Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires contracts for the sale or disposition of interests in land to be written and signed by the parties. However, agreements to grant leases for terms of up to three years need not comply with section 2 if the landlord reserves the best rent that can be reasonably obtained without extracting a premium and the lease takes effect in possession immediately: see section 2(5)(a). The litigation in Looe Fuels Ltd v Looe Harbour Commissioners [2008] EWCA Civ 414; [2008] PLSCS 266 is a salutary reminder of this important exception to the general rule.
The Harbour Commissioners in Looe decided to install a new fuel tank in the harbour. They agreed orally to lease the new tank to the company that ran the existing refuelling station in the port, but subsequently tried to withdraw from the arrangement so that they could enter into a lease with another party. The company claimed that there was a binding agreement for lease and issued proceedings for specific performance of the agreement.
Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires contracts for the sale or disposition of interests in land to be written and signed by the parties. However, agreements to grant leases for terms of up to three years need not comply with section 2 if the landlord reserves the best rent that can be reasonably obtained without extracting a premium and the lease takes effect in possession immediately: see section 2(5)(a). The litigation in Looe Fuels Ltd v Looe Harbour Commissioners [2008] EWCA Civ 414; [2008] PLSCS 266 is a salutary reminder of this important exception to the general rule.
The Harbour Commissioners in Looe decided to install a new fuel tank in the harbour. They agreed orally to lease the new tank to the company that ran the existing refuelling station in the port, but subsequently tried to withdraw from the arrangement so that they could enter into a lease with another party. The company claimed that there was a binding agreement for lease and issued proceedings for specific performance of the agreement.
The High Court decided that the Commissioners had orally bound themselves to grant a lease to the company at a rent of £6,000 pa. The minutes of a board meeting of the Harbour Commissioners confirmed that the majority had voted in favour of the proposals to grant the company a new lease. In addition, the application form for a government grant to help defray the cost of the installation of the tank stated that the fuel tank was to be let to the company. The Commissioners had also produced a report for the Charity Commission, stating that they had agreed to lease the tank to the company. The parties had agreed a three-year term, starting immediately, at the best rent that could reasonably be obtained for the land. Consequently, section 2 of the 1989 Act did not apply and the Commissioners were bound to grant the lease to the company.
The Court of Appeal upheld the judge’s ruling. Their lordships agreed that the Commissioners had secured the best rent that could reasonably be obtained. Most of their capital outlay was being funded by a government grant. The remainder of the cost was to be recovered in the form of the rent payable during the three-year term. The Court of Appeal considered this a remarkably good bargain, even though the Commissioners’ own outlay represented only 25% of the overall cost of the new fuel tank, since very few landlords can boast that they can recover their capital outlay within three years of their original investment.
The ruling has sparked similar decisions establishing the importance of the exceptions to the rules requiring formality in cases concerning leases for terms of up to three years. In such cases, evidence of the parties’ agreement, together with valuation evidence confirming that the rent represents the full open market rent for the property, will determine whether the arrangement is valid or void.
Allyson Colby is a property law consultant
