Whether a binding contract for disposition exists to pass title in property
This forfeiture claim was brought by JB Leitch on behalf of our freehold client, concerning the leasehold interest of a hotel.
The parties had agreed (subject to contract) in 2001 for the freehold to be sold to the leaseholders of the property. The leaseholders submitted an application to purchase the freehold by way of an application form, stating that the property’s use was residential. A Transfer was prepared by the freeholders and forwarded to the leaseholders for execution. Prior to registration of the leaseholders as registered proprietors of the freehold title, the freeholders discovered that the use of the property was commercial, namely a hotel. The transaction was aborted and part of the monies returned to the leaseholders, with a sum retained to cover the costs of the work carried out to date on the aborted sale.
No application was submitted to the Land Registry to transfer the ownership of the freehold; the leaseholders subsequently failed to pay ground rent to the freeholder and the freeholder brought forfeiture proceedings as a result.
At first instance, the County Court held that the leaseholders acquired both the legal and equitable interests in the freehold by way of the agreement entered into by the parties. The freeholder was therefore no entitled to rent, or to forfeit the lease. However, subsequent arguments made in submission to appeal determined that the first instance judge had found that only the beneficial interest had passed to the leaseholders; the freehold was therefore held on trust for the leaseholders by the freeholder and the freeholder was under a duty to act reasonably in the circumstances. The decision was therefore confused.
In order to effect a transfer of the beneficial title to the property, a binding legal contract must exist between the parties. Where such a contract is in place, a Court would ordinarily grant to the purchaser – in this case the leaseholders – an order for specific performance on the basis that equity ‘looks upon things agreed to be done as actually performed’.
The freeholder relied on an argument centred on the doctrine of conversion, whereby the leaseholders would become owners in equity but only if the contract between the parties is held to be valid: “one which is sufficient in form and in substance, so that there is no ground whatever for setting it aside”. Further, title to the property is granted by the freeholder or is accepted by the leaseholders.
On appeal, it was argued that no contract for the sale of an interest in land meeting the requirements of s.2 of the Law of Property (Miscellaneous Provisions) Act 1989 existed between the parties. Further, the freeholder argued that there is an important distinction between a document which creates a contract for the sale or disposition of an interest in land and a document which actually dispose of such an interest. Only the former is capable to find equitable title because that document is capable of giving rise to an order for specific performance.
As no document had been entered into which created a contract for the sale or disposition of the freehold title in the property, no beneficial title in the freehold could pass to the leaseholders. The application form and the Transfer documents were both prepared for the transaction, and neither could constitute a binding contract for the sale of land; correspondence was expressly marked ‘Subject to Contract’ but no contract existed.
The freeholder’s appeal was allowed and a possession order granted, allowing for relief where rent and costs were paid by the leaseholders within a set timeframe.
JB Leitch’s Stuart Miles comments on the decision:
“Our West Lancashire Investments case highlights how legal and equitable title passes on the sale of land and the importance of a binding contract. While two parties may agree terms, if no binding contract exists that clearly sets out the parties’ intention to transfer the title from one party to another, then title cannot pass to the purchaser and the vendor is free to abort the sale. It is therefore critical that any negotiations to purchase or sell land are expressly marked “Subject to Contract”, so that either party can abort the sale prior to entering a binding contract to purchase or sell the land. It is important to remember that section 58(1) of the Land Registration Act 2002 provides for conclusiveness of title i.e. whoever is registered at HM Land Registry as the owner of land, will be deemed to be the owner of the property.”
As no document had been entered into which created a contract for the sale or disposition of the freehold title in the property, no beneficial title in the freehold could pass to the leaseholders.