The risks of 'accidentally' exchanging contracts

This article is taken from May's public matters newsletter. Click here to view more articles from this issue.

The recent case of Alexander Kuznetsov and London Borough of Camden serves as a reminder of the fundamental elements of a property sale contract and the risks of unintentionally exchanging contracts.

This case centres around the attempts by London Borough of Camden to acquire the long leasehold interest that Alexander Kuznetsov held in a property that the council was seeking to redevelop. The council had attempted to negotiate the purchase with Mr Kuznetsov for a number of years but eventually proceeded with a compulsory purchase order in order to acquire the property. Mr Kuznetsov claimed that an exchange of correspondence culminating in a letter from the council dated 16 February 2017 created a binding open contract for the purchase of the property.

The letter from the council set out a recommendation that Mr Kuznetsov obtained a Red Book valuation and that on receipt of the valuation the council “will be willing to purchase your property at that value and pay compensation and all reasonable expenses”. Mr Kuznetsov claims to have added to the bottom of the letter “Thank you! I accept your offer and will instruct a valuer, as requested” and then added his signature and date before sending it back to the council. The council denies ever having received the letter.

The council was initially successful in striking out the claim but Mr Kuznetsov sought leave to appeal and it is that appeal that was recently heard and reported on. One of the grounds of appeal concerned whether the exchange of correspondence amounted to a contract in accordance with Section 2 of the Law of Property (Miscellaneous Provisions) (the ‘1989 Act’).

Section 2 of the 1989 Act states: “2(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.”

The judge believed that Mr Kuznetsov had a real prospect of establishing at a full trial that the letter dated 16 February 2017 as countersigned by him amounted to an open contract for the sale of his property and that contract complied with Section 2 of the 1989 Act. The letter set out the parties, identified the property, established a mechanism for calculating the price and was signed by both parties (allegedly, the council denies Mr Kuznetsov ever signed and returned the letter – but that is a matter for trial). This dispute will therefore go forward to a trial.

This case reminds us all of the need to be clear that negotiations are simply non-binding negotiations; that exchanges of letters can land parties in hot water if the intention of one of the parties is that a formal contract still needs to be drafted and negotiated. It certainly shows the benefit of marking letters with wording such as ‘subject to contract’ to make clear that further steps are required before parties become bound to purchase land. We will need to keep an eye out for the outcome of the trial.