| May 14, 2009

Back to HomeLegalese - May 14, 2009 Oral Contracts

By Susan Irwin, Lawyer/Executive Director, Rural Legal Services

“An oral contract isn’t worth the paper it’s written on.”

This warning (or something close to it) is attributed to a famous Hollywood movie producer. Even though the language makes it a classic bit of nonsense, the sentiment being expressed has often been seen as a true statement of the law.

In fact, oral contracts are enforceable in the Courts and many famous lawsuits have been fought over agreements that were never written down.

A written contract is always better than an oral one since the existence of a document makes it easier to prove the terms of the agreement. After all, it is very difficult to deny the existence of an agreement when the person seeking to enforce it can show the Court a written contract signed by both parties.

Where the contract hasn’t been written down, the Court must hear oral evidence from the parties as to what they thought were the terms of the agreement. Since people usually have slightly different memories of a shared event, the Judge often has a difficult job determining the real terms of the agreement. Sometimes, when the testimony from the parties is very conflicting, the Judge may rule that there could never really have been any contract.

As with most legal matters, though, there are some exceptions to the rule that oral contracts are enforceable. One of the most important exceptions to this rule came about more than 200 years ago with the passing of the Statute of Frauds by the English House of Commons.

This statute, which is now part of the law in Ontario as well as most other provinces, was intended to force people to make certain types of important contracts only by way of a written document. Since the terms would be in writing and signed by the parties, it was thought that the terms would be clear and that this would reduce fraudulent transactions, particularly with respect to land.

The type of “fraud” targeted occurred when the purchase price for the land had been paid by a purchaser who had moved onto the property. At that point, the dishonest seller would deny the contract and it was often impossible to prove the contract by oral testimony.

Under the Statute, an oral contract for the sale or purchase of land in unenforceable. In other words, no agreement to sell or purchase real estate is of any value unless it has been reduced to writing and signed by the parties. Because the contract is unenforceable, it is also difficult to recover money paid under such an oral agreement, a situation which has resulted in some writers claiming that the Statute is itself actually a tool for fraud.

At Rural Legal Services we do receive inquiries about the enforceability of various oral agreements as well as verbal “rent to own” arrangements for the purchase of real estate. The “rent to own” facts are usually that the person has verbally agreed to buy a home, for little or no money down, and with monthly payments thereafter. After a certain number of years of monthly payments, the purchaser will own the land.

These unfortunate purchasers are no better off than tenants, despite the fact that some appear to have paid far more each month than they ever would have paid to rent accommodation of a similar quality. They don’t have anything to prove that they have any interest in the real estate and as a result they cannot sell the property and if they, or the seller, die, then there is nothing for the purchaser to pass on to his or her heirs and no evidence of any agreement to bind the seller’s estate. Conversely the seller, as the registered owner, can still enter into a binding written agreement to sell the property to someone else. When that “someone else” wants to move in, the purchaser under the “rent to own arrangement” besides having their dream of being a home owner shattered, will have to find somewhere else to live.

There is no easy way to acquire a legitimate interest in real estate. Thanks to the Statute of Frauds and other provincial laws, agreements must be written, and deeds or other documents signed and registered with the government, before land can be conveyed.

If you are a party to an oral agreement to buy land, and have paid money, you should contact a lawyer to have your rights clarified. If you don’t have a lawyer, you can call the Lawyer Referral Service at 1-900-565-4577. For a $6.00 charge added to your telephone bill you will be given the name of a lawyer who will see you for an initial half-hour interview without any additional charge.

Rural Legal Services does not act on the purchase, sale or mortgage of real estate.

Susan Irwin

Lawyer/Executive Director

Legalese is a column of general information and opinion on legal topics by the lawyers of Rural Legal Services, Box 359, Sharbot Lake, ON, K0H2P0, 613-279-3252, or 1-888-777-8916. This column is not intended to provide legal advice. You should contact a lawyer to determine your legal rights and obligations.

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