The pitfalls arising from variations of deeds

Property transactions often involve the use of call options (or put and call options), particularly in relation to development sites or transactions that require extended settlements. These transactions are required to be documented by way of a deed. Parties may later seek to vary the terms of the deed because of a change in the commercial circumstances of either one or both parties. 

Deeds can only be varied in two ways:

Often if the consideration element is difficult to prove, parties will generally seek to vary the deed by using a deed of variation.

A deed is said to be the most solemn indication to the community that a person intends to do what that person has promised. A deed is binding due to the form of the record itself, not because it records a particular kind of dealing.

The formalities of creating a valid deed require the following elements:

Legislation throughout Australia has imposed additional formalities which ought to be remembered, for example attestation by a witness. Once a deed meets the relevant formalities it will be 'sealed' (and although such terminology is largely archaic, it is relevant in today's environment).

A crucial difference between a deed and a contract is most notably that a deed negates the requirement of consideration. Moreover, unlike a contract for the sale of land, a deed is an instrument which creates a binding obligation on a party when it is first executed, rather than having a requirement to be exchanged.

To validly exercise an option, strict adherence to the method prescribed in the instrument creating the option is required. It is common practice however, for parties to renegotiate the terms of the deed, for example to extend option periods. How can this be validly done? 

As a general principle, a deed cannot be released, discharged or varied except by way of another deed. Nevertheless, courts are willing to recognise a valid variation of a deed if 'consideration' has been provided. It is noted that 'consideration' is simply the exchange of one thing for another; it is the bargain or price made by the promisor in exchange for their promise. A nominal amount of consideration will suffice, so long as there is evidence of such consideration to support the variation.

In Elias v Forsyth & Anor [2004] QSC 338 the Queensland Supreme Court held that a property developer could validly vary a Deed on the basis of oral representations that were supported by consideration. 

The authorities illustrate that courts are willing to accept either a deed or an agreement supported by consideration, so which is best?

A deed of variation will be the most effective and unequivocal method to vary a deed. Issues surrounding consideration, eg 'is it sufficient?' or 'is it referable to the promise sought?', are also avoided through the use of a variation deed. Indeed, where a variation is for the benefit of, and to be relied upon by one party only, a deed of variation will commonly be used. 

A variation by way of agreement, be it by email correspondence or an oral representation, is not as robust as a variation by way of deed from an evidentiary point of view. In Elias v Forsyth & Anor, the Court's decision turned on an analysis of oral representations that may have been interpreted differently. When reliance is placed on ambiguous and vague representations, the validity of the variation is open to challenge.  

Despite the above, parties still utilise correspondence to extend option periods and routinely extend such periods through emails, letters etc. This method may be the most convenient for the parties (and their legal advisors). Nevertheless, the requirement that there be consideration should not be overlooked. Without consideration, any purported variation is likely not be recognised by a court. 

Given the likelihood of disputes arising from disagreements over option terms, any dispute will be more protracted and complicated to resolve if there are a number of ambiguous areas surrounding a variation. For this reason, parties should seriously consider using a deed of variation when amending option deeds.