Ever wondered what sets a deed apart from a contract? While they both are legally binding agreements, they aren’t the same thing. Knowing the difference can save you headaches down the line - especially with big decisions like buying property or securing a loan.
In this article, we discuss exactly what a deed is and why homeowners, professionals and business owners may want to use one versus a contract. We'll cover:
What is a deed?
The differences between a deed and contract
The implications of both
How to put a deed in place
What is a contract?
A contract is an agreement between two or more people that’s legally binding. It’s built on promises - like paying for a service or delivering goods - and everyone involved has to stick to it. If these legal promises are breached, the party can enforce legal action and seek damages. Therefore, a contract is used for business transactions to protect both parties. And unlike a deed, a contract doesn’t need witnesses, just clear terms, mutual agreement, and sometimes a signature to seal the deal.
The basic requirements for a valid contract
For a contract to be legally binding between parties, they need to have the following:
An offer of a transaction for something of value between one party or another. It should clearly state its terms.
There needs to be acceptance of the offer from the other party in the legal agreement. This creates a mutual understanding of the terms of the agreement.
The contract should state the consideration which is what is being offered of value. Whether this is services or goods, this needs to show what is being exchanged between the parties.
Both parties need to show their intention to create legal relations. This is to clarify they both are willing to be legally bound by the terms stated in the contract.
The certainty of terms needs to be clear on the contract for this to be a legally binding contract. Both parties must agree to the terms stated in the contract.
Both parties need to have the legal ability to agree to the contract. For example, they must be of legal age and mentally well to sign the legal agreement.
Common contracts in everyday use
Employee agreements
These are used for employment agreements so that both the business owner and their employee know the terms of their employment. While verbal contracts are legally binding, a written contract is essential for employees. It states their salary, duties in the role and the terms of their employment.
Sales contract
When a sale purchase is made for goods or services, a contract is formed that is legally binding. This will make sure this is delivered to the party and there is contract enforceability. If the goods or services are not delivered, legal action can be taken.
What is a deed?
A deed is a formal legal document that’s used to transfer ownership or confirm a serious agreement. Unlike a regular contract, deeds usually need extra steps, like being signed in front of witnesses. They’re often used for big things like buying property or giving someone rights over something valuable.
Unlike a contract, consideration does not need to occur for the deed to be enforceable. Consideration is where something is promised of value between parties. The formal document also has a longer period of limitation. The deed is in place for 12 years which is far longer than a contract. Deeds are commonly seen in property law arrangements such as a title deed.
Requirements for a deed
To be legally binding, these are the requirements of a deed:
Writing: The deed needs to be first written to be legally valid in the UK. This offers clarity for the parties involved. The word deed needs to be in the document to make this a valid deed.
Signed: The deed needs to be signed by all those parties involved in the deed. This will make sure they are legally bound by the deed.
Witnessed: A witness needs to sign the deed. They must be present when the deed is signed by the party. They need to sign to confirm they were a witness to the individual signing the deed. They will include their name, formal address and a signature.
Delivered: The deed must be delivered to whoever is granting the deed or needs to be dated which is also delivering the document.
Key differences between contracts and deeds
When it comes to deed vs contract, these are the main key differences you need to know about:
Contracts | Deeds |
|---|---|
Contracts can be oral or written. | Deeds need to always be written and meet specific requirements. |
Contracts require consideration which is something of value that must be delivered | Deeds do not need considerations to be legally binding. |
Contracts are enforceable as long as the terms and willingness have been present. | Deeds are harder to challenge and are more stringent. |
Contracts generally have a limitation period of six years to make a claim. | Deeds have a 12-year limitation period. |
Contracts only require a signature from each party involved. | Deeds require witnesses and also delivery to be legally bound. |
When to use a deed instead of a contract
Here's a quick recap of when you might want to use a deed over a contract:
Contracts | Deeds |
|---|---|
Purchase of goods | Property transactions |
Employment contracts | Power of attorney |
Rental agreement | New mortgages |
Contractor Agreement | Transfer of title deed |
NDAs | Appointment of trustees |
1. Property Transactions
When it comes to deed or contract UK, the law states that property transfers are required by deed.
When a property transaction is taking place, a deed is used rather than a contract as this is a more formal document. This will clearly transfer ownership rights between the buyer and the seller.
The deed needs to be signed by the seller, witnessed by a third party, and then delivered to the buyer. They will then need to sign this document, have this witnessed and then date the document to deliver it.
A deed offers a higher level of enforceability than a contract. Once a deed has been delivered, it is added to the public record by the Land Registry who make this a clear document of ownership.
2. Powers of Attorney
Deeds are a must when it comes to appointing powers of attorney. They are a legal requirement and will state clearly who has the authority to deal with financial matters. They empower other individuals to make decisions on behalf of themselves.
This often takes place when an individual is unable to make decisions themselves and requires another individual to deal with their affairs. This deed ensures any property, financial or medical decisions are made in their best interests. The power of attorney tends to be their next of kin.
Deeds provide greater protection against claims from others.
3. Significant Legal Obligations
When legal obligations are necessary, a deed is often the preferred method of agreement. This is due to the seriousness of this type of document compared to the common contract. They offer a greater level of legal assurance than a contract.
When it comes to business needs, in particular, deeds would be necessary with the following:
Setting up a business trust
Arranging a business sale deed
Arranging a deed of assignment
Setting up an escrow deed
Legal implications of using the wrong document
The consequences of using a contract when it should be a deed can lead to legal consequences, particularly when it comes to property transfers.
If using a contract during a property transfer, this will be classed as ineffective and will leave your property unsecured. By UK law, a deed should be used for property transfers.
Therefore, the seller could still be at risk of being liable for the property if a deed is not used.
Also if a power of attorney deed is not used and just a contract, the individual will fail to make any legal or financial decisions for the person. They could face conflict with other family members and have no legal ground in this case.
If a mortgage contract is also used rather than a deed, lenders may not be able to make the financial transaction and the house sale will fall through.
However, when services are being obtained, it’s only necessary for a contract. A deed would make the procedure complicated.
FAQs
What is the main difference between a deed and a contract?
The main difference between a deed and a contract is that one is more of a formal document than the other. A contract is a legal contract between parties where one is doing something of value to the other. The deed is a more serious document that offers a longer period where legal action can be enforced.
Why would I use a deed instead of a contract?
A deed is a formal document that is required by law in the case of property transactions and a power of attorney. They are enforceable by law and easier to uphold in court. They are essential in the transfer of interests and rights.
Can a deed be challenged in court?
A deed can be challenged if there is proof that fraud has occurred. You can also challenge the deed if it is not properly executed. For instance, it was not witnessed properly.
How do I execute a deed properly?
A deed needs to be written rather than orally agreed upon. It needs to be signed by the individual or individuals and dated to be delivered. It also needs to be witnessed by an impartial person.
What happens if a deed is not witnessed?
If the deed is not witnessed, it will be classed as invalid in the eyes of the law. The deed could be challenged in court and it will not be enforceable. That is why you should always deal with legal professionals in property law who are aware of property deed UK.
Conclusion
Those business owners and entrepreneurs involved in drafting and signing legal agreements need to be aware of the difference between a deed and contract. It’s also essential for property buyers and sellers in the UK to be well-informed.
We always encourage those who are seeking to make a legal document to get legal advice from a licensed commercial lawyer. Therefore, you know where you stand if you need to make a legal agreement, whether a deed or a contract.