When executing legal documents, you may be required to sign some as a deed and others as a ‘simple contract’. But what exactly is the difference?
Deed or contract?
Deeds are distinct from contracts as they are usually enforceable despite a lack of consideration. Consideration is anything given or promised by one party in exchange for the promise of another.
Deeds are useful when it is not clear if valuable consideration has been given. A situation like this may arise, for example, when dealing with a guarantee of an existing debt.
Also, deeds generally allow for a longer limitation period within which a claim under the instrument may be made. A contract has a limitation period of six years, but the window for a deed is usually twelve years.
In some transactions, a deed is a legal requirement. These include:
- transfers and certain leases of real estate;
- appointments of trustees;
- powers of attorney; and
- variations of existing deeds.
For a deed to be legally binding and valid, it must:
- be in writing;
- be clear from the face of the document that it is intended to take effect as a deed – the instrument does not need to have the word ‘deed’ on its front cover, but it must contain the word deed within the document. Perhaps most importantly, the execution clause should be worded so that the signatory is executing the document as a deed;
- be validly executed by the parties to it – valid execution by the parties depends on who is signing it. Companies must execute using two authorised signatories (two directors or a director and a secretary), or a director in the presence of a witness. Individuals need to sign in the presence of a witness. LLPs need to abide by the same rules as those for companies, but their authorised signatories will be members. Affixing a company’s seal to a document is also a valid method of execution, although this approach is now less common; and
- be delivered – contracts take effect on execution but deeds only take effect on delivery of the instrument. Delivery does not occur when the document is physically moved, but when it is clear that the parties intend to be bound by the deed. In practice, the deed will state that it is delivered when dated.
When arranging for a deed to be executed, care must be taken by all of those involved to satisfy the formalities. If they are not observed, the validity and subsequent enforceability of the deed is at risk.