Sale of Land: Is it necessary to sign a contract? - REHDArehdainstitute.com/wp...of-Land-Is-it-necessary-to-sign-a-contract... · AGENDA •Introduction •Elements of Contract •Common

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”

“Conclusion”

True or false?

INTRODUCTION

Answer the question of when exactly a contract

is formed in transactions of land

and property

Highlight ways to safeguard your

interests in such transactions

Tackle the common misconception that such transactions only take effect

upon signing of a contract

ELEMENTS OF CONTRACT

Contract

Offer

Consideration

Intention to create legal

relations

Acceptance

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.

• 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

INCOMPLETE AGREEMENTS – ARE THEY BINDING?

• 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


Facts

•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.

• 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 purposessufficiently settled by the two letters of offer and acceptance i.e. therewas a complete and definite contract which was made up by two lettersdated February 23 and March 3.

• 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.

Issues

•Whether a contract of sale existed; and, if so

•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 telephoneconversation.

•The letter from the purchaser’s lawyer could not be interpreted to mean that there was no binding contract until aformal contract was signed.

• 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.


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.


• 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.”

STIPULATION FOR EXECUTION OF FORMAL DOCUMENTS

• 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.


• 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


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.


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.


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.


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.”


• 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.


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


– 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 subject-

matter 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”.

BOOKING PRO FORMA

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.”

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.”

THE REASONABLE MAN TEST

• 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

CONCLUSION

Thank you

Documents

Sale of Land: Is it necessary to sign a contract? - REHDArehdainstitute.com/wp...of-Land-Is-it-necessary-to-sign-a-contract... · AGENDA •Introduction •Elements of Contract •Common