Why legal formalities matter in property deals
The majority of people instruct a solicitor when purchasing property or otherwise acquiring an interest in the same, whether it be a house or land, mainly due to the fact that these are inevitably significant transactions.
However, not everybody takes that step or takes it early enough or perhaps more importantly, not always before undertaking significant investment. Alternatively, not every situation seems to call for getting lawyers involved even if, in hindsight, it would have been better to do so.
So, what can the law do for you, if you did not get all your i’s dotted and all the t’s crossed?
Important legal context for this question is twofold:
- A basic principle of our law of contract is that parties to a contract are free to determine for themselves what obligations they will accept, and the court’s role is to enforce those terms[1]
- Notwithstanding parties’ otherwise broad freedom to contract in our law (above), there is some statutory regulation and age-old judge-made rules which restricts that freedom. Most notably, for present purposes, the Law of Property (Miscellaneous Provisions) Act 1989 (“the Act”).
The Law of Property (Miscellaneous Provisions) Act 1989 (Section 2)
Section 2 of this Act provides, so far as relevant for the purpose of this article, as follows:
- 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 in one document or, where contracts are exchanged, in each.
- The terms may be incorporated in a document either by being set out in it or by reference to some other document.
- 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.
- Where a contract for the sale or other disposition of an interest in land satisfies the conditions of this section by reason only of the rectification of one or more documents in pursuance of an order of a court, the contract shall come into being, or be deemed to have come into being, at such time as may be specified in the order.
- Nothing in this section affects the creation or operation of resulting, implied or constructive trusts.
Whilst parties are generally free to contract on whatever terms they choose[2], they are not free in every situation to contract in whatever way they choose and still expect the court to perform its role of enforcing the terms agreed.
Contracts relating to land or an 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 per section 2 of the Act. The justification for the formalities requirements set out in the Act are the need for certainty, consumer protection, encouraging the standardisation of transactions and the uniqueness of land[3]
So, what if you have what you think is a clear agreement to purchase a property or other land, or acquire an interest in the same from somebody but it is not in writing or, not fully in writing? Section 2(5) of the Act makes it clear that the regulation governing contracts does not affect resulting, implied or constructive trusts. These are equitable claims which may, subject to proof and in certain circumstances, be used to enforce alleged property rights where you do not have a contract satisfying the Act’s requirements[4]. Further, even though it is not specifically mentioned in section 2(5) of the Act, the equitable claim of proprietary estoppel[5] may also come to the rescue.
Careful identification and selection of the claim to pursue however, may be all important in terms of what remedy the court may ultimately be inclined to give, and depending on the context (albeit the below two, are often pursued together in the alternative).
Constructive Trusts
Where you do not have a contract satisfying the Act’s requirements, it may be worth considering whether you have a claim based on what is known as ‘common intention constructive trust’.
To establish this, a claimant must show that there was an agreement that they should have a beneficial interest in the property, even if there was no agreement about the precise extent of that interest and that they have acted to their detriment in reliance on this common intention.
Property lawyers would be most familiar with this in a domestic context relating to cohabitees where either they have purchased a property jointly, such that they both own the legal title but have never spelt out their respective beneficial interest in the property and then, on relationship breakdown, a dispute arises as to what that interest is[6]. Alternatively, one of the cohabitees may be sole legal proprietor in which case the other person has a greater uphill struggle to satisfy the court that they have any interest in the property, at all. However, subject to the evidence, it can be done.
A recent joint proprietorship case where constructive trust was successfully deployed, was Nilsson v Cynberg[7]. This case was also significant in that it resolved some ambiguity which existed in in this area of the law.
Nilsson v Cynberg
When the Cynbergs acquired their matrimonial home, they made an express declaration of trust that they were joint tenants in equity. Where parties do this, that will be conclusive as to the parties’ beneficial interest unless varied by ‘subsequent agreement’. When the Cynbergs separated, by informal discussion Mr. Cynberg agreed to relinquish his interest in the home providing Mrs. Cynberg ultimately left it to the children. Mr. Cynberg was later made bankrupt and his Trustees in bankruptcy argued that he retained his beneficial interest in the property based upon the Cynbergs’ original, express declaration of trust and pursued a claim for possession and order for sale. One of the questions the court had to answer was whether ‘subsequent agreement’, was an agreement satisfying section 2 of the Act, or whether it could be an informal, common intention constructive trust. This was the ambiguity. The court decided the latter was sufficient to vary the original declaration. Mrs. Cynberg succeeded both on this basis, and proprietary estoppel as she relied upon the informal discussion to her detriment, in foregoing additional financial relief upon divorce and paying the mortgage for 15 years. You can read more detail on this case here.
Proprietary Estoppel
As flexible as the constructive trust proved to be in Nilsson, proprietary estoppel has, in some instances, not proven to be anywhere near as flexible at least when it comes to actually acquiring the property you say you are entitled to. That is ironic given how closely analogous they are. That is why it is stated that careful identification and selection of the claim to pursue may be all important in terms of what remedy the court may ultimately be inclined to give.
To establish a claim in proprietary estoppel, a claimant must show:
- the owner of the land encouraged the claimant by words or conduct (that could be active or passive) to believe that the claimant has or will in the future enjoy some right or benefit over the owner's property that is not merely personal in nature; and that the claimant must have reasonably believed that those words or that conduct was seriously intended to create that right;
- the claimant must have acted to his detriment in reliance on the belief that he has or will acquire some right over the owner's land; and
- that it must be unconscionable for the owner to act in such a way as to defeat the expectation that the claimant had been encouraged or induced to believe.[8]
It is furthermore now well established at the highest level that it will be assumed (though not legally presumed) that the way to remedy the unconscionability is to fulfil the claimant’s expectation e.g. by ordering transfer of the relevant property, subject only to a check on the proportionality of that compared with the claimant’s detriment suffered.[9]
Property lawyers would again be most familiar with this being deployed within a familial context and often involving the passing down of farmland from parents to their children who dedicate their life to working on the family farm on the informal promise of their inheriting the same.[10]
As with the constructive trust its operation is not so limited, at least in legal theory. That stated, its effectiveness outside of that context is at least questionable as two recent cases show. In both cases, proprietary estoppel was not permitted to enable the claimants to acquire the property they alleged they were clearly entitled to, though in one case it was permitted as the basis of a lesser money remedy. Crudely, based on these cases, though the underlying policy of section 2(1) of the Act is to prize certainty in land transactions, the trend seems to be that the more formal, but not quite compliant with the Act that you are, the less likely proprietary estoppel will help you acquire the property you say you are entitled to.[11] In other words, a near miss, is a miss in this regard.
Pathway to Relief v Your Best Properties Limited
In this case[12], Your Best Properties Limited (YBP) orally agreed to sell a hotel to Pathway for £1.65m. Despite Pathway paying part of the £300,000 deposit in advance of raising the remainder of the funds to meet an 18-month completion deadline, YBP decided not to proceed with the sale. In court Pathway argued that the hotel should be transferred to them on the basis of proprietary estoppel. The court disagreed, finding that the agreement to transfer the hotel was essentially contractual, but an ineffectual oral agreement under section 2(1) of the Act and that Proprietary Estoppel could not be used to effectively enforce an ineffective agreement, contrary to section 2(1) of the Act. You can read more detail on this case here.
Thandi v Saggu
Mrs Thandi[13] had agreed to sell a mixed-use property to Mr Saggu for an agreed ‘fixed’ price of £270,000 and pursuant to which Mr. Saggu paid over deposits. Mrs. Thandi subsequently withdrew from the agreement, claiming it was oral and non-binding. Mr Saggu disagreed because the parties had reduced their agreement to writing of sorts, by signing and dating three letters, each one superseding the other. These letters contained ostensibly clear terms as to sale and purchase of the relevant property. The court found there were other terms agreed relating to the sale that were not contained in the letters. Therefore there was no contract satisfying section 2(1) of the Act. Whilst the court considered it was okay to allow the proprietary estoppel claim, it would not order transfer of the property based on it because, the case was ‘essentially contractual’, but without a contract complying with the Act. It did however order return of the deposits paid by Mr. Saggu based on proprietary estoppel, though the same could be recovered in something called restitution, anyway. You can read more detail about the case here.
Summary
When you are acquiring a house or land, it is strongly recommended that you take legal advice at an early stage. A lawyer is qualified to draw up the requisite, formal written contract/s, or other instrument[14] for you, ensuring everything meets all the Act’s requirements. This provides the most certainty, which is one of the underlying policy aims of the Act in the first place.
Not everyone will do so, or will not do so early enough, and this is often where lawyers see issues arise. Sometimes this will be either because they have not thought about the legalities or perhaps that the situation at the time appeared to lend itself to a less formal approach. In such circumstances, if a dispute arises, you may need to consider your legal position in hindsight and, whilst you may well have a claim, it might not be for all you were expecting.
Choosing the right claim to pursue is crucial, as it can greatly affect what remedy the court is likely to grant, depending on the situation.
If your arrangement to buy or deal with a house or land had no formal agreement at all[15], you might actually have a better chance of getting what you expected, even without a contract. On the other hand, if you had a clearer but incomplete or oral agreement, you may be less likely to get what you expected.
[1] Per Lords Hamblen and Burrows in RTI Ltd (Respondent) v MUR Shipping BV (Appellant) [2024] UKSC 18 (“RTI”), para 41 citing prior authority
[2] Subject to exceptions
[3] Yaxley v Gotts [2000] Ch 162, at 188-190
[4] ‘Equity’ is a branch of English law which, in certain circumstances and in accordance with established principles, relieves against the effect of the strict law in a particular case
[5] The elements of a claim in proprietary estoppel are well known (see for example Thorner v Major [2009] 1 WLR 776 , per Lord Walker at §29): a representation or assurance made to the claimant; reliance on it by the claimant; and detriment to the claimant in consequence of his (reasonable) reliance.
[6] Though intention common intention constructive trust is not limited in its scope to the domestic, cohabitee context Oberman v Collins [2020] EWHC 3533 (Ch) “Oberman”
[7] [2024] EWHC 2164 (Ch) “Nilsson”
[8] Howe v Gossop [2021] EWHC 637 (Ch) “Howe”, para 20
[9] Guest v Guest [2022] UKSC 27 “Guest”
[10] Please see the article(s) written on the same by our own Katie Alsop here.
[11] That is not conclusive legal opinion, but writer’s observation based on two recent authorities
[12] [2024] EHWC 1284 (Ch) “Pathway”
[13] [2023] EWHC 2631 (Ch) “Saggu”
[14] Not covered here
[15] Though still sufficiently clear to be able to establish the requisite elements of a constructive trust or proprietary estoppel claim
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
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