Contract: will the court order rectification of a contract which fails to comply with section 2?

Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 continues to present a trap for the unwary. Under section 2, a contract for the sale or other disposition of an interest in land must:

• be in writing;
• be signed by, or on behalf of both parties; and
• incorporate all the terms which have been expressly agreed between those parties.

The most common situation in which section 2 causes difficulties is where contracting parties agree to vary a contract which has already been exchanged. Unless the variation itself complies with section 2, the variation will be unenforceable, although provided the original contract complied with that section it will continue to be enforceable in its unamended form. See for example Eyestorm Ltd v Hoptonacres Homes Ltd, covered in January's Property Update.

However, section 2 also applies where the original contract entered into by the parties does not record all the terms which they had expressly agreed. In Oun v Ahmad, the parties had signed two separate documents on the same day. The first was a normal contract for sale. The second was a short form document which set out how the purchase price was to be apportioned between the building, the goodwill of the business and the fixtures and fittings.

The court found that the first document did not create a valid contract for sale under section 2, as it did not include the provisions governing apportionment of the price. The question was therefore whether the contract could be rectified so as to include those provisions, and make it valid.

Section 2 does envisage that rectification may be used to validate a contract which would otherwise be invalid. Where the written document does not incorporate all of the terms expressly agreed, the courts have the power to order rectification if the parties have a continuing common intention in relation to the matter to be rectified, but by mistake the document does not reflect that common intention.

The buyer in this case pointed out that the parties intended to enter into a legally binding contract. If the first document did not comply with section 2 because it omitted the apportionment of the price which had been expressly agreed, then the parties had made a mistake as to the legal effect of that document. The buyer argued that the court could correct that mistake by rectification, which would then reflect the parties' common intention to be legally bound.

The High Court disagreed. It held that rectification was about setting the record straight where a mistake in the drafting means the document does not reflect the parties' common intention. In this case, the express agreement to omit the apportionment provisions meant that there was no defect or mistake in the recording of the agreement. The court held that it was beyond its power when rectifying a document to write into it a term which the parties had expressly agreed should not be included.

Things to consider

In reaching its decision, the court was mindful of the legislative objective of section 2. Clearly, if rectification were available in every case where the parties had omitted a term from their written agreement, this would undermine the certainty which section 2 is designed to promote.

It appears that the courts are continuing to apply section 2 strictly. Whilst rectification may be available in certain circumstances to "rescue" a contract which would otherwise fail the section 2 test, it cannot be relied on in all cases. The only safe course of action is to ensure that all the terms which the parties have agreed are incorporated in one document (or, where contracts are exchanged, in each).

This analysis was written by Sarah Allen, associate in Wragge & Co's Real Estate group.

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