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greatest importance for land lawyers lies in their application to the purchase of a family home, when the house is transferred to just one of a couple. A trust enables the other partner to obtain an interest in the home in certain circumstances. This large topic is separately dealt with in Chapter 9.
The issues in this chapter are of vital importance to everybody dealing with land. The rules are designed to clarify dealings with land and to avoid important obligations being entered into unwittingly. The reasons for formality obligations are further considered within the section on ‘Critical and controversial issues’. It is inevitable that if formality requirements are overlooked then transactions will fail. It is a common problem that individuals are unfamiliar with formality and registration requirements; their transactions may be ineffective as a result. It is important for students and lawyers to remember the impact of formality rules whenever they advise on the effects of what people have done, whatever area of land law (leases or easements, for example) is involved.
It should be added that we are concentrating on lifetime dispositions. On death, pro-perty passes by will. A will must be signed and also witnessed by two persons. As these rules are not specific to land, they will not be studied further.
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Transfers of landNearly all sales of land take effect in two legal stages: a contract for the sale of land and the actual transfer or conveyance of land. One reason for this is that it takes time for the purchaser to make the necessary checks to ensure that there are no legal problems.
The contract provides an assurance for both parties that the sale will go through and clarifies the obligations imposed on each party. If the contract is to bind purchasers, it must be registered (see Chapter 10).
The contract is not entered into as soon as a price is agreed. At the pre-contract stage, neither party can be sure that the sale will go through. This causes great problems if the seller pulls out in order to accept a higher offer from somebody else (gazzumping – common when house prices are rising) or the buyer pulls out in order to buy another house.
It is very unwise for a buyer to enter a contract until checks have been undertaken to ensure that the property has no problems. For example, it would be disastrous if a local authority had plans to demolish it in order to construct a new road. It has long been common to make all correspondence ‘subject to contract’. This is effective to ensure that there is no contract. Making enquiries and dealing with any problems is likely to take at least a month and can mean that the contract is not ready to be entered into until close to the transfer.
Commonly there is a two- to three-month delay between a price being agreed and the final transfer (the stage often described as completion). This gap provides time for sellers to obtain alternative housing and buyers to find the necessary loan finance and to sell their existing homes. Nevertheless, the process is widely viewed as unnecessarily
Main issues and rules
protracted. Attempts are being made to shorten the time period, mainly by ensuring that the seller provides all the essential information before a price is agreed.
Contracts for the sale of land
Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (the 1989 Act) requires contracts for the sale of land to be in writing, signed by both parties. This applies to all contracts to transfer or create legal interests, including contracts to transfer (assign) or create leases. It is different from previous legislation, so pre-1989 cases have to be viewed with some suspicion.
How does the 1989 Act apply to the typical house purchase? It is common for con-tracts to be drawn up in duplicate agreements: each contains detailed standard terms (two A4 pages of very small print) covering the sorts of points that can go wrong in a purchase transaction. Each party signs one of the duplicate agreements and gives it to the other: this is called exchange of contracts. The 1989 Act makes it clear that this pro-cedure is as effective as if both parties signed a single document. However, the Court of Appeal in Commission for the New Towns v Cooper (Great Britain) Ltd1held that it does not suffice simply to have a contract by correspondence. Suppose Andy writes to Beth, offering to buy her house for £175,000. Beth replies, accepting this offer. Although they have both signed documents, the 1989 Act is not satisfied: they have neither signed a single contract nor exchanged contracts containing all the terms. The law takes this strict approach because we want parties to be well aware of what they are doing before they bind themselves to buy and sell land: this is more likely if the specified procedures are followed.
We will now consider in more detail what contracts are caught by the 1989 Act and what the writing must include. We also need to investigate the effect of failure to comply with the Act.
What agreements are caught?
It has been observed that all contracts for the sale or creation of legal interests are caught. Short leases provide an exception. We will see later in this chapter that most leases not exceeding three years require no formalities. The 1989 Act provides that con-tracts for such leases similarly do not require writing. However, assigning such a lease does require writing.
Clarification has been provided that options require writing. Options are rights to buy (or, less commonly, sell) land. The exercise of the option gives rise to full contractual duties to buy and sell the land. The 1989 Act does not apply to the exercise of the option:
that is a unilateral act by the buyer. It is only the initial creation of the option that has to be signed by both seller and buyer. More difficulty is posed by agency contracts. Suppose that Andrew agrees with Brian that he will sell land to whomever Brian introduces. This will not be caught; instead, the 1989 Act will apply to the future contract between the introduced person and Andrew. On the other hand, it appears that a contract between
1 [1995] Ch 259 at pp. 283–9 and 292–5.
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Andrew and Brian to sell to Charlotte will be caught. This is because Charlotte’s right to a conveyance derives directly from the Andrew–Brian contract.
Boundary agreements have also received attention. Suppose that the boundary between the gardens of two neighbours is unclear. If they agree that it should be in a certain place, this does not require writing. They are not consciously transferring land to each other but working out where the boundary line should fall. This seems a practical and acceptable solution to an everyday sort of problem.
What must the writing include?
The simple answer is that all terms must be included; otherwise the contract (not merely the omitted term) will be ineffective. This can cause substantial difficulty if, for example, the parties fail to tell their lawyers that they have agreed that the sale price includes the curtains. There is then every probability that the agreement produced by the lawyers will omit the curtains term and that the whole agreement may be void.
However, there are ways of getting around this sort of problem. The Law Commission thought that it might be possible to rectify the contract to include the missing term.2This is an application of normal contract principles which allow for rectification to correct mistakes. It might apply to the curtains example, though not if the parties deliberately keep the term out of the written contract.
Another possibility is that there may be two separate contracts. There are two types of case. The first is illustrated by the following example. Suppose Malcolm agrees to sell his house to Nicola for £250,000. They also agree that Nicola will buy the carpets for
£500. In this example the carpet contract can be seen as a separate contract: there is one contract for selling the house and another for selling the carpets. So long as neither is conditional on the other, only the contract relating to the house will require writing. The earlier example about curtains cannot be viewed this way, as they were to be included within the sale price.
So, how separate must the contract be? To answer this we enter the realm of collateral contracts, which the Law Commission thought to be separate. The collateral contract is best explained by an example. Olivia orally agrees to sell her house to Pia, whose survey reveals rotten wood in the back door. Pia tells Olivia that she will not proceed with the purchase unless the door is replaced. Olivia agrees, but none of this finds its way into a later written contract to sell the house. In this example we may say that there is a separate collateral contract: Pia agrees to enter a contract to buy the house if Olivia undertakes to replace the door. This is a case where the collateral contract certainly refers to the contract of sale, but can still be seen as separate. On that basis, there is a valid written contract to sell the house and a valid oral contract for the door to be replaced.
It would be wrong to think that every omitted term can be treated as part of a collat-eral contract: this would be inconsistent with the statutory writing requirement. On the other hand, few would want to strike down contracts in circumstances as in the Olivia and Pia example. It is probably necessary to establish something along the lines of ‘I will buy (or sell) if you agree . . .’. Simply promising something extra in order to clinch a deal
2 Law Com No 164, para 5.6 (this report led to the 1989 Act).
Main issues and rules
(such as the curtains in the earlier example) is unlikely to suffice, as this is part of the eventual agreement of sale.
Failure to comply with the 1989 Act
Without the necessary writing there is no contract. The pre-1989 law took a more relaxed approach in allowing enforcement by a person who had undertaken acts of part perform-ance to the knowledge of the other. Although part performperform-ance cannot operate today, there is scope for slightly similar doctrines. If a person is allowed to act to their detriment on the supposition that there is a valid contract, they may bring a claim based upon a constructive trust or estoppel. These remedies require proof of detriment, which is more difficult to prove than was part performance. This area is discussed in the following chapter. Suffice to say at this stage that the courts are wary about any widespread use of these remedies to circumvent the 1989 Act.
Transferring the land
We now move on to the completion stage: the time when the buyer pays the purchase price and acquires the land. The transfer document was traditionally called a conveyance, though for registered land we refer to transfers. An important consideration for registered land is that the transfer has to be registered before a legal title is obtained. Without registration, the purchaser obtains no more than an equitable right to the land.
For both unregistered and registered land, the Law of Property Act 1925 (LPA), section 52 requires there to be a deed. This is part of a wider rule that legal estates and interests in land must be created by deed. Without a deed, the transfer is ineffective to create a legal interest (unregistered land) or authorise registration (registered land).
What is a deed? Traditionally, deeds had to be signed, sealed and delivered (they are sometimes called documents under seal). These rules were relaxed by section 1 of the 1989 Act. No seal is required, but a new rule is that the document must be witnessed by a person present at the time it is signed.
Given that a seal is no longer required, how do we tell whether a document is a deed?
The 1989 Act states that ‘An instrument shall not be a deed unless . . . it makes it clear on its face that it is intended to be a deed’. It seems unlikely that a document (even if witnessed) will be a deed unless it describes itself as a deed.
The requirements of signature and witnessing are moderately clear. But what is meant by requiring that it be delivered? ‘Delivered’ is a misleading word. It does not require physical handing over of the document to the other party. Rather, it means only an inten-tion to be bound by the deed. However, a delivered deed may be condiinten-tional on some future event. A seller will usually sign the transfer in advance of completion, enabling the seller time to set about moving home while the lawyers finalise the legal details.
The signing of the transfer does not immediately shift ownership. It is conditional on completion and does not take effect until that time.
Before leaving deeds, it might be added that they can operate in areas unrelated to land. For example, they can be used to create obligations (usually described as coven-ants). Deeds are especially useful because, unlike normal contracts, no consideration is required.
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Creating interests in landIn this section we consider the formality requirements for creating interests such as leases and mortgages. We have already looked at estate contracts, which must be in writing.
Legal interests
LPA section 52 requires a deed. Without a deed there can at most be an equitable interest (based upon a contract, where there is one). These formalities are commonly overlooked as regards leases (by the parties and by students in answering problems!).
However, the tenant will have an equitable lease if there was a written contract for a lease.
LPA section 54(2) provides an important relaxation of this rule for short leases. Even oral leases are effective if ‘taking effect in possession for a term not exceeding three years . . . at the best rent which can be reasonably obtained without taking a fine’. The three-year maximum is straightforward, but there are further requirements. The first to con-sider is ‘best rent . . . without taking a fine.’ The best rent requirement usually causes no difficulty, as short leases are generally created at a full rent. The phrase ‘without taking a fine’ means that no capital sum must be paid. Peter might lease a house to Queenie for two years with (i) a rent of £10,000 a year; (ii) £1,000 paid now and £9,500 a year rent;
(iii) £19,000 paid now and no (or nominal) rent; or (iv) a rent of £3,000 a year. The final situation is outside section 54(2) because the rent is clearly not the best rent. The second and third situations also fall outside section 54(2) because the capital payments of £1,000 and £19,000 constitute fines. Only the first situation does not require a deed.
The final requirement for section 54(2) to apply is that the lease must take effect in possession. Long v Tower Hamlets LBC3held that the lease must take effect in possession at the time it is created, with the three years being counted from that time. Long involved a lease to take effect in about three weeks’ time. It was argued that the lease would last for less than three years. That was true and appeared to suffice under the pre-1925 law.
However, James Munby QC held that since 1925, applying the clear wording of section 54(2), the lease must take effect immediately. The three-week delay was fatal to its being in possession.
This result may be regarded as unfortunate, as it is very common for leases to start a short time in the future. It gives rise to some very awkward distinctions. Suppose Andy has a flat available for occupation from 1 September. In May he advertises it as available and reaches oral agreement that month with Bella (a student) for her to lease it for a year from 1 September. This could be interpreted in two ways. The first is that there is a lease to take effect from 1 September. In the absence of a deed, Long holds that this will be ineffective. Alternatively, they may agree that Andy will give Bella a lease on 1 September.
This is a contract for a lease. As the lease will not exceed three years and, when created, take effect in possession (it will be created and take effect on 1 September), neither lease nor contract requires any formality. These two possibilities (future lease; contract for a lease) will in practice be extremely difficult to distinguish, especially if there is no writing.
3 [1998] Ch 197.
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It would be rare for Andy and Bella to think in terms of a distinction between contract and immediate lease.
Why do we relax formality requirements for short leases? Three points spring to mind.
Short leases (like the student lease Bella was taking) are frequently entered into without legal advice. Many people would be unaware of any requirement of a deed, so they would not use deeds. It would be unfortunate to make it difficult to create legal leases in this sort of situation, thereby penalising innocent parties such as Bella. Next, we shall see in Chapter 13 that the courts sometimes imply leases from the payment of rent. This would be difficult if all leases had to be by deed. Finally, the presence of a full rent means that any future purchasers of the land, who are bound by the lease, will at least receive rent. It is less clear that we should allow oral leases. It may be proper not to require a deed, but should we not expect the parties to use writing? Even then, short implied leases would need exemption.
Equitable interests
Declarations of trust will be separately considered in the following section. LPA section 53(1)(a) requires writing for all other equitable interests (including restrictive covenants and equitable charges).
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TrustsExpress declarations of trust
The owner of any property can declare themselves a trustee. For land (but not other assets), LPA section 53(1)(b) requires the declaration to be evidenced in writing. Suppose that Sally owns a house, which she wants to be held on trust for her infant nieces Theresa and Ursula. She could transfer the land to trustees (the transfer requires a deed), declar-ing the trusts in the deed. Alternatively, she could simply sign a piece of paper along the lines: ‘I hereby declare myself a trustee of 23 Acacia Avenue, Elsfield, for Theresa and Ursula.’
Trusts not requiring writing
LPA section 53(2) establishes that resulting, implied and constructive trusts can arise without any writing. These trusts are sometimes imposed in situations in which there is no element of avoiding formalities. Perhaps the best example of this is where a trustee makes a profit out of the position of trustee – as where a trustee receives a bribe for selling trust assets to the briber. Equity requires the trustee to hold the bribe on a con-structive trustfor the beneficiaries. It would be ridiculous to say that there could be no trust as there is no writing.
Constructive trusts can be used where injustice would result if formality requirements were strictly insisted upon. Suppose George transfers land to his friend Harriet on the oral understanding that Harriet is to hold on trust for George’s grandson Ivor. A few days later, Harriet has an argument with George and proceeds to deny any liability to Ivor, assert-ing that the land is hers. The courts are quite clear that it is fraudulent for Harriet to claim the land for herself, when it was only transferred to her because she agreed to hold for Ivor. To avoid such conduct (usually described as unconscionable conduct), the courts
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impose a constructive trust. This constructive trust gives effect to an obligation which lack of writing initially rendered ineffective. Although it avoids the normal effect of lack of formalities, it is justified by the objective of avoiding unconscionable conduct.
We should contrast the situation in which George simply tells Ivor that he is holding the land on trust for him. This oral declaration of trust is ineffective. This time, there is no unconscionable conduct by anybody. We might feel that George has acted badly, especially as he has told Ivor, but (unlike Harriet) he has not benefited from inducing somebody to part with property. There is no constructive trust.
We will now turn to the situations in which resulting and constructive trusts are imposed, concentrating on situations relevant to formality issues. As mentioned above, the application of trust principles to the family home setting is postponed to Chapter 9.
Resulting trusts
There is said to be a resulting trust when a transferee holds on trust for the transferor.
An example of a resulting trust is where Brian transfers land to Cheryl so that she can manage it while he goes abroad for five years. Cheryl will hold the land on a resulting trust for Brian. LPA section 53(2) applies and the trust is effective without any writing.
Situations where resulting trusts operate
We will consider two further situations in which resulting trusts are encountered. The first is where money is handed over, rather than land. Suppose Mary and Norman are buying a £240,000 house together as an investment. The purchase is organised by Norman and the house is registered in his name alone. However, Mary provides £160,000 towards the cost, Norman paying the other £80,000. Norman will hold the house on a resulting trust, giving Mary an equitable two-thirds share. We do not treat the money she provided as a gift (assuming no contrary evidence) and she obtains a proportionate share in the property purchased with it. If the house is purchased as a family home, any trust will nearly always be what we call a common intention constructive trust. These trusts are considered in Chapter 9.
The second situation is where a trust is set up, but it does not, as lawyers say, exhaust the beneficial interest. Suppose Peter transfers land to Quentin and Richard to hold for Sally for life and thereafter to Sally’s children who reach the age of 21. Sally has children aged four and six. Sadly, both children die in a car crash a year later. Sally dies broken-hearted ten years later, not having had further children. It is plain that this situation has not been catered for: the trusts assume that at least one child will reach 21. There will be a resulting trust in favour of Peter: it is unthinkable that Quentin and Richard, chosen to be trustees, should themselves benefit from this oversight.
This second form of resulting trust is sometimes described as automatic. Even though Peter intended to get rid of the land completely, it will still result back to him. There is some controversy as to whether all resulting trusts should be based upon intention,4but this is best left to courses and books on trusts.
4 Megarry J in Re Vandervell’s Trusts (No 2) [1974] Ch 269 uses the term automatic, supported by Lord Millett in Air Jamaica Ltd v Charlton [1999] 1 WLR 1399 at p. 1412 (PC); contra Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] AC 669 at p. 708.