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Deeds

For a very full guide to the execution of deeds see Land Registry Practice Guide 8.


Can the document be changed after signature?

R (on the application of Mercury Tax Group Limited) v HMRC
[2008] EWHC 2721 (Admin)

Facts

The parties to several deeds executed early versions of the deeds, and the signature pages were then transferred to the final versions, which were different from the versions executed. It was argued that this was ordinary commercial practice and did not make the deeds ineffective.

Decision

The High Court (Underhill J.) held that the deeds were invalid. Section 1(3) of the Law of Property (Miscellaneous Provisions) Act 1989 requires that the signature of a deed by an individual and the witness attestation should form part of the same physical document that includes the other clauses of the deed, and this requirement had not been satisfied because the final form of the deeds had not been signed. It was doubtful that the deeds would have been effective even as contracts not made by deed, in view of the transfer of the signatures from a materially different document.

Underhill J. said:
    "[T]he common understanding is that the document to be signed exists as a discrete physical entity (whether in a single version or in a series of counterparts) at the moment of signing. ... [T]his is not entirely talismanic (though it would not affect my view even if it were): the requirement that a party sign an actual existing authoritative version of the contractual document gives some ... protection against fraud or mistake."
Comment

After considerable concern had been expressed by many solicitors, a joint working party of the Law Society Company Law Committee and The City of London Law Society Company Law and Financial Law Committees has prepared guidance entitled “Guidance on the execution of documents at a virtual signing of closing”. This guidance has been approved by Mark Hapgood Q.C. The guidance confirms that the Mercury case should be viewed as limited to its own particular facts and, to the extent that it is inconsistent with the Court of Appeal’s decision in Koenigsblatt v. Sweet [1923] 2 Ch 314, the latter decision should prevail. It suggests a number of options for dealing with virtual signings and closings of documents governed by English law.


Corporations

Reform

Regulatory Reform (Execution of Deeds and Documents) Order 2005

Explanatory document


This Regulatory Reform Order simplifies and clarifies the law relating to execution of deeds and documents. It irons out the inconsistencies between s74 of the Law Property Act 1925, s36A of the Companies Act 1985 and s1 of the Law Reform Miscellaneous Provisions Act 1989. In force on 15 September 2005 and applies to England Wales.


Section 74 LPA 1925

Bolton Metropolitan Borough Council v Torkington
[2003] EWCA Civ 1634.

Introduction

Where a company is registered under the Companies Act, s36A of the Companies Act 1985 sets out the formalities required for the execution of a deed. In the case of other corporations s74(1) of the Law of Property Act 1925 applies. Prior to the changes made by the Regulatory Reform Order referred to above it said:
    "In favour of a purchaser a deed shall be deemed to have been duly executed by a corporation aggregate if its seal be affixed thereto in the presence of and attested by its clerk, secretary [etc], and where a seal purporting to be the seal of a corporation has been affixed to a deed, attested by persons purporting to be persons holding such offices as aforesaid, the deed shall be deemed to have been executed in accordance with the requirements of this section, and to have taken effect accordingly."
Facts

In this case the council was engaged in subject to contract negotiations to grant leases to the defendant. The Mayor had sealed the documents in anticipation of completion but negotiations broke down and the council did not wish to proceed. The defendant, who was in occupation and resisting a claim for possession, argued that the sealing of the documents amounted to execution.

Held

The Court of Appeal disagreed holding that execution of a deed requires not only that the seal be affixed but also that the deed be delivered - and that s74(1) does not suggest otherwise. The purpose of s74(1) is to make it unnecessary for a purchaser to require proof of the corporation's formal compliance with the provisions of its memorandum and articles of association or its charter.(Longman v Viscount Chelsea (1989) 58 P&CR 189 applied.)
    "When section 74(1) came into effect, it did so as a new provision which was part of a group of provisions relating to the execution of deeds. Thus, section 73(1) refers to execution of a lease by an individual, requiring for that purpose that the individual must sign or place his mark upon the deed. Nothing is said about delivery, but no one suggests that delivery is not a requirement for the instrument to be a deed. Section 74(1) similarly says nothing about delivery and only deems the execution and the taking effect accordingly of the deed if the prescribed conditions are satisfied.

    ... It appears to me that on the natural construction of s74(1) in its context in the 1925 Act, that subsection was not dealing with delivery at all. There are strong pragmatic reasons for that interpretation, as in many cases the affixing of the seal by a corporation prior to it being intended to bind the corporation is the only practical course." (Peter Gibson LJ, para 36 and 45).
The court also held on the facts that there was clearly no intention to deliver the deed and went on to make this general comment:
    "It would be surprising, in my view, if in the course of subject to contract negotiations which the parties know and intend will not cause them to be bound unless and until contracts are exchanged, the act of one corporate party in sealing the lease in readiness for completion was intended to bind that party. ... [i]f one was to infer an intention to deliver from the act of sealing and both parties were corporations one would have the bizarre situation that both, by sealing the lease and counterpart respectively, would be bound, despite having made clear by the negotiations being subject to contract that they were not to be bound until completion. In the context of local authority practice, it would be remarkably inconvenient if a local authority authority which was conducting subject to contract negotiations were to be bound when, to prepare itself for completion, it caused its seal to be affixed at a moment convenient to the Council" (Para 53).
Note: The corporation in this case was a council and the court was considering the matter in that context. It was not a corporation under the Companies Acts. In the latter case there is a statutory presumption in s36A(5) of the 1985 Act: "and it [the deed] shall be presumed, unless a contrary intention is proved, to be delivered upon its being so executed". However, as I understand Gibson LJ's reasoning he would hold that the fact that negotiations are "subject to contract" would rebut the presumption. Nevertheless, to be safe it may be better to use the phrase "subject to completion"; or possibly establish a new formula: "subject to delivery of deed"?


Execution of leases delivered in escrow

Dyment v Boyden
[2004] EWCA Civ 1586

Where a lease is signed and delivered in escrow, it cannot bind the tenant until the tenant has properly executed the counterpart, even if the escrow conditions have been released in relation to the lease.
    "In my judgment it is in principle wrong that an intended party to a lease should be treated as bound at a time before he has committed himself to the lease merely because the other party has delivered the lease in escrow and the escrow conditions are subsequently satisfied. That is all the clearer in a case such as the present where the other party has prepared a counterpart lease for execution and exchange and where penal consequences would otherwise follow." (Peter Gibson LJ, para 28)

Bank of Scotland plc v King and Okoronkwo
[2007] EWHC 2747 (Ch).

Summary

This High Court decision illustrates how important it is to make it clear that a deed is being delivered in escrow where it is not intended to take immediate effect, and also illustrates that a seller's lien for unpaid purchase monies does not provide adequate security for a seller.

Facts

Two of the defendants agreed to sell their house to the other defendant. Most of the purchase price was to be advanced by the Bank and secured by a mortgage on the property, and the sellers' solicitors were aware of this. Before exchange, the buyer's solicitors sent the net mortgage advance to the sellers' solicitors to hold the same to their order, and contracts were exchanged with completion expressed to be due that same day. The buyer executed a mortgage deed in favour of the Bank granting a first legal charge over the property.

The sellers' solicitors wrote to the buyer's solicitors enclosing a TR1 (Transfer of whole) dated with the contractual completion date and executed by the sellers. The TR1 provided for the buyer to give an indemnity covenant in respect of restrictive covenants affecting the title, but the TR1 was not executed by the buyer.

The sellers' solicitors used the funds they had received from the other side to discharge the existing charges against the property. The buyer never paid the balance of the purchase money and the sellers continued to live in the property. Eventually, the sellers' solicitors wrote to the buyer, stating that they were going to rescind the contract. The buyer counter-signed a copy of that letter, by way of acceptance of its terms, and the sellers' solicitors served notice to complete on the buyer.

The Bank sought declarations that the transfer had been completed on the contractual completion date, that the property was charged to the Bank for £1.2M plus interest and costs and that any seller's lien in favour of the sellers was postponed to the Bank's charge. The Bank also sought an order that the charge be registered at the Land Registry.

Decision

Morgan J. held that the transfer had not been delivered in escrow and was effective to transfer the property to the buyer. The letter sending the transfer to the buyer's solicitors did not indicate that the same was conditional, and the sellers were aware of the loan and of the fact that the Bank would not have released the funds until it had a charge over the property, executed by the buyer following completion of the transfer to him. The sellers' use of the money constituted a waiver of any requirement for the buyer to execute the transfer.

The Bank was entitled to have a first legal charge registered against the title, despite the fact that the sellers remained registered proprietors of the property at the Land Registry. This was because the transfer had effectively transferred the property to the buyer, who was entitled to be registered as proprietor. The buyer was able therefore to execute an effective charge in favour of the Bank. The sellers were taken to have intended to subordinate their seller's lien to the Bank's mortgage, in view of their knowledge of the Bank's loan.


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