England and Wales Court of Appeal (Civil Division) Decisions

Court of Appeal

		29 June 1993

1. Giving the first judgment at the invitation of Sir Thomas Bingham MR, PETER GIBSON J said: This is an appeal by the defendant, PHH Asset Management Ltd, from the order of Judge Brandt with his leave, the order having been made on October 2 1992 at the trial of an agreed preliminary issue. That preliminary issue was whether the defendant and Mr Timothy Pitt, the plaintiff, entered into a contractual relationship on October 3 1991. The judge held that they did and he gave judgment for the plaintiff for damages for breach of contract to be assessed in default of agreement.
2. The facts are these. In August 1991 the defendant, acting as the undisclosed agent on behalf of mortgagees in possession of property known as The Cottage, Parsonage Lane, Chelsworth, Suffolk, placed the property on the market at an asking price of £ 205,000. Mr Piers Roberts of G A Property Services acted as the selling agent of the defendant. There were two contenders who were interested in purchasing the property. On September 11 1991 a written offer of £ 185,000 was made on behalf of one of the contenders, Miss Buckle. On September 23 the plaintiff submitted an offer of £ 190,000 and that was accepted by Mr Roberts subject to contract. The memorandum of sale showed the vendor to be the defendant.
3. On September 24 Miss Buckle increased her offer to £ 195,000. The acceptance of the plaintiff's offer was withdrawn in the light of that. On September 30, in response to encouragement to make a full and final offer, the plaintiff increased his offer to £ 200,000. Miss Buckle promptly matched that offer, but the plaintiff's offer was the one accepted, subject to contract.
4. On October 1 Miss Buckle increased her offer to £ 210,000. The next day Mr Roberts told the plaintiff that the acceptance of the plaintiff's offer was again withdrawn. Not surprisingly the plaintiff was annoyed.
5. The next day, on October 3, he spoke on the telephone to Mr Roberts. He made three points. He said that he would seek an injunction to prevent the sale to Miss Buckle. He said that he would go to Miss Buckle, tell her that he was withdrawing and that would leave her alone in the field and she should then lower her offer in the absence of a rival. He also said that he was in a position to exchange as quickly as Mr Roberts wanted. Mr Roberts then spoke to his principals and reached an oral agreement with the plaintiff. That oral agreement is reflected in a letter from the plaintiff to Mr Roberts of the same day. That reads as follows:

Following our telephone conversation of today, I write to confirm the main points discussed.

(1) Your client has decided it is in his best interest to stay with my offer of £ 200,000 (Two hundred thousand pounds), subject to contract for the above property.

(2) The vendor will not consider any further offers for the property on the basis that I will exchange contracts within a period of two weeks of the receipt of that contract.

(3) The vendor will be writing to me to confirm the above.

That same day the defendant wrote to Mr Roberts in the following terms:

Further to our recent telephone conversation, we confirm our instructions to continue with the sale to Mr Pitt, for the sum of £ 200,000, subject to exchange of contracts within fourteen days of receipt of draft contracts.

We would be grateful if you could inform both parties of our decision and if exchange of contracts do not take place within the required time, we will then reconsider the second offer.

6. That is a reference to the offer of Miss Buckle.
7. That letter to Mr Roberts was copied to the plaintiff in compliance with what is recorded in para (3) of the letter from the plaintiff to Mr Roberts.
8. The understanding of the defendant in this matter is shown from a letter which Mr Roberts wrote the next day, October 4, to agents acting on behalf of Miss Buckle. In it Mr Roberts said:

We are sorry to have to advise you that our clients have chosen to continue negotiations with the other prospective purchasers and will only consider issuing a contract to your clients if exchange does not take place within 14 days of receipt of the draft.

9. There then occurred a delay before the defendant or its principals issued a draft contract. On November 7 a draft contract was sent to the plaintiff's solicitor, thus starting the 14-day period.
10. On November 12 the plaintiff raised two queries. One of them was answered two days later. On November 15 the plaintiff indicated that he was ready to exchange immediately. This was prompted by the plaintiff learning that there might be a problem over the prospective sale to him. That day the defendant's principals wrote to the plaintiff's solicitors, expressing their intention to proceed with Miss Buckle's offer of £ 210,000, but they gave the plaintiff the opportunity to exchange contracts that day at the increased price. The plaintiff refused and on November 18 1991 the draft contract with the plaintiff was withdrawn and the property was subsequently sold to Miss Buckle for £ 210,000.
11. On March 30 1992 these proceedings commenced. The plaintiff sued for breach of the agreement, which he said was reached on October 3 1991 and he claimed damages. At the trial of the preliminary issue before Judge Brandt the plaintiff gave oral evidence. Three points were argued by Mr Richard Payne, on behalf of the defendant. The first was that what was agreed on October 3 1991 was subject to contract, being part and parcel of the subject to contract negotiations for the sale of the land. Therefore, it was said that there was no enforceable agreement. The second point taken was that no consideration was given by the plaintiff for the agreement. The third point was that the agreement was one to which section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 applied and was unenforceable. The learned judge rejected all three points, holding that there was a valid enforceable contract.
12. Before us the same three points are put forward by Mr Payne, for the defendant. It is common ground that if there was a contract for the sale of an interest in land then the correspondence of October 3 1991 does not satisfy the terms of section 2 and accordingly such a contract would be unenforceable. Section 2, as is well known, is the section that implemented the recommendations by the Law Commission in its 1987 report Transfer of Land: Formalities for Contracts for Sale etc of Land (Law Com No 164), although the section enacted did not follow precisely the form of the clause appended to the report. In short, what it did was to replace the requirement of section 40 of the Law of Property Act 1925 that a contract for the sale of land must be evidenced by a memorandum in writing by the requirement that a contract for the sale of an interest in land must be made in writing and by incorporating all its terms in one document or, where contracts are exchanged in each, must be signed by or on behalf of each party.
13. Mr Payne argued that if one looked at what was agreed on October 3 1991 it was plain that this was simply part of the continuing negotiations between the plaintiff and the defendant, and he stressed the word 'continue' in the sentence which I have read from the letter from the defendant to Mr Roberts:

We confirm our instructions to continue with the sale to Mr Pitt.

14. It is quite clear that the negotiations for the sale of the land were subject to contract and that would continue until there was an exchange. So, he submitted, this was simply an incident in the course of those negotiations.
15. The learned judge rejected that argument when it was put to him and said that there was nothing else to decide on what was argued. He held that what was argued on the telephone was capable of subsisting as a collateral contract on its own.
16. It seems to me, too, that there was nothing further to decide in relation to what was agreed on October 3 if what was agreed was what is often called a 'lock-out agreement'. To my mind, that is the crucial question in this case. One has to look at what was agreed to see whether there was something that was capable of subsisting as a binding contract independently of the continuing negotiations for the sale of the land. In my opinion, the crucial paragraph is para (2) of the letter from the plaintiff to Mr Roberts:

The vendor will not consider any further offers for the property on the basis that I will exchange contracts within a period of two weeks of the receipt of that contract.

17. As the learned judge put it in his judgment, there was a clear acceptance that Mr Pitt, the plaintiff, should have a clear run of achieving an exchange of contracts which was to be within two weeks after receipt of the draft. The defendant was agreeing that it would not consider further offers. That was its plain understanding and that is reflected in the letters from the defendant to Mr Roberts and from Mr Roberts to Miss Buckle's agents to the effect that only if the exchange of contracts did not take place within the required time would the defendant reconsider the second offer from Miss Buckle. I can see no reason why that agreement, whereby the defendant was locking itself out from negotiating with other prospective purchasers for a limited period, should be considered to be subject to contract, there being nothing further to agree. Accordingly, I would reject Mr Payne's argument on the first point.
18. On the second point, the consideration moving from the plaintiff, Mr Payne submitted that in reality there was no consideration provided by the plaintiff. The plaintiff was expressing himself to be ready, willing and able to proceed to exchange contracts, which was, he submitted, simply what he would have to do in any case. Further, he said that the learned judge rightly described the threat by the plaintiff to issue an injunction as rapid, that is to say of no substance. He accordingly submitted that there was nothing by way of valuable consideration which the defendant received. I cannot accept these submissions either. I accept that the threat of an injunction had a nuisance value only in that I cannot see how the plaintiff could have succeeded in any claim. Nevertheless, that nuisance was something from which the defendant was freed by the plaintiff agreeing to the lock-out agreement. Further, the threat of causing trouble with Miss Buckle was again a matter which could have been a nuisance to the defendant and again removal of that threat provided some consideration. But I also believe that the promise by the plaintiff to get on by limiting himself to just two weeks, if he were to exchange contracts, was of some value to the defendant. The defendant had the benefit of knowing that, if it chose to give the plaintiff a draft contract to agree, there would be no delay on the plaintiff's part beyond a maximum of two weeks thereafter. The learned judge held that these three items constituted valuable consideration sufficient to support the lock-out agreement and I respectfully agree with him.
19. The third question is whether there was a contract for the sale of an interest in the land. Mr Payne described the agreement as being:

if exchange is effected within the stated time the vendor will sell the property to the purchaser.

20. I do not think that can be what the parties agreed. Of course, if there is an exchange then the vendor is bound to sell to the purchaser. It is plain that the defendant was not committing itself to a sale to the plaintiff at this preliminary stage. The terms of the contract had not been agreed, nor even put to the plaintiff. It seems to me obvious that there was no contract for the sale of land as at October 3, nor was there any option for the sale of land, that being another way in which Mr Payne put the matter. It is quite impossible to say on the documents before us and the evidence that was received that there was any interest in the land created in favour of the plaintiff at October 3.
21. It seems to me that what was agreed was a lock-out agreement. In Walford v Miles [1992] 2 AC 128*, Lord Ackner at p139 said:

There is clearly no reason in English contract law why A, for good consideration, should not achieve an enforceable agreement whereby B, agrees for a specified period of time, not to negotiate with anyone except A in relation to the sale of his property.

22. He identified the negative element in such an agreement as being the characteristic of a lock-out agreement.

B, by agreeing not to negotiate for this fixed period with a third party, locks himself out of such negotiations. He has in no legal sense locked himself into negotiations with A. What A has achieved is an exclusive opportunity, for a fixed period, to try and come to terms with B, an opportunity for which he has, unless he makes his agreement under seal, to give good consideration.

23. In the present case it was not incumbent on the defendant to proffer a contract. It did not bind itself to do so, but once it did it was bound, in my judgment, by the terms of the lock-out agreement for the 14-day period that followed.
24. It seems plain to me that the agreement reached on October 3 was not a contract for the sale of any interest in land and therefore section 2 has no application to that contract.
25. In my judgment, the learned judge reached the right decision in holding that this was a contract which was enforceable in law. For my part I would dismiss this appeal.
26. MANN LJ agreed and did not add anything.
27. Also agreeing, SIR THOMAS BINGHAM MR said: This appeal should be dismissed for the reasons given by Peter Gibson J.
28. For very many people their first and closest contact with the law is when they come to buy or sell a house. They frequently find it a profoundly depressing and frustrating experience. The vendor puts his house on the market. He receives an offer which is probably less than his asking price. He agonises over whether to accept or hold out for more. He decides to accept, perhaps after negotiating some increase. A deal is struck. Hands are shaken. The vendor celebrates, relaxes, makes plans for his own move and takes his house off the market. Then he hears that the purchaser who was formerly pleading with him to accept his offer has decided not to proceed. No explanation is given, no apology made. The vendor has to embark on the whole dreary process of putting his house on the market all over again.
29. For the purchaser the process is, if anything, worse. After a series of futile visits to unsuitable houses he eventually finds the house of his dreams. He makes an offer, perhaps at the asking price, perhaps at what the agent tells him the vendor is likely to accept. The offer is accepted. A deal is done. The purchaser instructs solicitors to act. He perhaps commissions an architect to plan alterations. He makes arrangements to borrow money. He puts his own house on the market. He makes arrangements to move. He then learns that the vendor has decided to sell to someone else, perhaps for the price already offered and accepted, perhaps for an increased price achieved by a covert, unofficial auction. Again, no explanation, no apology. The vendor is able to indulge his self-interest, even his whims, without exposing himself to any legal penalty.
30. The reasons why purchaser and vendor can act in this apparently unprincipled manner are to be found in two legal rules of long standing: first, the rule that contracts for the sale and purchase of land must be evidenced (or now made) in writing; second, the rule that terms agreed subject to contract do not give rise to a binding contract. These rules are deeply imbedded in statute and authority. They make possible the behaviour I have described, but the validity and merits of those rules are not, and could not be, the subject of challenge in this appeal.
31. For the purchaser there is, however, one means of protection: to make an independent agreement by which the vendor agrees for a clear specified period not to deal with anyone other than that purchaser. The effect is to give that purchaser a clear run for the period in question. The vendor does not agree to sell to that purchaser - such an agreement would be covered by section 2 of the 1989 Act - but he does give a negative undertaking that he will not for the given period deal with anyone else. That, I am quite satisfied, is what happened here, as the judge rightly held. The vendor and the prospective purchaser made what has come to be called a 'lock-out agreement'. That was a contract binding on them both. The vendor broke it. He is liable to the prospective purchaser for damages, which remain to be assessed. I would dismiss the appeal.

Appeal dismissed with costs. Leave to appeal to the House of Lords refused.

The electronic text of this judgment was provided by Estates Gazette, whose assistance is gratefully acknowledged.