Demystifying Oral Contracts in Property Law

What are Oral Contracts?

Verbal agreements in property law are, simply put, contracts that are either partially or entirely concluded without a written record. Just like written contracts, oral contracts (another term for verbal contracts) have valuable legal standing in property law and can be used to prove that a legally binding agreement exists between two or more parties. They are considered valid as long as both parties agree to the terms, identify themselves when the contract is made, and demonstrate the intention to fulfill the contract terms .
When determining the legality of verbal agreements, courts look to accepted legal principles as set out in common law. The legal definitions for verbal agreements have, thus, been defined by a long history of judicial rulings. The specific wording of these definitions can vary by state, but most states accept a verbal contract as being a legally valid agreement that can be upheld by courts of law or enforced by statutory regulations.

Legally Binding Nature of Oral Contracts

Verbal or oral agreements in property law are not always legally enforceable, but there are a number of exceptions that parties should be aware of. Section 126 of the Law of Contract Act provides that ‘no suit shall be brought in respect of a contract for the sale of land or any interest in land unless: a) The agreement upon which the suit is based is in writing; and b): An instrument in writing is signed by some party to be charged’. However there are a number of exceptions and loopholes. Section 126(2) provides that the requirement for such contracts to be in writing is subject to a number of exceptions, including: where the party against whom such instrument is required is in possession of land under colour or semblance of title, by virtue of any contract made by him or some person under whom he claims; and where a contract is executed in the performance of a public duty. The High Court of Kenya has held that once a contract is in writing, it does not matter that it is unsigned. So long as that party is shown to assert title to the property it is sufficient proof. Section 45(1) of the Registration of Titles Act (RTA) provides "The title of every person who has been registered under this Act shall for all purposes in any proceedings in any court, be taken to be absolute and indefeasible; and no person shall be entitled to impeach or affect the title or to bring any action or suit in respect of any estate or interest in any land by reason of any unregistered matter or to claim any estate or interest in land by reason of any matter so registered or by reason of any omission to make any entry or note on any register, index or deposited plan". The RTA provides for circumstances under which registration can be overturned so the above provision is not absolute. It should also be noted that the RTA has been repealed and replaced by the Land Registration Act, 2012 and the Land Act, 2012. Although the new laws contain provisions that seek to address the shortcomings of the RTA, case law decided pre-2012 has not been expressly overruled. Section 60 of the Land Act provides that "An unregistered interest in land shall not confer any rights over other encumbering interests to which land may be subject." This includes rights over a registered land and/or a claim to length of possession. However it is questionable whether the new legislation has completely overridden the above rules. However, where persons are in possession of land for 12 years, they can apply to the court to vest them with title. Parties should also note that a defence of part performance is only available for contracts that are specifically enforceable. Therefore unless there is a registered or unregistered interest attaching, the sale of an interest in land must be by a registered instrument in order to be able to recover possession of the land. Efforts to recover possession by any other means, even with evidence of a verbal agreement, could result in the penalties provided for in section 73 of the RTA or section 77 of the new legislation displacing the registered title holder.

Issues with Oral Contracts in Property Deals

Notwithstanding the personal touch that seeing, touching and smelling a property can provide, the existence of verbal agreements between parties can be fraught with difficulty. Verbal agreements have no terms, no physical evidence of their existence, and can mean anything to the people involved. The situation is made worse because once lawyers are involved, the verbal agreement usually has to be discussed with the other side directly, which can be uncomfortable. Most importantly, verbal agreements can easily lead to misunderstanding and conflict.
Verbal buy-sell agreements can lead to misunderstanding (whether there is one or two parties to a buy-sell agreement). Disagreements can revolve around the amount to be paid, date of sale, items to be included in the sale, break fees, etc. Verbal agreements can also give rise to issues about whether an agreement has been terminated, or whether a new agreement has been entered into (e.g., where a seller has accepted a deposit on a certain price, but then negotiates with the buyer or someone else, a new price and/or raises issues with respect to the condition of the property).
The situation is no better if the deal is being done by a corporation or partnership. Who has the authority to bind the corporation (i.e., the signer), and what is that authority? And if it is a partnership, does one partner have the authority to commit the entire partnership, or just themselves?
In short, verbal agreements raise many risks and issues. Even seemingly simple verbal buy-sell agreements can easily lead to conflict, confusion and sometimes litigation.

Examples: Oral Contracts in the Realm of Property

Throughout the development of property law, verbal agreements as to the transfer of the title or other rights of land have been challenged and confirmed in courts. The first is a contemporary case, which, despite its circuit court ruling is probably due for Supreme Court review.
In May 1997, Mr. and Mrs. Gendowski signed a Power of Attorney document granting their son Gary power over their property for purposes of sale or conveyance.
Less than one year later, Gary sold the property to his cousin, for whom he was executor of an estate, on May 3, 1998. The property was then sold to a third-party buyer shortly thereafter, and shortly after that Gary and his wife divorced. (Gary had also inherited property from his mother.)
A year later, in 1999, Gary and his wife entered a property settlement agreement specifying that the wife would receive Gary’s property transfer to his cousin upon the death of the cousin, as well as any proceeds of property in which he claimed an interest including heirlooms, antique cars, and the like. Gary signed the agreement.
Several years later, Mrs. Gendowski filed a Partition Action, claiming that Gary had no rights to the property as her Power of Attorney. Gary, counter-claimed and sought to partition the property.
The Circuit Court affirmed the wife’s claim, accepting her belief that Gary had intended to hold the property for her, and taking into account evidence of Gary’s conduct at such time as when he accepted money for rental of the property . While no written document existed, the Circuit court held that Gary’s actions evidenced a verbal agreement to hold the property for his parents’ benefit.
The Circuit Court of Salem County determined that Mrs. Gendowski, and not her husband, owned the property, but denied her a Partition Action, instead ordering a sale of the land so that she could receive her portion of the proceeds.
In another case, plaintiff Calloway brought suit against her brother-in-law to recover retrospective money for Improvements made to the property she had rented from him over a period of approximately fourteen years. She claimed that her brother-in-law orally agreed to reduce her rent in exchange for her improvements to the property.
The oral agreement was upheld by the District Court, which determined that Calloway proved the existence of an oral contract. To support its findings, the appellate court cited that plaintiff supported her position with signed checks for the improvements, an agreement that she would pay for materials in exchange for a reduction of her rent, testimony of neighbors that defendant told them Calloway helped him clean and paint the property, and Calloway’s own testimony, which the lower court held was credible.
While the case at bar presents a specific set of circumstances, both cases show that courts are willing to consider, and uphold verbal agreements as between co-parties to property based on the intentions of the parties at the time of entering said agreements.

How to Approach Oral Contracts

To minimize legal risks associated with verbal agreements, best practices can be followed in the context of an overarching legal strategy that is both collaborative and company-wide. Below are a few key considerations:
Standardization. Document specific requirements and step-by-step processes relating to information gathering, review, and record-keeping associated with verbal agreements. Create a set of standardized compliance checklists, and determine through training and testing which employees have the knowledge and have successfully implemented the standardization process. Create standardized templates for agreements and transaction documentation, which will discourage employees from drafting non-standard (and therefore non-enforceable) agreements.
Integration. Questions should be asked at various stages of the business process, such as during a telephone conversation, at an initial meeting, or in an interview. At these key points, consistency and accuracy of record keeping are vitally important. Therefore, records should be integrated into every aspect of the business and become accessible at any time. Implementing such integration requires continuous monitoring and auditing from a central authority – for example, an ethics department – to ensure that contractual obligations are met.
Training. All employees should be trained on the company’s policy with respect to verbal agreements, which should include the protocol for any initial discussions or negotiations with third parties. The company should create a checklist listing required information and documentation to record after the oral commitment has been made, including: information that should be recorded; how and when that information should be recorded; individuals responsible for recording the information; individuals who will review the information; recordkeeping requirements; and processing of the information.

Key Takeaways

When it comes to land law and the purchase of property, verbal agreements have a limited value. It is extremely important that any contract between an individual and a property developer, real estate agent or any other third party relating to land is documented in writing. A binding written signed agreement ensures that terms agreed are carried out and provides important evidence in the event of any dispute. As such, if you are purchasing, selling or leasing property , or wish to authorise another to undertake actions on your behalf, it is recommended that any agreement is documented and evidenced by signature. In some cases, written agreement may be required by law. Certain contracts are therefore covered by the Statute of Frauds, which deals with formalities in relation to the creation and transfer of interests in property. Therefore it is important to seek legal advice to avoid any unnecessary problems or avoidable litigation.