A land contract being a contract for the sale of land, or of an interest in land is void unless it complies with Law of Property (Miscellaneous Provisions) Act 1989, section 2 .
Section 2 applies to all land so that whether you are buying or selling a house or buying or selling land for a large development project you need to understand what makes a legally binding contract to ensure your sale or purchase goes to plan.
In order to have a binding contract for the sale or disposition of an interest in land such as a contract for the sale of a freehold or leasehold property, an option agreement or an agreement to grant a lease it must:
- be in writing;
- incorporate all the agreed terms in one document; and
- be signed by or on behalf of each party.
Without the above components, there will be no contract and there could be problems with the transaction.
In addition a contract will only be formed if it is certain as to its terms and when the following basic elements are in place:
- intention to create legal relations
Section 2 only applies to contracts “for” disposition and not contracts “of” disposition so that:
- a contract to grant a lease of a piece of land in the future is caught but the lease itself which, whilst a contract, effects an immediate disposal of an interest in land and is, therefore, not caught; and
- a transfer or mortgage, which are dispositions, do not need to satisfy Section 2 and need only be signed by the transferor or mortgagor (if there are no transferee or mortgagee covenants).
Does a settlement agreement need to comply with Section 2?
The recent case of Rollerteam Limited v Riley (2016) considered whether a settlement agreement needs to comply with Section 2. The disputed settlement agreement settled four pieces of litigation. In exchange for the payment of sums of money, one party agreed to execute deeds of trust over two properties in favour of another party.
The deeds of trusts were executed and handed over and part of the money paid over. One party refused to pay the balance of the monies due claiming that the settlement agreement did not comply with Section 2 and was not binding. The Court of Appeal held that the settlement agreement in this case was not a contract for the sale or other disposition of an interest in land and Section 2 did not apply to it. The settlement agreement did not anticipate further action and only came into being once the deeds of trust had been executed. The deeds of trust were executed and complete in themselves and there was nothing further to be done under them.
Points to remember
- Any variations to a land contract must also comply with Section 2.
- Being a valid and binding contract under Section 2 does not obviate the need to complete any necessary filings or registrations, for example SDLT Returns, Land Registry registrations, etc.
- You must ensure that heads of terms are marked “Subject to Contract” so as not to form a contract and risk constituting a binding contract if the requirements of Section 2 are satisfied.
- It is not clear whether electronic signatures will satisfy the Section 2 signature requirement. To be on the safe side we suggest that all land contracts have “wet ink” signatures.