In commercial practice, “agreement” and “deed” are widely used terms which are often talked about interchangeably in conversation. In law, however, the distinction between the two is significant. Using the wrong terminology or failing to execute a deed correctly can have serious legal consequences.
When Would a Transaction Typically be Executed as a Deed?
If an agreement does not confer a benefit on one of the parties, it is generally advisable to execute it as a deed and not a contract. A deed does not require consideration to be enforceable, so in situations where one party is not providing or receiving any consideration, executing it as a deed ensures its enforceability.
What is Consideration?
Consideration is something of value exchanged between the parties to a contract, such as money, goods, services or a promise to do—or refrain from doing—something. It is usually required for a simple contract to be legally enforceable, although it does not need to be financially equal or adequate. A deed, by contrast, can generally be enforceable without consideration.
Formalities of a Deed
A deed is a special document recognised by law as binding without the need for consideration as opposed to an ordinary contract. A deed dispenses with such a requirement which explains why it is commonly used for one-way promises where there is no consideration from the party receiving the benefit.
However, there are strict legal requirements for a deed to be legally effective; this is set out in Section 1 of the Law of Property (Miscellaneous Provisions) Act 1989. The formalities are as follows:
- It must be in writing and made clear that it is intended to be a deed
- It must be validly executed by signature
- For individuals, the deed must be signed in the presence of a witness, who also signs the deed
- For companies, the following variations are acceptable:
- The deed must be signed by two directors
- The deed must be signed by one director and the company secretary; or
- The deed must be signed by a director in the presence of a witness
- It must be delivered, which is typically inferred from the document being dated and handed over. This indicates an intention by the party to be bound by the deed.
These formalities distinguish deeds from simple contracts which are made in a variety of ways, such as in writing, orally, or through a course of conduct. However, the lower contractual threshold in relation to formality requirements is partnered with more structural obligations of offer, acceptance, consideration, and intention of the parties to create a legal relationship. Where an arrangement does not involve consideration from one party, treating it as a standard contract may not be appropriate. This is one of several reasons why parties may choose to formalise a transaction by executing it as a deed.
Practical Benefits
First and foremost, a claim for breach of a simple contract has a limitation period of six years under the Limitation Act 1980. However, claims for a breach of a deed can be brought within twelve years of the breach. This can be important for long-term dealings and arrangements where the breach may not be prominent or obvious to the claimant at first but is slowly unveiled as time passes.
Further, the formalities of executing a deed are more stringent than those for a simple contract. A deed must be signed, witnessed, and explicitly stated to be a deed among other requirements. These formalities add a layer of solemnity and clarity to the transaction which may be beneficial in ensuring all parties understand the seriousness of their commitment.
There are certain transactions which are required by law to be executed as a deed, including transfers of property, land, and legal mortgages. In other cases, parties may choose to execute a transaction as a deed even where this is not legally required, because a deed generally benefits from a 12-year limitation period and can be enforceable without consideration.
Preventing Disputes
It is not uncommon for disputes to arise where a document that was intended as a deed falls short of meeting the formal requirements, such as missing a witness signature for example. This can make a guarantee immediately unenforceable or halve the limitation period for bringing a claim. In most cases it is far more prudent to ensure that a deed is drafted and executed properly than risking the possibility of a transaction completely falling apart because of an improper legal procedure.
If you require help with contract drafting, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online.