Posted on March 27, 2014 by 1

Buying land without a formal exchange of contracts

Can you buy land in New South Wales without a formal exchange of contracts?  The answer from a recent Supreme Court case is that legally there is nothing to stop parties from contracting without following the normal practice of a formal exchange of counterpart contracts.  Practically however, there needs to be a very strong indication of an intention to be bound to a contract without following the normal procedure.

Hill v Newth [2014] NSWSC 298 involved a proposal to buy a series of Torrens title farmland lots.  The vendor/defendant, Mrs Newth, sent out letters to potentially interested purchasers offering to sell her land and nominating a price per acre (yes, per acre, not per hectare).  Mr Hill, a solicitor, answered her letter and entered into correspondence with her offering to buy the properties in question.

Their discussions ranged over price, settlement date, fencing of the property, and the identity of the purchasing entities which he would use.

The Alleged Informal Contract

It was Mr Hill’s case that the parties intended to be bound to the sale once Mrs Newth had sent an email accepting Mr Hill’s terms. However, a month after that date formal contracts were provided under cover of a letter which stated that no binding contract will exist until formal exchange. Mr Hill responded with comments on the formal contracts.

Subsequently, Mr Hill sent the executed contracts back to Mrs Newth’s solicitor together with the deposit cheques.    The deposit cheques were not presented, and Mr Hill heard nothing more from Mrs Newth or her lawyer for some months, when Mrs Newth’s lawyer returned the deposit cheques, the contracts, and advised the sale would not go ahead.  Mrs Newth that same day exchanged with another party.

Mr Hill’s argument was that after he had sent the contracts and the deposit cheques, he was committed to the sale.  By holding the deposit cheques without returning the contracts exchanged, Mrs Newth, in the words of Mr Hill’s lawyer, kept the Plaintiff a prisoner to the bargain they had already concluded (paragraph 51).

Mr Hill also argued that an estoppel arose whereby Mrs Newth could not deny that the contract s were on foot.  Mr Hill was deprived of the deposit monies and therefore he had acted to his disadvantage.

Was there a binding contract?

Stevenson J noted that: In New South Wales, real estate is ordinarily sold by the signing and exchanging of contracts in the form approved by the Law Society of New South Wales and the Real Estate Institute of New South Wales (paragraph 12).

His Honour was quick to note however that there was no legally binding reason for this, it was simply that the practice was so entrenched that a party asserting the formation of an informal contract (as it was referred to in Dowdle v Inverell Shire Council (1999) ANZ Conv R 429 at 421) had a difficult task to prove that the parties had in fact intended to be bound other than by an exchange of formal contracts.

His Honour cited Gleeson CJ’s comment in  Lezabar Pty Ltd v Hogan (1986) NSW Conv R 55-468 that:

One reason why this consideration (formal exchange of counterparts) is important is that the form of contract ordinarily used contains important provisions for the protection of both parties and a court would not lightly attribute to knowledgeable parties an intention to forego such protection (emphasis added).

His Honour had no difficulty in finding that a binding contract had not come into existence at or before the date that the formal, written contracts were sent.  There was nothing to displace the very strong expectation that the contracts would only be binding following formal exchange.

His Honour also did not agree that there was any estoppel.  There was, he said, no evidence that Mr Hill had acted to his detriment.  His deposit was returned to him.

Conclusions

The facts in this case are in many ways unremarkable.  It seems at first glance that Mr Hill always had a difficult task before him in proving that the parties intended to be bound by informal letters, emails and discussions.

I suggest that it is always difficult to overcome the presumption that the parties will only be bound by a formal exchange.  It is not mentioned in the case but the Conveyancing Act 1919 (Act) section 54A requires a contract for sale of land to be evidenced in writing.  Could the exchange of emails referred to in the case be sufficient to fulfil the obligation under section 54A?

Arguably not.  Section 52A of the Act also sets out a series of documents which any contract for sale of Torrens land must attach, including zoning certificates, DPs, FIs and the like.  While you might not use the standard form Law Society contract, there is a legal requirement in most cases to disclose certain documents.

While parties may be able to enter into legal relations and show their intention to be bound by many and varied methods which the case law acknowledges, you can’t go past an old fashioned formal exchange to know that you have a binding contract, ensuring you don’t have to go to Court to confirm that the contract is on foot.