Signature Living: deeds, guarantees and Mercury Tax

In March 2020, the High Court was asked to consider whether two deeds of guarantee were enforceable, even though the deeds were not attested by a witness.

Signature Living Hotel Ltd v Sulyok

The agreements were entered into by Signature Living Hotel Ltd (the “Borrower”) and Andrei Sulyok (the “Lender”) in order to guarantee a loan of £188,000 made by the Lender to the Borrower.  The agreements were expressed to be deeds.

The sole director of the Borrower executed the agreements on behalf of the Borrower (in addition to a loan agreement) but failed to have his signature attested by a witness.  The validity of the guarantees was challenged by the Company on the basis that the formalities for the execution of a deed had not been followed.

How to create a deed

The Law of Property (Miscellaneous Provisions) Act 1989 provides that an agreement is validly executed as a deed (by an individual) if and only if:

1. it is signed:
   • by him in the presence of a witness who attests the signature; or
   • …; and
2. it is delivered as a deed.

Section 46 of the Companies Act 2006 provides that a document is validly executed as a deed by a company if it is duly executed by that company and is delivered as a deed.

Section 44(2) of the Companies Act 2006 provides that a document is validly executed by a company if (inter alia) it is signed by a director of the company in the presence of a witness who attests his or her signature.

The High Court’s view

The High Court accepted that the Company’s signature on the deeds of guarantee was not witnessed.  As a result, no deed had been formed (section 44(2) not having been complied with).

The court considered R (On the application of Mercury Tax Group & Another v HMRC (2008). The obiter from Mercury Tax states that a defective deed cannot survive as a simple contract, on the basis that the parties had intended the documents to be deeds and their validity must be judged on that basis.

The Court in Signature Living took a different view, stating that if an otherwise valid contract of guarantee is intended to be embodied in a deed but the formalities as to creating a deed have not been complied with, the creditor could still enforce the agreement as a simple contract.  The Court did not follow the obiter in Mercury Tax.

Could the guarantees be said to have formed as simple contracts?

The Court looked at the guarantees that had been signed by the Lender and the Borrower.  They were found to contain the necessary requirements to form a guarantee:

• they were in writing, as is required by the Statue of Frauds 1677;
• they were signed by a sole director, which is a valid means (for the purposes of the Companies Act 2006) of a company signing a simple contract; and
• each contract was expressed to be signed by the Borrower in consideration of the Lender providing the loan,

and then the other requirements for contract formation were clearly there: offer and acceptance, intention to create legal relations and nothing to suggest that the contract should be void for reasons of public policy.

The Lender was therefore entitled to enforce the guarantees.

Final thoughts

This case is, we would suggest, a welcome clarification that a simple contract can survive a botched attempt to create a deed.

That must be the sensible public policy conclusion.  If the parties have gone to all the trouble to execute a deed, but have tripped over an execution formality, then it would seem somewhat perverse that they should be prevented from having formed a mere simple contract.

Nevertheless, to form a simple contract the necessary conditions must still be satisfied.

Deeds are often used where there is no consideration passing between the parties or where the nature of that consideration is unclear.  In such cases a botching in the execution of the deed could very well result in no contract being formed at all.

So too beware circumstances where a deed is being used to lengthen the limitation period from six to 12 years.  And so too beware circumstances where a deed is being used to create a power of attorney, where botching the deed formalities will likely be fatal to purpose of the document being executed.

As with all things with deeds, careful thought needs to go into when and where they are executed and these kinds of issues can usually be avoided if proper thought and due care goes into the execution process.

This piece was researched and prepared by Amir Kursun with input from Henry Humphreys.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice.  Much of the above will no doubt fall out of date and conflict with future law and practice one day.  None of the above should be relied upon.  Always seek your own independent professional advice.

Humphreys Law