Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989

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1 Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 Katie Hooper St John s Chambers Friday, 17 th June 2011

2 Section 2: Contracts for the sale etc of land to be made by signed writing SS 2(1) and 2(5): (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 in one document or, where contracts are exchanged, in each. (5) This section does not apply in relation to a) a contract to grant such a lease as is mentioned in section 54(2) of the Law Property Act 1925 (short leases); b) a contract made in the course of a public auction; or c) a contract regulated under the Financial Services and Markets Act 2000, other than a regulated mortgage contract [a regulated home reversion plan, a regulated home purchase plan or a regulated sale and rent back agreement];] and nothing in this section affects the creation or operation of resulting, implied or constructive trusts.

3 How far does the section extend? The court has very recently reconfirmed the scope of s.2 in Helden v Strathmore Ltd [2011] EWCA Civ 542. H borrowed 1m to buy his home subject to a charge which described the debt and interest rate as in accordance with the offer letter. There was no offer letter but there had been oral discussions and agreements as to the terms and interest rates. H challenged the validity of the charge on the basis that it did not comply with s.2. His appeal was dismissed. Lord Neuberger stated at paragraph 27: "Section 2 is concerned with contracts for the creation or sale of legal estates or interests in land, not with documents which actually create or transfer such estates or interests. So 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 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."

4 Section 2 issues (1) Proprietary estoppel- can proprietary estoppel be used to overcome a s.2 defect even though estoppel is not included in s.2(5)? (2) Collateral contracts- what is the position where a person claims that an agreement which does not comply with s.2 formalities constitutes a contract which is collateral to the land contract? (3) Boundary agreements- Is an agreement settling a boundary dispute subject to s.2 even if it involves the transfer of property from one party to another? (4) Mutual wills- are mutual wills, which contain a bequest of land, subject to s.2?

5 (1) Proprietary Estoppel Can proprietary estoppel be used to make enforceable an agreement that does not comply with s.2 of the 1989 Act? In 1999, the Court of Appeal answered this question in the affirmative in Yaxley v Gotts [1999] EWCA Civ Lord Walker said: the doctrine of estoppel may operate to modify (and sometimes perhaps even counteract) the effect of s. 2 of the 1989 Act. The circumstances in which s. 2 has to be complied with are so various, and the scope of the doctrine of estoppel is so flexible, that any general assertion of s.2 as a 'no go area' for estoppel would be unsustainable... In this case that principle must of course be applied consistently with the terms in which s. 2 of the 1989 Act has been enacted, including the saving at the end of s.2(5)

6 Post- Yaxley case law- Kinane Kinane v Mackie-Conteh [2005] EWCA Civ 45 An agreement creating an equitable charge to secure a loan was held to be valid by reason of estoppel operating as a constructive trust even though the requirements of s.2(1) had not been complied with. At paragraph 28, Arden LJ appeared to agree with Yaxley. However, the claim in fact succeeded as a constructive trust, which is expressly excepted from the effect of s.2. But Neuberger LJ made clear that: It would be contrary to legal principle, and inconsistent with the statutory purpose, if the court were to hold that a particular set of facts fell within section 2(5) if, as a matter of extra-statutory law, the facts could not properly be said to give rise to "the creation or operation of [a] resulting implied or constructive trust.i am content to assume, in favour of Mr Mackie-Conteh, that it would not be open to Mr Kinane to avoid the consequences of Section 2(1) of the 1989 Act if he could only establish a proprietary estoppel, and not a trust." (paragraphs 41 and 42).

7 Yeoman s Row Management Ltd v Cobbe [2008] UKHL Oral agreement between a company and a commercial individual regarding development property. Non s.2 compliant. HOL held that C not entitled to a proprietary remedy, including proprietary estoppel. On the s.2 issue, Lord Scott (at paragraph 29) said obiter: My present view, however, is that proprietary estoppel cannot be prayed in aid in order to render enforceable an agreement that statute has declared to be void. The proposition that an owner of land can be estopped from asserting that an agreement is void for want of compliance with the requirements of section 2 is, in my opinion, unacceptable. The assertion is no more than the statute provides. Equity can surely not contradict the statute. Although Lord Scott s comments were obiter, they indicate that: - proprietary estoppel cannot be used to circumvent s.2 of the 1989 Act; - there will be a much stricter application of proprietary estoppel in future cases than in earlier cases such as Yaxley.

8 Brightlingsea Haven Ltd v Morris [2008] EWHC 1928 (QB) At paragraph 47, Jack J referred to Cobbe and stated that Lord Scott s obiter comments do "not sit easily with those cases where it has been held that a proprietary estoppel may be given effect to by a constructive trust. Jack J also said that, by applying other cases like Yaxley, s.2(1) "was not bar to the defendants' claims" (para 55).

9 Hutchinson v B & DF Limited [2008] EWHC 2286 (Ch) Peter Smith J expressed his agreement with the obiter comments of Lord Scott, and said that a 5- year lease term, having failed to comply with the s.2(1) formalities, could not be made enforceable through proprietary estoppel. His comments were themselves obiter because the case for proprietary estoppel had not been made out in other respects.

10 Herbert v Doyle [2010] EWCA Civ 1095 Oral agreement for the transfer of car parking spaces. Non s.2 compliant. At first instance, the judge held that no constructive trust had arisen in Mr. Herbert s favour because he had not completed the promised works. The judge expressed his disagreement (albeit obiter) with Lord Scott s obiter remarks in Cobbe, stating that he considered that the courts may give effect to a proprietary estoppel by recognising or imposing a constructive trust (which is not required to comply with s2 by virtue of s2(5)).

11 Herbert v Doyle (continued) On the application for permission to appeal, Arden LJ stated: "There is a common thread running through the speeches of Lord Scott and Lord Walker. Applying what Lord Walker said in relation to proprietary estoppel also to constructive trust, that common thread is that, if the parties intend to make a formal agreement setting out the terms on which one or more of the parties is to acquire an interest in property, or, if further terms for that acquisition remain to be agreed between them so that the interest in property is not clearly identified, or if the parties did not expect their agreement to be immediately binding, neither party can rely on constructive trust as a means of enforcing their original agreement. In other words, at least in those situations, if their agreement (which does not comply with section 2(1)) is incomplete, they cannot utilise the doctrine of proprietary estoppel or the doctrine of constructive trust to make their agreement binding on the other party by virtue of section 2(5) of the 1989 Act."

12 Thorner v Majors [2009] UKHL 18 Thorner involved a successful proprietary estoppel claim based upon tacit remarks and conduct, where there was a familial rather than a commercial/contractual relationship. Lord Neuberger stated at para 99: "I do not consider that section 2 has any impact on [...] a straightforward estoppel claim without any contractual connection. The emphasis in Thorner was on the fact that this had been a gift rather than a contract, which is why s.2 did not apply. Thorner indicates a sharp demarcation between gifts and contracts and possibly commercial and non-commercial proprietary estoppel claims.

13 Advising Clients on s.2 in the proprietary estoppel context Although there have been a number of cases in recent years which have cast doubt on the correctness of Yaxley, none of these have in fact expressly overruled Yaxley. Yaxley appears to remain good law. There is considerable uncertainty now as to the approach of the courts when faced with a proprietary estoppel claim in which the agreement falls foul of s.2 It would appear from Thorner v Majors that there is a sharp dividing line between the application of proprietary estoppel in the commercial (e.g. Cobbe) and non-commercial (e.g. Thorner) contexts. It may be that s.2 can be overcome in the domestic context but the position remains largely unresolved.

14 (2) Collateral contracts On occasion, parties will enter into a s.2 contract and a collateral contract which are closely related. If the promise said to be binding as a collateral contract is in truth one of the terms for the sale or other disposition of land it will be unenforceable unless it is contained in the written contract required by s.2 Law of Property (Miscellaneous Provisions) Act 1989 (Business Environment Bow Lane Ltd v Deanwater Estates Ltd [2007] EWCA Civ 662 per Andrew Morritt C at [42]). The land contract must be genuinely separate and distinct for it not to fall foul of s.2.

15 Scrowther v Watermill Properties [2009] EW Misc 6 (EWCC) C entered into an equity release and rentback scheme. As part of a rentback bonus, C released to D 31,250 of the purchase price. When D subsequently obtained a possession order, C claimed repayment of the rentback bonus. D defended on the basis that the retention of 31,250 constituted a collateral contract. The court held that C was entitled to the return of 31,250 because: the collateral agreement was central to the whole scheme, representing a reduction in the purchase price of the property, i.e. it was not truly collateral; as such, the rentback bonus agreement fell within s.2; the rentback bonus was dealt with in a number of sources, none of which complied with s.2; this agreement was void and, as the rentback bonus was inconsistent with the sale contract (representing the balance of the purchase price), C was entitled to the return of 31,250.

16 North Eastern Properties v Coleman [2010] EWCA Civ 277 The collateral contract related to a 2% Finder s Fee/discount which was not referred to in the contract for sale. The contract for sale also contained an entire agreement clause. It was held that the Finder s Fee contract was truly collateral and enforceable because: - the sale price was not discounted to reflect the finder s fee; - performance of the land contracts was not made conditional upon performance of the Finder s Fee agreement; - the Finder s Fee was a reward and not part of the consideration for the performance of the use of the entire agreement clause may (and did in this case) indicate that the land sale was not conditional upon the Finder s Fee agreement. It was held that nothing in s.2 was designed to prevent parties to a composite transaction which included a contract for the sale or other disposition of an interest in land from structuring their bargain so that the land contract was genuinely separated from the rest of the transaction. This meant that its performance was not made conditional upon the performance of some other expressly agreed part of the bargain. Recently considered on 20 May in Re Stealth Construction Ltd [2011] EWHC 1305 (Ch)

17 (3) Boundary Agreements An agreement which merely settles the line of a disputed boundary may fall outside the scope of s.2, even though it results in the transfer of property from one party to the other (Joyce v Rigolli [2004] EWCA Civ 79). It is a matter of fact and degree as to whether such an agreement crosses the threshold of s.2. The court in Joyce v Rigolli held that s.2 would not apply where the amount of land transferred is trivial. What amounts to trivial is a value judgment for the court on a case-by-case basis. These principles have been confirmed and applied fairly recently in Melhuish v Fishburn [2008] EWCA Civ 1382 Having some flexibility in this area is necessary to encourage compromise agreements.

18 (4) Mutual wills Healey v Brown [2002] EWHC 1405 (Ch) Husband and wife made mutual wills, leaving their interest in the family home to their niece, with remainder to their son. Wife died and husband subsequently transferred the family home into the joint names of him and his son, so that the home passed to the son by operation of law on husband s death. Held: an agreement to make mutual wills that contains a bequest of land must comply with s.2. As there was no single document signed by both parties and the wills were not exchanged, s.2 had not been complied with.

19 Mutual wills (continued) The ineffective agreement in Healey still gave rise to a constructive trust but one that was limited in extent- per Re Goodchild [1997] 3 All ER 63, the constructive trust was applied only as to the property received by husband from wife and not as to husband s own half share. The niece was held to have a 50% share in the property, rather than the full ownership that was intended. Analysis: Query whether this decision produced an unfair result due to the limited constructive trust imposed. There is a clear danger on relying on mutual wills in relation to land in future. Healey recently applied by the Court of Appeal in Fry v Densham-Smith [2010] EWCA Civ 1410 (albeit in relation to general mutual wills principles, rather than the s.2 issue).