Sale of Land: Is it necessary to sign a contract? By Ho Ai Ting 25 February 2016
AGENDA Introduction Elements of Contract Common Misconception Incomplete Agreements Are They Binding? Reasonable Man Test Conclusion
INTRODUCTION Many of us frequently enter into transactions involving the sale of property and land. In our flurry of negotiations with the vendor, do we really know when the contract becomes concluded?
INTRODUCTION Signing True or false? Conclusion
INTRODUCTION Answer the question of when exactly a contract is formed in transactions of land and property Tackle the common misconception that such transactions only take effect upon signing of a contract Highlight ways to safeguard your interests in such transactions
ELEMENTS OF CONTRACT Offer Acceptance Contract Consideration Intention to create legal relations
COMMON MISCONCEPTION Transactions only take effect upon signing of a contract true or false? Courts have upheld agreements in the following forms: Letters JR Lincks Educational Consultants Sdn Bhd v Goh & Sons Enterprise Sdn Bhd [2008] 3 CLJ 815 Perry v Suffields, Limited [1916] 2 Ch 187 Cipta Cermat Sdn Bhd v Perbadanan Kemajuan Negeri Kedah [2007] 1 CLJ 498, CA Telephone conversations Elias v George Sahely & Co (Barbados) Ltd [1982] 3 All ER 801
COMMON MISCONCEPTION Forms Storer v Manchester City Council [1974] 1 WLR 1403 Provisional Agreement Branca v Cobarro [1947] KB 854 the agreement entered into by the parties contained a clause as follows: 'This is a provisional agreement until a fully legalized agreement, drawn up by a solicitor and embodying all the conditions herewith stated, is signed.' It was held by the Court of Appeal that a binding agreement had come into effect.
INCOMPLETE AGREEMENTS ARE THEY BINDING? Different forms of incomplete agreement Agreement in principle Stipulation for execution of formal documents Agreement subject to contract Booking pro forma Part performance before agreement is signed Criteria/ machinery laid out in agreement
AGREEMENT IN PRINCIPLE Parties may reach agreement on broad matters in principle but leave important points unsettled. Even an agreement for sale of land dealing only with the barest essentials may be regarded as complete if that was the clear intention of the parties. Perry v Suffields [1916] 2 Ch 187 Elias v George Sahely & Co. (Barbados) Ltd [1982] 3 All ER 801 Storer v Manchester CC [1974] 1 WLR 1403
AGREEMENT IN PRINCIPLE Perry v Suffields [1916] 2 Ch 187 Vendor filed action for specific performance of contract contained in two letters of February 23 and March 3 for sale and purchase of certain freehold licensed premises. February 23 letter secretary of company made an offer of 7000 to the plaintiff March 3 letter plaintiff accepted the offer of 7000. Facts A draft contract later on sent by plaintiff contained condition as to commencement of title, the payment of a deposit, and the time for completion, which was to be postponed until after the completion of the other contract with district council. As a result, defendant ended negotiations as he could not entertain the purchase of the property on the conditions mentioned. Judgment English Court of Appeal held that the parties rights were for all purposes sufficiently settled by the two letters of offer and acceptance i.e. there was a complete and definite contract which was made up by two letters dated February 23 and March 3.
AGREEMENT IN PRINCIPLE Elias v George Sahely & Co. (Barbados) Ltd [1982] 3 All ER 801 Facts A vendor agreed, in a telephone conversation, to sell property to a purchaser at an agreed price. The purchaser s lawyer wrote to the vendor s lawyer confirming the contract, and enclosed a deposit stating that he was to hold it pending completion of the contract for sale. A receipt was sent but the letter was not acknowledged. The vendor failed to complete the contract and the purchaser unsuccessfully sought an order of specific performance. The purchaser appealed. Whether a contract of sale existed; and, if so Issues Whether it was evidenced by a note or memorandum signed on the vendor s behalf. Judgment An oral contract for the sale of land which was neither in writing nor partly performed was merely unenforceable, not void. In the present case there was a contract of sale, as an oral contract had been concluded during the telephone conversation. The letter from the purchaser s lawyer could not be interpreted to mean that there was no binding contract until a formal contract was signed.
AGREEMENT IN PRINCIPLE However, if the alleged documents do not contain the terms essential for such an agreement to be enforced, court will hold it unenforceable. May and Butcher, Limited v The King [1934] 2 KB 17 Held: Since the price for the goods concerned not having been agreed on between the parties, there was no binding or concluded contract, and there being a stipulation in the agreement that the price should be agreed, it could not be implied that the price was to be a reasonable price.
AGREEMENT IN PRINCIPLE Dhanani v Crasnianski [2011] 2 All ER (Comm) 799 Held: It was established law that whether there was a binding contract between the parties, and upon what terms, depended upon what they had agreed. It depended not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that led objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law required as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties had not been finalised, an objective appraisal of their words and conduct might lead to the conclusion that they had not intended agreement of such terms to be a precondition to a concluded and legally binding agreement. Further the court should not be astute to find defects in what the parties had agreed, but should seek to give effect to what they had agreed. It was true that the courts were reluctant to conclude that what the parties intended to be a contractual agreement was too uncertain to be of contractual effect, especially where a party had acted upon it. However, it did not follow that the fact that work had been performed that the parties had to have entered into a binding contract. Rather, that was a very relevant factor pointing in that direction. Whether the parties intended to enter a contract, that it to create legal relations, depended not upon a detail textual analysis, but upon how a reasonable man versed in business would have understood the exchanges between the parties. Finally, the law would not recognise an agreement to agree as giving rise to enforceable obligations. On its proper construction, the reasonable businessman would have understood the signed letter and term sheet to be legally binding. The term sheet, however, left so much to be agreed that it was in reality an agreement to agree with no indication of any objective criteria by reference to which agreement was to be reached on the matters not then agreed. Accordingly, the agreement contained in the letter and term sheet was unenforceable because it did not contain the terms which were essential for such an agreement to be enforced.
STIPULATION FOR EXECUTION OF FORMAL DOCUMENTS Effect of a stipulation that an agreement is to be embodied in a formal written document depends on its purpose. Von Hatzfeldt-Wildenburg v Alexander [1912] 1 Ch 284 It appears to be well settled by the authorities that if the documents or letters relied as constituting a contract contemplates the execution of a further contract between the parties it is a question of construction whether the execution of the further contract is a condition or term of the bargain or whether it is a mere expression of the desire of the parties as to the manner in which the transaction already agreed to will in fact go through. In the former case, there is no enforceable contract because the condition is unfulfilled or because the law does not recognise a contract to enter into a contract. In the latter case, there is a binding contract and reference to the more formal document may be ignored.
AGREEMENT SUBJECT TO CONTRACT Agreements for the sale of land by private treaty are usually made subject to contract. Well settled when an arrangement is made subject to contract or subject to the preparation and approval of a formal contract and similar expressions, it will generally be construed to mean that the parties are still in a state of negotiation and do not intend to be bound unless and until a formal contract is exchanged. Ayer Hitam Tin Dredging Malaysia Bhd v YC Chin Enterprise Sdn Bhd [1994] 2 MLJ 754, SC Kam Mah Theatre Sdn Bhd v Tan Lay Soon [1994] 1 MLJ 108, SC Winn v Bull (1877) 7 Ch D 29 Eccles v Bryant and Pollock [1948] Ch 93, CA Chillingworth v Esche [1924] 1 Ch 97, CA
AGREEMENT SUBJECT TO CONTRACT Ayer Hitam Tin Dredging Malaysia Bhd v YC Chin Enterprise Sdn Bhd [1994] 2 MLJ 754, SC Merely because the parties contemplate the preparation of a formal contract, that would not prevent a binding contract from coming into existence before the formal contract is signed. However, when an arrangement is made subject to contract or subject to the preparation and approval of a formal contract, it will generally be construed to mean that the parties are still negotiating and do not intend to be bound until a formal contract is exchanged.
AGREEMENT SUBJECT TO CONTRACT Whether the contract was a concluded contract or otherwise is a question of fact Charles Grenier Sdn Bhd v Lau Wing Hong [1996] 3 MLJ 327, FC JR Lincks Educational Consultants Sdn Bhd v Goh & Sons Enterprise Sdn Bhd [2008] 3 CLJ 815, CA Lim Keng Siong & Anor v Yeo Ah Tee [1983] CLJ (Rep) 231, FC
AGREEMENT SUBJECT TO CONTRACT Charles Grenier Sdn Bhd v Lau Wing Hong [1996] 3 MLJ 327, FC Where parties who have been in negotiation to reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes a) Where the parties have reach finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. b) Where the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or implied, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. c) Where the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
AGREEMENT SUBJECT TO CONTRACT Charles Grenier Sdn Bhd v Lau Wing Hong [1996] 3 MLJ 327, FC (Cont ) In the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document. in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution.
AGREEMENT SUBJECT TO CONTRACT Charles Grenier Sdn Bhd v Lau Wing Hong [1996] 3 MLJ 327, FC (Cont ) The court examined the two letters that passed between the parties, and was unable to find that the parties intended that there should be no concluded contract until a formal sale and purchase agreement had been executed by them. On the contrary, the court found their objective intention to be travelling in quite the opposite direction. They had identified the parties to the transaction, the property, the price and the terms they considered essential with sufficient clarity.
AGREEMENT SUBJECT TO CONTRACT JR Lincks Educational Consultants Sdn Bhd [2008] 3 CLJ 815, CA..the plaintiff became tenant of the premises pursuant to the tenancy agreement by letter dated 22 July 1993, immediately upon the plaintiff being given possession and the keys to the premises on 24 January 1994, notwithstanding the execution of a formal written tenancy agreement subsequently, purporting to create a tenancy effective only from 1 March 1994... The fact that the defendant waived the rental for the period 1 September 1993 till 1 April 1994 is immaterial, and does not derail the landlord/tenant relationship already in place.. The subsequent formal written agreement was nothing more than a continuation of the tenancy created by the letter of 22 July 1993.
BOOKING PRO FORMA Courts are willing to recognise the booking pro forma as a contract provided that the essential terms i.e. parties, property and price have been agreed upon by the parties. Daiman Development Sdn Bhd v Mathew Lui Chin Teck and Another Appeal [1978] 2 MLJ 239, FC Karuppiah v Petaling Garden Co Sdn Bhd [1972] 1 MLJ 173, FC Yeo Long Seng v Lucky Park (Pte) Limited [1971] 1 MLJ 20 Howe v Smith (1884) 27 Ch D 89, CA Eckhardt Marine Gmbh v Sheriff, High Court of Malaya, Seremban & Ors [2001] 4 MLJ 49, CA Storer v Manchester City Council [1974] 1 WLR 1403
BOOKING PRO FORMA Daiman Development Sdn Bhd v Mathew Lui Chin Teck and Another Appeal [1978] 2 MLJ 239, FC - Respondent paid a booking fee of $700 and signed a booking pro forma. According to the booking pro forma the parties agreed the purchase price of the house at $26,000. Respondent also agreed that on receiving notice by the respondents he would sign the agreement for sale. - Subsequently, the appellants informed the respondent that the price of the house was increased to $35,100 because of amendments to the building plans and increase of material and construction costs. The appellants informed the respondent that unless he agreed to pay the deposit based on the increased price, they would cancel the booking and refund the booking fee. - Court held that..the booking pro forma was a firm contract. It identified the parties, it specified the property to be bought and its price. Appellants had no right to change the price stated in the booking pro forma in such circumstances.
BOOKING PRO FORMA However, courts will not hesitate to release the parties from their obligation when the document is essentially still subject to contract, when the agreement is deemed an inchoate contract, when the terms are vague or if either party has not complied with the terms of the document. Kam Mah Theatre Sdn Bhd v Tan Lay Soon [1994] 1 MLJ 108, SC Skyline Trading Co v Tiow Yoke Lan [1969] 2 MLJ 212, FC Hui Jia Hao v Perdana Park City Sdn Bhd [2012] 8 MLJ 385 Golden Century Development Sdn Bhd & Anor v Ganhoe & Anor [1983] 1 MLJ 86, FC Gibson v Manchester City Council [1979] 1 WLR 294, HL
BOOKING PRO FORMA Kam Mah Theatre Sdn Bhd v Tan Lay Soon [1994] 1 MLJ 108, SC Respondent (purchaser) corresponded with appellant (vendor) by a letter for the purchase of lands. The terms of the document contained a proviso i.e. that the sale and purchase agreement shall incorporate all the terms and conditions herein and other usual terms and conditions and shall be signed on or before 18 March 1989, otherwise the deposit was to be refunded to the respondent. Sale and purchase agreement was prepared and signed by respondent only with two new conditions which appellant did not agree and therefore refunded respondent s deposit. SC held that there was no contract at all, because the document was dependent on the signing of a formal contract to be further negotiated and approved by both parties. The proviso in the said document was very similar to the phrase subject to contract. The words usual terms and conditions failed to reveal certainty and were too ambiguous. It is settled that the formula of subject to contract gives rise to a strong presumption of the necessity of a further formal contract and it requires cogent evidence to displace this strong presumption. On the facts of this case, there was cogent evidence to show that the negotiations were still ongoing between the parties, including: (i) the provision of the return of the deposit on the failure of the parties signing the contract by 18 March 1989; (ii) the agreement which was signed by the plaintiff only, containing two more conditions; (iii) there could have been a further amended draft of the ultimate agreement to take account of withdrawal of the compulsory acquisition over part of the land; and (iv) the correspondence after the date of the said document.
BOOKING PRO FORMA Skyline Trading Co v Tiow Yoke Lan [1969] 2 MLJ 212, FC Respondent paid booking fee of $2000 for a flat on the understanding that she should sign a contract of purchase within 2 weeks of receipt of notice from the vendors. Upon informing herself of the terms of the proposed agreement and form of lease she decided that she was not prepared to buy the flat on the terms of the proposed agreement, which offered a lease instead of a sale of the flat, and she asked for the return of the booking fee. FC held that the contract of purchase was,, inchoate, of the type where a purchaser of land agrees to purchase subject to a proper contract to be prepared by the vendor s solicitor. When the respondent paid the booking fee, neither parties were aware of the precise terms of the contract which did not yet exist even in draft. Besides the price, the rate of installments and interest both of which could be increased and varied at the discretion of the vendor none of the terms and conditions were made known to and accepted by the respondent. The condition expressed in the reservation form thus left the terms of the contemplated contract so nebulous and vague that no enforceable contract between the parties could have arisen..
BOOKING PRO FORMA When does the contractual relationship begin? Contractual relationship begins when all the basic elements of contract have been fulfilled i.e. offer, acceptance, intention to create legal relations and consideration. From the cases discussed, there must also be certainty in the subjectmatter such as the parties, the property transacted and the price. Ambiguity in any of the essential terms may lead to the court s conclusion that the booking pro forma is still subject to contract.
PART PERFORMANCE BEFORE AGREEMENT IS SIGNED Parties may begin to act on terms of agreement before a formal contract is signed. That contract may have retrospective effect so as to apply to work done or goods supplied before it was actually signed. Steadman v Steadman [1974] 2 All ER 977, HL Trollope & Colls Ltd v Atomic Power Construction Ltd [1963] 1 WLR 333 Cipta Cermat Sdn Bhd v Perbadanan Kemajuan Negeri Kedah [2007] 1 CLJ 498, CA
PART PERFORMANCE BEFORE AGREEMENT IS SIGNED Cipta Cermat Sdn Bhd v Perbadanan Kemajuan Negeri Kedah [2007] 1 CLJ 498, CA I think there was a concluded contract despite the want of a duly executed formal agreement You have an offer by the defendant. You have an acceptance by the plaintiff. And you have consideration. You also have certainty of parties, certainty of price and certainty of the property. And you have the unequivocal acts of part performance by the plaintiff which are referable to an existing contract between the parties.
CRITERIA/MACHINERY LAID DOWN IN AGREEMENT Court has less difficulty in upholding agreements which lay down criteria for determining matters which are left open. Hillas & Co Ltd v Arcos, Ltd [1932] All ER Rep 494, HL Brown v Gould [1972] Ch 53 Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444, HL
CRITERIA/MACHINERY LAID DOWN IN AGREEMENT Hillas & Co Ltd v Arcos, Ltd [1932] All ER Rep 494, HL Option to renew for such new lease to be for a further term of 21 years at a rent to be fixed having regard to the market value of the premises at the time of exercising this option taking into account to the advantage of the tenant any increased value of such premises attributable to structural improvements made by the tenant.. if such a formula were given to a valuer employed by the landlords and a valuer employed by the tenant, the figures produced by the two valuers would not be identical yet in all probability also, if those valuers gave evidence before the court and were duly cross-examined, the court could reach a conclusion.. Although the rent is to be fixed having regard to such matters, nevertheless the fixing of the rent is to be basically a discretionary matter, with the person fixing the rent obliged merely to have regard to certain matters, and then, provided he does not altogether forget these matters or depart from the rational, being fancy-free in the rent that he fixes.
THE REASONABLE MAN TEST Dhanani v Crasnianski [2011] EWHC 926 (Comm) The general principles to be applied by the courts when determining whether the parties have made an enforceable agreement have recently been summarised by the Supreme Court in RTS Ltd v Molkerei Alois Muller GmbH [2010] UKSC 14, [2010] 3 All ER 1, [2010] 1 WLR 753. At para 45 Lord Clarke said: Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends, not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement The yardstick was the reasonable expectations of sensible businessmen.
CONCLUSION Basic elements of contract would require there to be an offer from one party, an acceptance from the other party, intention to create legal relations, and consideration. Additionally for transactions involving land and property, we should also pay attention to ensure certainty of parties, property and price as well as any other terms essential to the transaction. Whether the contract was a concluded contract or otherwise is a question of fact In determining whether the parties have made a binding and enforceable contract, the court will look into the intention of the parties and adopt the reasonable man test.
CONCLUSION To safeguard your interest: Record all transactions properly Be as clear and concise as possible when laying out terms to an agreement, be it formal or otherwise Draw up and sign a formal contract as soon as possible
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