In Scotland, for the most part, so far as the obligation relates to land, this is well founded. The Requirements of Writing (Scotland) Act 1995 requires a written document for the "creation, transfer, variation or extinction of an interest in land".
However, in the recent case of Carlyle v Royal Bank of Scotland plc, the UK Supreme Court was asked whether a verbal commitment (given on the phone) to provide funding for land development was binding. They said that it was - in the particular circumstances of this case.
Facts of the case
RBS's customer, Mr Carlyle, was a property developer. In early 2007, he became aware that development plots were available for purchase at the Gleneagles Hotel. Due to the staging of the Ryder Cup tournament at Gleneagles in 2014, the vendor of the plots wanted to ensure that there were no half-built developments present during the staging of the tournament. The vendor told Mr Carlyle that any sale contract would contain a condition that if the development of the property was not substantially completed by 31 March 2011, the vendor could buy-back the property.
Mr Carlyle approached RBS for funding. The initial purchase price of the plot was to be £1,250,000. Mr Carlyle would then require additional funding of £700,000 for development. Due to the condition imposed on the sale of the plot, achieving the additional £700,000 funding for development was crucial to the whole venture. At a meeting with RBS, Mr Carlyle asked for a full-commitment on the proposal for the development funding and this was met with an enthusiastic response from representatives of RBS.
Mr Carlyle then had a verbal offer for the land accepted. The deposit was to be paid through funding from RBS. At the point of taking the deposit funding, Mr Carlyle again repeated the requirement that it was crucial that RBS then provide further funding for development. He stated that he would not pay the deposit or conclude missives until he had a commitment on the development funding. Following a phone call with his representative at RBS, during which he was informed that the whole deal had been approved, Mr Carlyle then paid across the deposit for the plot and concluded missives for the purchase. A loan agreement was subsequently signed but, crucially, only for the funds required to purchase the land.
Matters moved on and, in August 2008 during the midst of the credit crunch and recession, RBS confirmed that it would no longer be making available the funding for the development and called-up their security.
Had the Bank made a commitment to lend?
The main issue then was whether RBS had made a legally enforceable commitment to provide the development funding? Was the commitment RBS had given verbally to Mr Carlyle sufficient or was some further stage, such as the signing of a loan agreement, required before the parties were legally bound.
In the first decision, given by the Outer House of the Court of Session, it was held that RBS had given an enforceable "collateral warranty" in which they had bound themselves to advance the development funding. On appeal, the Inner House of the Court of Session held that there was no such binding commitment. In their view there would only be a legal commitment to lend at the time the loan agreement - containing all the essential terms of the loan (interest rates, repayment terms, securities etc.) - was signed. Up to that point, the Inner House held, there was no legal obligation on RBS. That decision of the Inner House was then appealed to the UK Supreme Court.
The Supreme Court held that there was a binding commitment by RBS to lend.
A crucial aspect of the Supreme Court's reasoning was on the somewhat technical point as to the limits on where an appellate court can overrule factual decisions, or come to different conclusions based on the factual evidence, where such evidence was heard in full only by the lower court. The Supreme Court held that the Inner House had overstepped its remit in this regard by coming to its own conclusion based on matters of fact. Ultimately, the Supreme Court agreed that the Outer House had been entitled to make the decision it did (i.e. that there was an enforceable commitment by RBS to lend). They noted the unusual circumstances of the buy-back clause as well as the repeated requests for a commitment to lend the additional sums from Mr Carlyle. The fact that a second stage (i.e. the written loan agreement) was required to formalise the relationship on the development funding, did not preclude the fact that RBS had made a binding commitment to provide the funds at an earlier stage. In this instance, it was also held that the parties were sufficiently aware of the terms that would apply to the loan that a commitment to provide it could be binding.
The case is perhaps slightly unusual and, to a great extent, turns on the unusual facts. The nature of the buy-back clause in the original sale contract made this a special case and meant that Mr Carlyle required a cast-iron commitment that went over and above an agreement in principle. In this case, the Supreme Court was persuaded that the conduct of the parties was sufficient to hold that this commitment was present. By their phone call confirming approval of the whole deal, RBS had made a commitment to which they expected to be bound.
The case shows, that in certain narrow circumstances, the court can hold that parties have made certain legally enforceable commitments despite the absence of formal documentation. This is the case even if the commitment is one of a formal nature that would normally be expected to be documented in writing. This can extend to contracts that are ancillary to land such as agreements to lend, or commitments to development funding. However, the enforceability of such agreements will depend very much on the conduct of the parties and whether they expected that they had made a legally enforceable commitment. The case provides a useful illustration of where such conduct might be considered sufficient, and a reminder that in some cases, getting things in writing is not always required.