closely at the terms, or apparent terms, of their bargain, and if then argue that the term – or the entire contract – is void for non-compliance with section 2. We will no doubt see more of such cases as the beneficiaries of land contracts made at the height of the market seek to enforce them.