Oral land contracts and proprietary estoppel: Thandi v Saggu

The problem of oral land contracts and proprietary estoppel

England’s Law of Property (Miscellaneous Provisions) Act 1989 (‘LPMPA’) requires land contracts to be in writing and signed by both parties. Failure to comply results in the invalidity of the contract (LPMPA, s. 2(1)).

The LPMPA abolishes the doctrine of part performance since the doctrine presupposes the validity, but unenforceability, of oral land contracts. The LPMPA, s. 2(8) repeals section 40 of the Law of Property Act 1925 (‘LPA’) which rendered oral land contracts unenforceable but did not deny their existence as contracts. Also repealed then is section 40(2) of the LPA which provided for the continuing operation of part performance.

The LPMPA does, however, say that section 2 does not affect the creation or operation of resulting, implied or constructive trusts. This leaves some space for equity to give effect to oral land contracts (LPMPA, s. 2(5)). But where does this leave proprietary estoppel?

The courts worry that invoking proprietary estoppel in relation to oral land contracts undermines the LPMPA’s formalities requirements. So too, it might be said, does the use of the common intention constructive trust in relation to oral agreements relating to land. This, however, is expressly permitted by LPMPA s. 2(8). The lack of a similar saving provision for proprietary estoppel deepens the suspicion that its use in the land contract context should not be allowed.

Potential responses to the problem

The possible approaches to the use of proprietary estoppel in relation to land contracts seem to be:

Approach 1

To refuse to allow proprietary estoppel claims arising out of promises given in oral land contracts which ought to satisfy the LPMPA formalities rules. This would be the fullest recognition of a conflict between the formalities rules and the equitable doctrine. It would leave the common intention constructive trust as the principal ‘equitable safety valve’ to deal with cases where insistence on the LPMPA rules would be unconscionable.

Approach 2

To give free rein to proprietary estoppel claims even in the oral land contract context. The conflict between this and the formalities rules would be seen as an illusion: proprietary estoppel is seen as satisfying an equity that has arisen, rather than enforcing a contract.

Approach 3

To allow proprietary estoppel claims in relation to oral land contracts provided that the same facts could also give rise to a common intention constructive trust claim (which would seem to cover all, or the vast majority, of active encouragement cases) (Yaxley v Gotts).

The only problem with this is that it seems rather pointless. If a common intention constructive trust claim can succeed, what is the point of the proprietary estoppel claim? The answer to this may lie in the remedial discretion of the courts in proprietary estoppel.

Approach 4

To allow proprietary estoppel claims to succeed only where there is a ‘double assurance’ or ‘something more’ which estops promissor’s from pleading the formalities rules (Actionstrength; Cobbe; Kinane).

One problem here is that it is difficult to know what would amount to such a double assurance. Is the requirement satisfied by an oral assurance that is clearly intended to be immediately binding? But how is this different from the normal understanding of an assurance?

Approach 5

To allow proprietary estoppel claims to succeed where the claimant does not seek enforcement of the contract but is satisfied, for example, with a licence (Howe v Gossop).

This might, in effect, be a recognition of approach 2 above (that proprietary estoppel is not an enforcement of the contract).

If approach 5 is a version of approach 2, why not enforce the contract if that is what is needed to prevent unconscionability? If it is not a version of approach 2, it is not easy to understand the principle that justifies approach 5.

Thandi v Saggu

Thandi v Saggu ([2023] EWHC 2631) concerned a proprietary estoppel claim arising out of an oral agreement for the sale and purchase of land. The LPMPA formalities requirement was not satisfied.

The claimant relied on proprietary estoppel not to enforce the contract but to recover financial losses arising from the failure to enter into the contract. The oral contract, and the price payable under it, arose from an attempt to settle a separate commercial dispute.

The seller’s failure to go ahead with the transaction meant that her indebtedness arising from that dispute continued and that the buyer incurred wasted legal fees.

The proprietary estoppel claim succeeded. The judge, Hugh Sims KC sitting as a Deputy Judge of the High Court, took approach (2): proprietary estoppel was not being used to enforce a contract but to prevent unconscionability ([137]).

It seems, however, that he thought that this would have been a problem if the claimant had sought enforcement of the contract ([139]). As hinted above (point 5 in the previous section) I doubt the logic of this.

The relief granted was:

1. Recovery of the deposits paid to the seller; and
2. Reimbursement of the legal costs related to the aborted transaction (but not those incurred in relation to the broader commercial dispute).

The purchaser’s claim for relief in respect of the difference between the purchase price and the market value of the property failed because, on the facts of the case, it would have given the claimant more than he bargained for ([144]).

Michael Lower

Meaning of ‘saleable area’: Top Faith Property Ltd v Wong Ben

In Top Faith Property Ltd v Wong Ben ([2022] HKCA 783) Top Faith Property Ltd (‘the buyer’) entered into a Provisional Sale and Purchase Agreement to buy the entire issued share capital of Hero Wealth Corporation Ltd for HK$250 million. Hero Wealth was the vehicle for the ownership of office units in the Lippo Centre.

Pre-contract, the buyer made an inquiry as to the ‘saleable area’ of the office units. The shareholders of Hero Wealth (‘the sellers’) provided a plan stating that the saleable area was 758.46 square metres. This was untrue and the buyer relied on misrepresentation to rescind the contract.

The buyer succeeded at first instance. The sellers appealed. They argued that the statement was true. There was no standard definition of ‘usable area’ and the architect who prepared the plan took a reasonable approach to calculating the usable area.

The 1999 Code of Measuring Practice of the Hong Kong Institute of Surveyors (‘HKIS’) did incorporate a definition of ‘saleable area’. The representation was false if this definition were applied.

However, the sellers argued that this did not enjoy any special status. The architect who prepared the plan was not bound by it and chose, instead, to use the definition of ‘usable floor space’ in the Building (Planning) Regulations (Cap 123F).

The Court of Appeal said that when interpreting a representation, ‘the proper approach is an objective one that focuses on what the words and conduct constituting the Representation would in the relevant context have conveyed to a reasonable person in the position and with the characteristics of the plaintiff’ ([24]).

The question was as to the common understanding of reasonable vendors, purchasers and estate agents) [25]).

The HKIS code was the only available professional guide as to the meaning of the term at the relevant time and was generally accepted by the market ([28]).

Thus, the representation was ‘indisputably false’ and the appeal failed.

Michael Lower

Proprietary estoppel and oral land contracts: the last word?

Howe v Gossop ([2021] EWHC 637) addressed the question as to whether proprietary estoppel can be relied upon where the claim arises out of an oral agreement concerning land.

The problem is that such an agreement is only enforceable if the formalities requirements in section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 have been satisfied. There are concerns as to whether it would be legitimate to allow oral land agreements to be the basis of a successful proprietary estoppel claim. In that case, proprietary estoppel appears to undermine the formalities rules.

In Howe v Gossop, the court resolved this conundrum with the proposition that proprietary estoppel claims can arise out of oral agreements concerning land so long as the relief sought does not amount to the enforcement of the oral agreement.

Facts

Mr and Mrs Howe sold land and buildings near their farm to Mrs Gossop. The terms of the transfer required Mr and Mrs Howe to pay GBP7,000 to Mrs Gossop for road resurfacing work carried out at Mrs Gossop’s expense.

Mr and Mrs Howe and Mr and Mrs Gossop subsequently orally agreed that the Howes would transfer two parcels of land (the ‘Green land’ and the ‘Grey land’) to the Gossops in return for a waiver of the obligation to pay GBP 7,000.

The Gossops carried out work on the Green land and the Grey land. Then relations between the parties broke down. The Howes brought proceedings to recover possession of the Green land and the Grey land.

The Gossops relied on proprietary estoppel in their defence, seeking a declaration that they were entitled to an irrevocable licence to occupy and use the land. They only raised this defence in relation to the Green land because the parties had not clearly delineated the Grey land. The defence succeeded in the court below.

Appeal

The Howes argued that a proprietary estoppel claim could not succeed because the agreement was not in writing as required by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. They argued that a claim based on an oral land contract could only succeed in exceptional circumstances (relying on passages in the House of Lords decision Cobbe v Yeoman’s Rowe Management Ltd and the Court of Appeal decision in Herbert v Doyle).

Decision

Snowden J. rejected the appeal. There was no requirement that the case be exceptional before proprietary estoppel can be relied on ([65]).

He distinguished cases in which proprietary estoppel was being used, in effect, to secure specific performance of an oral contract from cases where proprietary estoppel was being used as a defence to an action for possession.

The Gossops sought an irrevocable licence rather than specific performance of the contract and so there was no clash with the formalities requirements for land contracts ([50] and [53]).

Nor did it matter that the parties attempted to arrange for the agreement to be embodied in a written contract ([79]).

Snowden J. does not appear to rule out entirely the use of proprietary estoppel to enforce an oral land agreement but this would only be possible where there was some additional (unspecified) factor:

‘if a claimant is seeking relief that amounts to enforcement of a non-compliant contract, he needs to point to something else as the basis for an estoppel based on unconscionability.’ ([66])

Kinane v Mackie-Conteh ([2005] EWCA Civ. 45) is given as an example. In these cases, ‘some additional representation or conduct by the defendant’ is needed ([70]).

The fairness of the decision

Snowden J. pointed out that the Howes could not complain of being unfairly treated; the Gossops waived the GBP7,000 debt and got only equitable relief in return ([76]).

Michael Lower

Recovering pre-payment of purchase price where the agreement was never completed

In Hui Tze Ha v Ho Yuet Lin ([2021] HKCFI 1901) D and P entered into a written agreement on 18 September 1992 under which D agreed to sell property in Kowloon to P for HK$1.2 million. P paid a ‘deposit’ of HK$1 million. The agreement was never completed. Time for completion was of the essence.

P died in 2001. In March 2016, P’s estate brought proceedings to recover the deposit of HK$1million. In October 2016, D counterclaimed that she was entitled to forfeit the deposit and a declaration that the agreement was terminated by virtue of P’s repudiatory breach in failing to take the steps necessary to complete.

Deputy Judge MK Liu said that when neither party took the necessary steps to complete on the contractual completion date, the effect was that each party then had a reasonable time to complete (Camberra Investment Ltd v Chan Wai Tak, Chong Kai Tai Ringo v Lee Gee Kee).

Deputy Judge ML Liu held that D elected to treat the agreement as at an end when she brought her counterclaim for a declaration to this effect in October 2016 (drawing on the principles set out in Chao Keh Lung v Don Xia).

The payment of HK$1 million out of a total agreed consideration could not be treated as a deposit (Polyset Ltd v Panhandat Ltd). It was a payment in advance ([33]).

P’s estate’s unjust enrichment claim arose when the contract was terminated in October 2016 ([37]).

D was ordered to repay the HK$1 million ([46]).

Michael Lower

No oral modification clauses: Rock Advertising v MWB Business Exchanges Ltd (Part 2)

In Rock Advertising Ltd v MWB Business Exchanges Ltd ([2018] UKSC 24) the UK Supreme Court had to consider the effectiveness of a No Oral Modification (‘NOM’) clause (see here for Part 1 of the blog post about this case setting out the facts and the decision). This post considers the underlying principles that the judgments had to confront.

The clause in question provided:

‘This Licence sets out all the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.’

The UK Supreme Court had to consider whether the parties were bound by an orally agreed modification of the licence agreement between them.

There were two aspects to this question: (1) was the clause binding according so that oral modifications were of no legal effect; and (2) if the clause did not preclude oral modifications, whether a subsequent oral agreement purporting to modify the original agreement indicated an intention to dispense with the NOM clause.

When parties who have accepted a NOM clause agree to an oral modification, they have expressed two conflicting intentions. Which is to prevail? If the courts give effect to a NOM clause are they respecting or denying freedom of contract?

The essential objection to the idea that the clause always precludes effective oral modifications is that this would contravene freedom of contract: ‘Those who make a contract may unmake it. The clause which forbids a change may be changed like any other (Beatty v Guggenheim Exploration Co (1919) 225 NY 380, 387 – 388, Cardozo J.).

Nevertheless, Lord Sumption (and the majority of the Supreme Court) thought that the NOM clause was effective and that the subsequent oral modification was of no effect: ‘Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows … The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed.’ ([11])

Lord Sumption saw three good commercial justifications for NOM clauses:

1. ‘it prevents attempts to undermine written agreements by informal means’;
2. ‘it avoids disputes not just about whether a variation was intended but also about its exact terms’; and
3. giving effect to NOM clauses: ‘makes it easier for corporations to police internal rules restricting the authority to agree [variations]’.

Lord Sumption thought that these justifications should carry weight since ‘the law of contract does not normally attempt obstruct the legitimate intentions of businessmen except for overriding reasons of public policy’ ([12]).

If the parties were to act on an oral variation in the belief that it was effective then estoppel might come into play but:

‘the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself: see Actionstrength Ltd v International Glass Engineering In Gl En SpA’ ([2003] 2 AC 51′ ([16]).

Lord Briggs took a different line on the first of the two questions. He thought that it was conceptually impossible for the parties to impose a formalities requirement on themselves, ‘not to be free, by unanimous further agreement, to vary or abandon [the contract] by any method, whether writing, spoken words or conduct, permitted by the general law’ ([26]).

On the other hand, turning to the second question, Lord Briggs was of the view that ‘an agreed departure [from the NOM clause] will not lightly be inferred, where the parties merely conduct themselves in a non-compliant manner’ ([27]). So normally, as in the present case, the approach of the majority and that of Lord Briggs would lead to the same conclusion.

Where, however, there are circumstances, such as an urgent need to agree a variation without waiting for the production of a written variation, then Lord Briggs thought that an agreement to depart from the NOM clause might be inferred ([30]).

Michael Lower

 

 

England: oral agreements and the common intention constructive trust

In Matchmove Ltd v Dowding ([2016] EWCA Civ 1233, CA (Eng)) Matchmove (a company controlled by F, a property developer) was negotiating for the purchase of a plot of land (‘the land’) and the adjoining meadow. F intended to split the land into two plots and to build a house on each plot. He orally agreed with his friend D that D would buy one of the plots and the meadow (D wanted to keep horses on the meadow).

In due course, Matchmove entered into a written contract for the sale of the plot to D and this sale was completed. There was, however, no written contract for the sale of the meadow to D. F and D fell out and F sought to resile from the oral agreement to sell the meadow to D.

D sought a declaration that Matchmove held the meadow on trust for him. Matchmove denied the existence of a binding agreement for the sale of the meadow. It relied on the lack of a signed written agreement to satisfy section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989.

F had intended the oral agreement concerning the meadow to be immediately binding. He was well known by D to have a business approach that attached real importance to his word as a businessman. By the time of the dispute, D had paid the entire purchase price for the meadow to Matchmove.

In these circumstances, the question was whether the agreement gave rise to a common intention constructive trust that could fall within section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989.

The Court of Appeal referred to Arden LJ’s discussion of this question in Herbert v Doyle. There, Arden LJ said that section 2(5) could  not be relied on:  (1) 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; (2) if further terms for that acquisition remain to be agreed between them so that the interest in property is not clearly identified; and (3) if the parties do not expect their agreement to be immediately binding.

The Court of Appeal did not see this statement as setting out three conditions to be satisfied but as being three ways of making the same point about the effect of the judgment in Cobbe v Yeoman’s Row ([32]).

There was a clear express agreement between the parties. Although both parties were well aware that a written contract would be needed, they regarded this as a technicality and took the view that they already had a binding agreement. The payments made by D provided the detrimental reliance.

There was a common intention constructive trust that fell within section 2(5). D could enforce the oral agreement for the purchase of the meadow.

Michael Lower

 

 

Failure to pay deposit by stipulated date: the seller did not waive the breach by cashing a cheque for the deposit after communicating an intention to treat the agreements as terminated

In Fast Happy Ltd v Lee Chun Pong Bruce ([2017] HKEC 121) the plaintiffs entered into provisional sale and purchase agreements (‘the agreements’) for the sale of land by the plaintiffs to the defendants. The initial deposit was to be paid in two instalments on dates specified in the agreements.

The cheque for the first instalment was not honoured when presented. The cheque for the second instalment was proffered after the date specified in the agreements. Time was of the essence for making the payments.

The sellers’ solicitors sent an email and a letter to the estate agents handling the transactions terminating the agreements on the grounds of the buyers’ breach. The plaintiffs’ bank then re-presented the cheque for the first instalment of the deposit and it was honoured.

The defendants registered the agreements at the Land Registry and the plaintiffs sought the vacation of these registrations. The defendants argued that the plaintiffs had waived the breach by presenting the cheque for the first instalment of the deposits after the defendant’s breach.

The defendant’s argument failed. The sellers were entitled to cash the deposit cheque and to forfeit the deposit without waiving the breach. This was especially the case since the sellers had by then given clear notice of their intention to treat the agreement as having come to an end.

This was a case where the estate agents were acting for both parties and not only for the sellers. Thus notice of termination given to the agents was an effective way of giving notice to the defendants.

Michael Lower

Misrepresentation as to the identity of the purchaser

In Greatland Property Consultants Ltd v Charis Patria Ltd ([2016] HKEC 2518) C signed sale and purchase agreements to sell two floors of a building to P (a company that owned two other floors of the building) for a total consideration of HK$ 6 million. This meant that P owned 80% of the shares in the building and could apply for a compulsory sale of the property under the Land (Compulsory Sale for Redevelopment) Ordinance. The sale was arranged by L, an estate agent. C had made it clear to L that it was prepared to sell for HK$6 million but that the price for a sale to P would be much higher. L represented to C that the buyer was a businessman from the mainland. On this basis, C agreed to sell for HK$ 6 million. The provisional sale and purchase agreements provided for C to pay L HK$60,000 by way of commission (or agreed damages if the sale did not go ahead). When C discovered that P was the purchaser it rescinded the sale and purchase agreements and paid P HK$300,000 by way of liquidated damages.

L brought proceedings against C claiming the HK60,000 she alleged was due under the sale and purchase agreements. C’s defence was that L had misrepresented the identity of the purchasers. To facilitate this, L had written the purchasers’ name in Chinese so that C would not realise that the purchaser was P. Although P’s company chop was placed next to the signature of the authorised signatory, this was only done after C’s representative had signed so that C had no way of seeing it before the contract was entered into. Overturning the finding at first instance that this misrepresentation had not induced the contract, the Court of Appeal (Chu JA giving the main judgment) held that C’s defence was successful. Its counterclaim to recover from L the HK$300,000 it had paid in damages to P was also successful.

Michael Lower

 

Vague arrangements as to the completion date

In Tsang Wing Man v  Chung On Ling ([2016] HKEC 2164, CA) D agreed to sell his property to P. Completion was to be within 3 days of P’s sale of her own property. It was held that this arrangement was so vague and uncertain as to be of no legal effect. As a result, there was no agreement as to the completion date. As indicated in Kwan Siu Man v Yaacov Ozer, this was strong evidence that there was no contractual intent. P had later given an oral promise to complete by the end of August 2011. This did not help matters since the need to resort to an oral term meant that there was a failure to comply with section 3(1) of the Conveyancing and Property Ordinance.

Michael Lower

Contracts and illegality: Patel v Mirza

In Patel v Mirza ([2016] UKSC 42) the UK Supreme Court considered the law concerning the recovery of money paid under a contract to carry out an illegal activity where the illegal act is not performed. If the activity were not illegal, the party who has paid the money would be entitled to recover the sum paid as a claim in unjust enrichment. The question is whether the illegality should prevent the claimant from recovering the money or other property transferred to the other party to the failed contract. In the context of Hong Kong’s property law, these principles are relevant, for example, where ding rights are sold to developers and false declarations are made to the Government as part of the overall performance of the contract. Can property transferred to developers in pursuance of the illegality-tainted contract be recovered?

Until now, English law in this area has been based on the House of Lords decision in Tinsley v Milligan and Hong Kong’s courts have applied this framework. Under the Tinsley approach, the question is dealt with as a procedural matter. The plaintiff is treated as having substantive legal rights and the question of illegality is dealt with as a procedural issue. The plaintiff can succeed if he has no need to plead his own illegality. If the plaintiff has to plead his own illegality (to rebut a presumption of advancement for example) then the claim will fail. This is subject to the possibility of a locus poenitentiae; the plaintiff who has to plead his own illegality might still be able to succeed if he can show that he withdrew from the transaction before implementation. This approach to the treatment of sums paid under illegal contracts that are not performed has come in for severe criticism. The  judgments of the nine members of the UK Supreme Court in this case are a collective attempt to create a new framework for dealing with cases of this sort. While there was unanimity as to the outcome on the facts of the case, there was disagreement within the Supreme Court on some of the fundamentals of the approach to be taken in this area.

In Patel, P paid GBP620,000 to M. M was to use the money to bet on shares in RBS relying on M’s insider information concerning an anticipated UK Government announcement. The announcement was never made. P sought to recover the GBP 620,000 on the basis that M would be unjustly enriched if he were permitted to keep it once the contract had failed. The question was whether the courts would help P given the illegality of the contract which amounted to a conspiracy to commit the offence of insider dealing. The UK Supreme Court were unanimous in deciding that P was entitled to recover the money despite the illegality of the contract and despite the fact that he would need to explain the nature of the agreement in order to establish his claim.

 

Lord Toulson and the majority: enforce the contract where to do so would be appropriate as a matter of policy (the ‘range of factors’ test)

The majority of the Supreme Court expressed agreement with the ‘range of factors’ approach articulated by Lord Toulson. Under this approach, the court would carry out a balancing act when deciding on whether or not to enforce a contract where there was unlawful conduct in its formation, purpose or performance. In broad terms, the court would:

a) consider the underlying purpose of the prohibition which has been transgressed, b) consider conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim, and c) keep in mind the possibility of overkill unless the law is applied with a due sense of proportionality.’ ([101] Lord Toulson).

Lord Toulson did not think any greater detail than that would help but suggested that relevant factors to be borne in mind when reaching a judgment would include: ‘the seriousness of the conduct, its centrality to the contract, whether it was intentional and whether there was marked disparity in the parties’ respective culpability.’ (107) The reliance approach in Tinsley should no longer be followed ([110] Lord Toulson).

 

Lord Neuberger’s Rule

Lord Neuberger takes a much simpler approach. He begins by saying that the appeal concerns, ‘a claim for the return of money paid by the claimant to the defendant pursuant to a contract to carry out an illegal activity, and the illegal activity is not in the event proceeded with owing to matters beyond the control of either party.’ ([145]). He contends for a very simple rule to the effect that the plaintiff is entitled to the money paid under such a contract (‘the Rule’) ([146]). This would apply ‘in appropriate cases’ even if the contract has been wholly or partly performed ([167]) though credit might have to be given for any benefit that the plaintiff has received ([168]). Lord Toulson’s balancing approach could be useful in deciding whether or not the case was an appropriate case for the application of the Rule ([174).

 

Do not enforce illegal contracts but order restitution of benefits conferred under contracts that fail on the grounds of illegality

The approach of the remaining judges is that the illegal contract is not enforced but is unravelled. Lord Mance disagreed with the majority’s suggestion that there needed to be a significant revision of the law in this area. His approach is that the unlawful contract could be rescinded and the parties put into the position that they would have been in had the contract never been entered into ([197]). Rescission would be available even if the contract had been partially performed, but the court would make adjustments to reflect any benefits that the plaintiff had received ([198]).

Lord Sumption spoke in favour of the illegality defence and the reliance principle as the appropriate guide as to when the defence was available (while accepting that its formulation in Tinsley was open to criticism). Where a contract fails then benefits conferred by one party on the other are recoverable ([247]). Equally, where the contract fails on the grounds of its illegality then the parties should be put into the position that they would have been had it never been entered into ([250]). The contract in this case was affected by the illegality principle ([267]) but restitution of the money that P paid to M in accordance with it should be ordered ([268]).

Michael Lower