Essay: Legal formalities in property transactions

A formality, in legal terms, is a requirement to put a matter of substance into a particular form for it to be considered legally valid . Formalities perforate all areas of law, but are especially prominent in Land law. If we contrast this area with, for example, Contract law even academics would agree there are far fewer requirements of form in the latter . I believe this is due to the significance of land in British history and the fact that ownership of land is viewed as prestigious.
 
The significance of the formalities surrounding the creation and conveyance of property rights split academics, some viewing them as useless, mischievous and corrupt and others believing positive goals are achieved utilising formalities . Some critics even go as far as saying formalities are created by lawyers to be extremely technical so people have to seek advice and pay lawyer fees . Personally, I believe that formality requirements may be irksome and time consuming, but beneficial nonetheless. Overall, they confirm the intentions of parties in most circumstances and in a majority of cases where it would be unequitable to uphold formal requirements, the law has put into place reasonable exceptions.
The Law of Property Act (LPA) 1925 s.1 sets out the proprietary rights which can exist at law: there are legal estates (a fee simple absolute in possession (a freehold) and a term of years absolute (a leasehold)) ; legal interests (five interests that can be conveyed and created at law ); and a third category of rights that take effect as equitable interests (these interests are only recognisable in equity and not at common law). However, even if a right falls within the substantive scope of s1 LPA 1925, it must, for the most part , comply with the relevant formalities to be valid and enforceable. Some scholars argue that penalizing non-compliance with formality requirements due to ignorance is unjust and would most definitely conflict with the intentions of parties. However, if we look at law in other contexts, ignorance is rarely a sufficient defence for non-compliance. In addition to this, we gain a number of benefits from these formalities such as evidence of transaction, security, clear terms and many more.
Fuller, in his essay ‘Consideration and Form’, gives us three general functions which the benefits of formalities fall under. A cautionary function, where parties are warned their actions will have legal consequences; an evidential purpose, providing evidence to parties and others concerning their transaction, and a channelling purpose, whereby formalities provide a well-defined means of entering into transactions.
The cautionary benefits of formalities are seen at the start of the transaction process. Here, the time consuming and irksome nature of formalities is viewed as a benefit as it forces parties to think about decisions, preventing them from entering transactions which they may later regret and ensuring parties do not enter into legally binding transactions by accident. For this to be effective formalities need to be adhered to before a transaction is considered valid; which is the requirement when conveying land . Subsequently, parties will have the opportunity to consider the results of their actions and examine whether they align with their own interests.
The next cautionary benefit conferred by formalities is that it protects against outside pressures such as duress. As formalities can make it difficult to enter into a transaction, they also make it harder for someone to be pressurised into one. There needs to be a deed drawn out that must be signed in the presence of a witness , which then has to be sent to the land registry . This already shows that the duress needs to be sustained over a long period of time (while the deed is drawn and registered) as well as an increased risk of detection by the witness (who is a disinterested 3rd party ). Another hurdle for someone looking to apply outside pressure is that due to the technical nature of formalities, legal professionals usually are involved; these legal professionals should be able to detect and prevent pressures . This is an important benefit as, even though there are substantive remedies for outside pressures such as misrepresentation, formalities seek to prevent victims from entering into these transactions as opposed to escaping the results of them .
A third benefit is that it helps clarify terms of a transaction and educate parties on the actual legal effect of these terms . Most transfers of land have a formality requiring the transaction to be signed and in writing (either a deed or an s.2 compliant written contract ). This in itself would help clarify the transaction as putting it in writing would highlight gaps. Furthermore, it is likely that legal advisers would be consulted (as formalities have a degree of complexity) and a professional would be able to spot any potential sources of disagreement and make the relevant provision for it. This would clarify both parties’ intentions and solve any misunderstandings that may have been present.
A legal advisor would also be able to educate parties on the actual legal effects of terms, taking into account relevant statutory rules and laws . For example, even though it may not be stated in the terms, notice must be given to tenants taking short-fixed term tenancy agreements . In addition to this, the Law Commission recommended that the rights and obligations stemming from mortgages of residential properties must be set out in a straightforward manner in the deed creating the interest and if a party tried to contract out a duty or obligation, the required formalities would refer to it as being ineffective . This could be seen as a detriment of formalities as actual legal effect could go against a parties’ intention; however, the rights and obligations that formalities are trying to protect are those viewed as too important to deny.
When looking at the evidentiary benefit of formalities, we must consider the benefit to a number of parties; mainly the parties involved in the transaction, third parties, the courts and the state. I believe the need for evidence in transactions relating to land is due to its importance and the durability it has compared to other types of personal property (land will continue to exist) . The most obvious evidentiary benefit is that if the parties involved in the transaction need evidence of terms or the existence of the transaction, it is readily available and parties would not have to depend on unreliable memories . Formalities permanently record the parties’ intentions (via a written contract or deed) in the hope of settling future disputes.
Third parties also benefit from the evidentiary nature of formalities. The formalities that give evidence for parties involved in the transaction are the deed or a written contract. However, a third party would be more concerned with the registration of the transaction as contracts and deeds can be hidden from third parties; it is the registration that conveys existing property rights which are open to public inspection . We can see the benefit to third parties is publicity; ensuring outside parties know of the existence and the terms of a transaction that may affect them thereby protecting their intentions (if the formality of registration was non-existent, third parties could be bound by transactions they had no intention of being bound by). However, I must mention that there are some property rights, such as short term leases and overriding interests, which do not have to be registered and can still defeat a third parties’ intention of being bound by unknown transactions.
The courts and the state also benefit from the evidentiary nature of formalities. In the court of law, a judge requested to mediate a particular transaction would need a great deal more evidence than the parties involved as they were not present in the events leading to its creation . A written document containing all terms of the transaction would be advantageous as the parties’ intention when contracting could be followed by the judge. When regarding the state, the most significant benefit is that formalities are used as an aid to impose taxes . Taxation definitely had an influence on the formalities set forward in the LPA 1925 as previously most oral transactions were done informally to avoid taxation . Even though this again can be said to be against the parties intentions, avoiding taxation is an unreasonable intention to have.
The final advantage of formalities is its channelling effect ; whereby formalities channel the parties’ intention to a specific legal goal. However, it can be said that formalities only have a negative channelling effect as even if they are complied with the transaction can still fail. Instead we see that if formality rules are not complied with you can usually be sure the transaction will not be valid . Also in a court of law if a party complies with formalities it is usually treated as evidence that their intention was to enter the transaction in question .
Even though there seems to be numerous advantages to formalities, some critics view them as an inherently mischievous burden . This is because, as with any legal rule, there are detriments. The main disadvantage of formalities is that they are something which is added to substance requirements, this definition of formality gives us the root of the first detriment; the costs of compliance. In my eyes this is a minor impairment as only some formalities incur costs (for example, the formality requiring transactions in writing may not) and costs are usually relative to the value of land and not typically unreasonable.
The second detriment is the failure of informal transactions. When a transaction does not comply with a formality it can fail and the parties’ intentions will not be upheld. This in itself could be seen as sufficient detriment to outweigh the benefits of formality; especially if we are dealing with cautionary formalities, where the only benefit would be that the parties are warned they are entering into legally binding transactions; even though they may already aware of this.
The injustice of this is that non-compliance of formalities usually occurs due to ignorance concerning requirements of form, and many critics view penalising non-compliance due to ignorance as archaic and unfair , as well as contrary to intentions of the parties at the time of the transaction.
However, over time the courts have reviewed certain provisions and come to the conclusion that some rights are exempt from formalities as they often arise in informal situations. An example of this is the exemption of leases less than three years do not have to be formalised as long as substance requirements are met (where the lease takes effect in possession; is granted for the best rent and no upfront premium was paid). The exception helps us preserve the intentions of the parties’ where requiring formalities would be counterproductive; as the transaction was likely completed in an informal way.
Another example where the courts had to introduce an exception to formalities is where the family home is concerned. Though there is rarely any formal process it is unlikely a married couple’s intention would be that the home belongs solely to one of them, due to this the courts ruled that an informal trust is created and held to be legal and enforceable . Lord Hodson agrees with this describing the idea of couples ‘…hammering out agreements…[as]…grotesque . Instead of requirements of form, the courts instead look at conduct to work out intentions of parties looking at things such as financial contribution or carrying out work on the property to work out intentions of ownership.
Parties may also fail to comply with requirements of form due to common misconceptions, such as separate properties being jointly owned once married and due to this honest belief they do not seek legal advice. In such situations it is viewed as unconscionable to require compliance with formality. However, it is a valid point to say that if formalities were strictly enforced, such misunderstandings of law will eventually be cleared up and formalities would no longer defeat intentions of parties in this situation.
Even in situations where partners are aware of the correct law it could still be seen as unfair to impose formalities to convey intention. This is due to the fact there could be emotional pressures stopping partners from formalising their intentions ‘… a wife’s true wishes can easily be overborne because of her fear of destroying or damaging the wider relationship between her and her husband…’ this can be asserted by the partner or self-induced (could be under the impression asking for a formal agreement shows a lack of commitment to the relationship). In this case we see the requirement of formalities would defeat the intentions of the parties and it seems equitable to allow the creation of a trust as partners rely on the security induced by their emotional relationship .
The final situation where formalities would adversely affect the intentions of a party is where it is impossible to comply with them. Impossibility can occur, for example, when military personnel on active service need to write a will transferring property rights but do not have the materials to make a formal will. Here it would be unfair to demand that the soldier comply with formalities and refusing his transfer of property definitely oppose his interests and intentions so the courts allow soldiers to create informal (but enforceable) wills .
In conclusion, as stated above, I believe that any legal ruling will have detriments attached to them, and it would be unrealistic to expect formalities not to have any. The question is whether the benefits conferred outweigh the instances in which an individual’s intentions are not upheld. I believe the benefits do outweigh the negatives as we see a range of benefits as a result of formalities and in most circumstances where it would be viewed as unconscionable to deny parties their intentions, the courts have introduced exceptions where formalities are not needed in some situations. Even though these exceptions could be viewed as a flaw of formalities, in law most rulings do have exceptions; as one all-encompassing, always equitable ruling, on any matter of law not just formalities, would be extremely difficult to draft. Therefore, in my eyes these exceptions do show what formalities lack, but overall I believe it to be a useful and justified legal tool.

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