Nowadays, it is becoming less and less common for business to be transacted ‘on a handshake’ and a recent case highlights the dangers of failing to get formal documentation in place to confirm the terms of an agreement.
The case involved a property developer, who made an oral agreement with the management of a company that owned a block of flats to the effect that he would buy the block once he had obtained planning permission on the property. The details of the agreement were that if planning permission were achieved, the company would sell the property to the developer (or a company nominated by him) for £12 million and then the developer would develop and sell the property. The owner was also to be entitled to 50 per cent of the sale proceeds exceeding £24 million.
The developer spent a considerable amount of time and money on obtaining the requisite planning permission only to find that the owner of the flats then refused to enter into a contract for sale on the agreed terms.
The developer sought a lien (a charge) over the property to secure his interest, basing his case on the argument that the agreement had created proprietary estoppel against the property owner.
The doctrine of proprietary estoppel is that it is inequitable for the legal title holder of a property to deny a right to anyone who has acted to his or her detriment, having relied on an assurance from the owner of the legal title that he or she will acquire rights in or over the property.
The developer therefore argued that estoppel applied because he had acted to his detriment by spending the time and money necessary to obtain the planning permission and had done so on the basis of the assurance from the owner that the property would be sold to him on the terms agreed.
The case was appealed to the House of Lords. The Law Lords concluded that where the agreement was ‘subject to contract’, estoppel could not ordinarily arise because the prospective purchaser’s expectation of acquiring an interest in the property was subject to a contingency that was under the control of the other party and was therefore speculative. The other salient point is that oral agreements over land are not binding and the developer was aware of that.
In spite of the fact that the property owner’s behaviour was unconscionable, the case could not be made out. The question arose, therefore, of what compensation was appropriate for the developer.
The Lords considered the fair recompense for the developer would be the extent of unjust enrichment received by the property company, which was the value of the services it had received from the developer without having to pay for them.
The developer therefore stands to receive only a fair value for his efforts in obtaining the planning permission for the owner. Failing to put the appropriate documentation in place means that the developer will miss out on the considerable profit he was expecting. This case is yet another demonstration of the importance of putting binding contracts in place when arrangements such as this are made.
Partner Note
Yeoman’s Row Management Ltd. and another v James Cobbe [2008] UKHL 55.
See The Solicitors Journal, 5 August 2008 p 31.