Land transactions: The formalities

Section 2 of the Law of Property (Miscellaneous) Provisions) Act 1989 governs the enforceability of a contract for the sale or other disposition of an interest in land. Essentially, section 2 requires the contract to be in writing, to incorporate all the terms expressly agreed between the parties in one document and be signed by or on behalf of the parties. Validity of electronic signatures Electronic signatures have long been the subject of much debate, culminating in the publication of the Law Commission’s report on 4 September 2019 which concluded that: “An electronic signature is capable in law of being used to execute a document (including a deed), provided that (i) the person signing the document intends to authenticate the document and (ii) any relevant formalities are satisfied.” What constitutes a signature for the purposes of section 2 has been tested in the courts on a number of occasions but until recently there had not been a decision as to the validity of an electronic signature. In Neocleous v Rees [2019] EWHC 2462 (Ch); [2019] PLSCS 189, Judge Pearce had to decide whether an automatically generated e-mail footer could satisfy the requirement that a land contract must be “signed” in order to comply with section 2. He concluded that the automatic insertion of name in the e-mail footer was a valid signature, and the manual typing, rather than automatic inclusion, of the words “Many Thanks” at the end of the e-mail indicated that the author was relying on the automatic footer to sign off the e-mail. Judge Pearce stated that the meaning of words tended to develop over time, and whether a signature is valid should only depend on whether it was applied with authenticating intent. Although only a County Court decision, and therefore not binding precedent, Judge Pearce’s reasoning in Neocleous is certainly persuasive and is an endorsement that function is more important than form. Indeed, the Law Commission’s report states that: “Save where the contrary is provided for in relevant legislation or contractual arrangements, or where case law specific to the document in question leads to a contrary conclusion, the common law adopts a pragmatic approach and does not prescribe any particular form or type of signature.” Basic elements for the formation of a contract Whether or not we accept the validity of an electronic signature, it is important to remember that being a binding and enforceable land contract for the purposes of section 2 does not obviate the need to comply with the essential requirements for the formation of any contract. These elements are: offer; acceptance; consideration (where not signed as a deed); and mutual intention to create legal relations. Intention to create legal relations Of all of these basic contractual elements, it is the question of whether there is intention to create legal relations that will often cause problems for unsuspecting contracting parties. In commercial transactions there is a rebuttable presumption that the parties intend to create legal relations which the courts will uphold unless there is strong evidence to the contrary. Use of the ‘subject to contract’ label When contemplating a property transaction, the parties will normally agree the main terms of a transaction and record these in a written document which is usually referred to as the heads of terms. The heads of terms will often be signed by both parties or their authorised representatives. Could the fact that the heads of terms satisfy the requirements of section 2 (they contain all the terms, are in writing and are signed by or on behalf of the parties) mean that a valid contract for the disposition of an interest in land has been created? It is generally accepted that heads of terms are not intended to be legally binding. It is usually clear that the heads of terms will lead to another document which is intended to be the negotiated contract. Therefore, in such circumstances there is no intention to create legal relations and so the heads of terms cannot be a binding contract. That said, the courts will determine the question of whether parties intend to be bound by making an objective assessment of their words and conduct. Therefore, it is essential to make it plain in any heads of terms or similar document that it is not intended to be legally binding by including a clear statement to that effect – the words “subject to contract”. In our electronic age, heads of terms are often finalised by e-mail and, although often considered a more relaxed medium of communication, it is still important to observe the necessary legal formalities to avoid any unintended consequences. Green (Liquidator of Stealth Construction Ltd) v Ireland [2011] EWHC 1305 (Ch) is authority for the fact that an exchange of e-mails could create a contract for the disposition of an interest in land. The dispute in this case was whether there was a contract for the grant of a mortgage (which must comply with section 2). The judge held that an exchange of e-mails set out in a “string” constituted one document for the purpose of section 2. In this case it was not disputed that a typed signature was sufficient for section 2, so the court did not have to opine on that particular issue. Ultimately, it was found that there was no contract as not all the terms were included in the e-mails. However, if an e-mail (perhaps attaching a final version of a document) and its reply did contain all the express terms and each was electronically signed on behalf of the parties then this exchange of e-mails could be a valid land contract – unless, of course, the parties did not intend to create legal relations. Therefore, it is just as important to include the “subject to contract” label on e-mail correspondence when negotiating terms for a contract for the sale of land so it is clear that you do not intend to bind the contracting parties until a formal document is executed. Limitations of the ‘subject to contract’ label The “subject to contract” label will normally prevent the creation of a binding agreement, as it indicates there is no intention to create legal relations, but it is not infallible. The courts are at liberty to consider whether the parties have, by their words or conduct, waived the “subject to contract” protection. An example of such a waiver might be where one party begins to perform its obligations before the formal contract is signed. Care should also be taken when including phrases in the heads of terms such as “subject to survey”, “subject to licence” or “subject to bank/regulatory consent”. The courts may well find that such phrases are intended to create immediate binding obligations to satisfy such conditions, notwithstanding the fact that the heads of terms are prefaced by the “subject to contract” label. To avoid this, it would be advisable to include a statement in the heads of terms that none of the terms are intended to be legally binding as well. Finally, do remember that even if the court was to find that the “subject to contract” label was ineffective and the parties had, in fact, by their words or conduct, waived the “subject to contract” protection, it would still be necessary to show that the terms of the contract were sufficiently certain to be capable of enforcement. Law of Property (Miscellaneous Provisions) Act 1989 Section 2: Contracts for sale etc of land to be made by signed writing. (1) A contract for the sale or other disposition of interest in land can only be made 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. (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… (6) In this section – “disposition” has the same meaning as in the Law of Property Act 1925 [namely, a conveyance (a mortgage, charge, lease, etc) and also a demise, request or an appointment of property contained in a will]; “interest in land” means any estate, interest or charge in or over land… Alison Murrin is an expertise counsel at Ashurst