Archive for the ‘subject to contract’ Category

‘Subject to contract’ re-affirmed

December 29, 2020

In Joanne Properties Ltd v Moneything Capital Ltd ([2020] EWCA Civ 1541) the English Court of Appeal had to consider whether a contract had been formed even though the relevant exchange was prefaced by the words ‘subject to contract’.

The parties were trying to negotiate a compromise of a dispute between them. Moneything’s solicitor introduced ‘subject to contract’ at an early stage in the discussions and nearly all the email and phone exchanges between the parties were explicitly ‘subject to contract’.

Moneything did, however, make one offer on 19 June 2019 which was not ‘subject to contract’. There were continuing negotiations (explicitly ‘subject to contract’). These exchanges culminated in an email offer on 11 July 2019 on behalf of Joanne Properties. Moneything’s solicitor’s reply was ‘agreed’. This email exchange, too, was ‘subject to contract’.

The terms in the 11 July 2019 offer were found not to be contractually binding. Lewison LJ reviewed the authorities on the meaning of ‘subject to contract’ and its continuing effect until expressly or impliedly withdrawn.

It was not enough that the parties appeared to have reached agreement on all terms nor even that one of the parties subjectively thought that the matter was settled. The ‘subject to contract’ umbrella prevented the emergence of a legally enforceable contract. The 19 June 2019 email had not ‘recalibrated’ the discussion by withdrawing the ‘subject to contract’ umbrella.

Michael Lower

Common intention constructive trust: when is the agreement ‘subject to contract’?

December 10, 2016

In Ely v Robson [2016] EWCA Civ 774 (CA, Eng) E and R co-habited in a property the title to which was in E’s name. When the relationship between E and R broke down, E began possession proceedings and R counterclaimed that she had a beneficial interest in the property under the terms of a common intention constructive trust. The couple met and orally agreed a relatively complex settlement under the terms of which E would hold the property for himself for life with the remainder interest belonging 80% to his children and 20% to R. There were terms governing the payment of outgoings, the right to occupy the property and the compromise of E’s claims to other properties owned by R. It was accepted that the terms of the arrangement would be reflected in a trust deed and that the precise form of the agreement was provisional since, amongst other things, the tax implications of the way in which the deal was structured would need to be considered. E did not pursue the proceedings any further given R’s acceptance of the settlement.

R claimed that the settlement was not binding on her since it was not incorporated in a signed, written agreement satisfying section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989. E argued that R was bound by the agreement on the basis of either a common intention constructive trust or proprietary estoppel.

For the purposes of the judgment, the English Court of Appeal  (Kitchin LJ giving the judgment) assumed that R, prior to the agreement, had a beneficial interest in the property under a common intention constructive trust. It reminded itself of Lord Scott’s approach in Cobbe v Yeoman’s Row to the use of proprietary estoppel in the context of agreements concerning land that did not satisfy section 2(1). Lord Kitchin also referred to the passage of Arden LJ’s judgment in Herbert v Doyle concerning such agreements. There is no common intention constructive trust where:

  1. a formal written agreement is anticipated; or
  2. further terms remain to be agreed so that the interest in property to be acquired is not clearly identified; or
  3. the parties did not expect their agreement to be immediately binding.

In these situations, if the agreement is incomplete, the parties cannot rely on constructive trust or proprietary estoppel (Herbert v Doyle, Arden LJ [57]).

The Court of Appeal rejected R’s contention that these requirements were not satisfied in the present case:

  1. although a formal written agreement was contemplated, nothing was said or written that precluded the possibility that a binding compromise had been agreed in the meeting between the parties (‘This was not a commercial transaction.’); and
  2. there were no terms still to be agreed; and
  3. the terms were sufficiently clear to constitute a binding agreement.

E relied on the agreement to his detriment by: not pursuing the possession proceedings; abandoning his claims to R’s other properties; and allowing R to remain in possession. Consequently, E held the property on constructive trust in accordance with the terms that had been agreed.

Michael Lower

Agreement ‘subject to a proper contract’

December 12, 2012

In Chillingworth v Esche ([1924] 1 Ch. 97, CA (Eng)) S agreed to sell his land to P. The parties signed a written document recording the agreed terms. This document said that the agreement was ‘subject to a proper contract to be prepared by the vendor’s solicitors’. P paid a deposit. The terms of the anticipated formal agreement were settled but P then informed S that he did not intend to proceed. He sought the return of the deposit.

The English Court of Appeal held that it was always a matter of construction whether the parties intended to be contractually bound. In this case, making the agreement ‘subject to a proper contract’ expressed an intention not to be contractually bound. There was nothing to indicate an agreement that S could retain the deposit even though the transaction had fallen through and he had to return it. The Court of Appeal spoke in terms of a conditional contract: the phrase used showed that the parties saw entering into the ‘proper contract’ as a condition precedent to the formation of the contract.

This case seems to mark the emergence of ‘subject to contract’ as a phrase with a definite legal significance:

‘To my mind the words “subject to contract” or “subject to formal contract” have by this time acquired a definite ascertained legal meaning – not quite so definite a meaning perhaps as such expressions as f.o.b. or c.i.f. in mercantile transactions, but approaching that degree of definiteness. The phrase is a perfectly familiar one in the mouths of estate agents and other persons accustomed to deal with land; and I can quite understand a solicitor saying to a client about to negotiate for the sale of his land: “Be sure that to protect yourself you introduce into any preliminary contract you may think of making the words ‘subject to contract.'” (Sargant LJ at 114).

‘Subject to contract’ does not apply where it is ‘meaningless in the context’

December 4, 2012

In Michael Richards Properties Ltd v Corporation of Wardens of St Saviour’s Parish, Southwark ([1975] 3 All ER 416) S offered property for sale by tender. The conditions of sale required interested parties to submit a tender form. Once S had chosen a bidder, the contract would be formed and the winner would be informed. P was the successful bidder. By mistake, the letter notifying it of this fact was marked ‘subject to contract’. P sent a cheque for the 10% deposit to S but later sought to resile and demanded the return of the deposit. S served notice to complete which was not complied with. S treated this as a repudiatory breach and re-sold for a lower price. P claimed the return of the deposit on the basis that there was no contract and S counterclaimed for damages.

S could have pleaded that the contract had already been formed by the time ‘subject to contract’ was introduced but failed to do so. Instead, it successfully pleaded that the words ‘subject to contract’ had no effect because they were ‘meaningless in the context’ (Nicolene Ltd v Simmonds). Goff J agreed that this was so:

‘This was a sale by tender. Nothing remained to be negotiated, there was no need or scope for any further formal contract, and it is difficult to see how it would be drawn. Nobody ever thought there was. The vendors did not submit a draft contract, nor were they asked to do so, and the matter proceeded with the steps necessary not to negotiate or finalise a contract, or even put it into further form or shape, but with the steps required for completion. In the context of a tender document which sets out all the terms of the contract, and which is required to be annexed to the tender offer, it seems to me that the words ‘subject to contract’ in the acceptance are meaningless, and that I ought to apply the principle of Nicolene Ltd v Simmonds.’ (at 424)

Goff J stressed that this was not intended to impede the normal operation of ‘subject to contract’ and that the decision rested on the unusual facts of the case.

“Subject to contract” and proprietary estoppel

December 3, 2012

In Secretary of State for Transport v Christos ([2003] EWCA Civ 1073, CA (Eng)) the Secretary of State for Transport proposed to acquire property owned by Mr and Mrs Christos in connection with the construction of the Channel Tunnel Rail Link. The negotiations were “subject to contract” from the outset. A price of GBP500,000 had been agreed in the course of these negotations. Mr and Mrs Christos became concerned, after several months, that the Secretary of State was trying to renegotiate the price. On 26 October 1999, the Secretary of State’s representative wrote to say that their valuers had no instructions to renegotiate. A few days later there was a meeting in which, so Mr and Mrs Christos contended, representations were made that the price would be GBP500,000 (less a small discount to reflect a defect in title that had been identified). The solicitors acting for Mr and Mrs Christos informed the Secretary of State’s representatives that they would imminently be exchanging contracts to buy a new property and would be relying on the compensation to pay part of the purchase price.

The question was whether the Secretary of State was now bound to pay the GBP500,000 that had been agreed. It was held that there was no contract because the negotiations had all been “subject to contract”. Nor was there an estoppel (alleged to be based on the letter of 26 October and the subsequent meeting) to prevent the Secretary of State from relying on a valuation to show that the market value of the property was less than GBP500,000. Attorney-General of Hong Kong v Humphreys Estate (Queen’s Gardens) was applied and Salvation Army Trustee Co Ltd v West Yorkshire Metropolitan CC was distinguished ([45]).

Was an agreement for lease binding?

September 14, 2012

In Tang Wai Man v Fotosky Investment Ltd ([2006] HKEC 2358, CFI) F owned the basement of a commercial building. It sent T a letter of agreement containing the terms of a proposed letting of the basement to T for use for the parking of motor vehicles (not headed ‘subject to contract’ but providing for a later formal tenancy agreement). When T then advertised for customers for the car park, F argued that the agreement was that the basement was to be used as a vehicle showroom and not for parking vehicles. F ran a vehicle parking business on other basement floors of the same building and T’s rates undercut its rates. F argued that T’s agent had misrepresented the use to which the property would be put, that in any event there was no binding agreement or (if there was) T’s use amounted to a repudiatory breach which F had accepted.

F succeeded. Although a preliminary agreement could be binding (even if a later formal agreement was envisaged) this was not the parties’ intention in this case ([69]). If there was an agreement then, despite the wording of the agreement, the parties’ shared intention was that the property was only to be used as a showroom ([62]). F had accepted a repudiatory breach.  of this term. The agreement did not properly identify the intended tenant ([72]). Although the agreement was not subject to contract, the phrase had been used by T’s agent at the outset and never been expunged ([76]). Alternatively, if there were an agreement, it had been induced by a misrepresentation ([81]).

Provisional sale and purchase agreement: binding if that was the parties’ intention

July 19, 2012

In Lam Tam Yi v Chak Wai Man ([1993] 1 HKC 537) the parties had entered into a provisional sale and purchase agreement in respect of a flat. The parties’ respective solicitors then exchanged subject to contract correspondence in respect of the anticipated formal agreement. Then the seller backed out claiming either that there was no enforceable contract or that it had been rescinded by the later subject to contract correspondence. These arguments failed. The provisional agreement was sufficiently detailed and evinced an intention to be bound. This was not rescinded by the later correspondence. Specific performance and damages were awarded to the buyers. The damages were not to be calculated by simply taking the liquidated damages sum from the provisional agreement. This covered a different event, non-performance, rather than late performance.

‘Subject to contract’ and the Pallant v Morgan equity

February 2, 2012

In London & Regional Investments Ltd v TBI plc ([2002] EWCA Civ 355, CA (Eng)) L bought TBI’s property portfolio by way of a share sale and purchase. The sale agreement included a clause to the effect that, after completion, the parties would use their reasonable endeavours to agree the terms of a joint venture for the development of land at two airports (one site was owned by TBI and TBI had an option concerning the other site). The outline terms of the proposed joint venture were set out in a note attached to the share sale agreement. The note was headed ‘subject to contract’. L & R claimed that this note reflected an earlier understanding between the parties and that it paid more for the shares than it would otherwise have done because of its expected profit from the joint venture. It claimed that the joint venture was integral to the entire deal and that only lack of time had prevented the completion of a formal binding joint venture. Summary judgment was given for TBI at first instance and the English Court of Appeal concurred: even if one accepted L & R’s version of events, its claim must fail.

L & R sought to invoke the Pallant v Morgan equity but the fact that the agreed note of the joint venture terms in the share sale agreement was headed subject to contract was fatal. It showed that there was no underlying agreement to share the relevant sites through the joint venture:

‘L & R seeks to invoke equity not to counter unconscionable conduct by one party which would defeat the informal understanding of both parties, but to reverse the effect of the express agreement they have made and replace it with state of affairs (sic) (joint ownership of the land with no joint development) which was never contemplated.’ (per Mummery LJ at para. 48).

Proprietary estoppel and rent free periods

December 21, 2011

In Edwin Shirley Productions Ltd v Workspace Management Ltd ([2001] 2 EGLR 16) E occupied several parts of  property owned by W under a combination of leases and licence agreements. W re-entered the property as a result of E’s failure to pay rent and licence fees over a long period. E argued that W had agreed to grant it lengthy rent-free periods to compensate it for the cost incurred by E in upgrading the property. It argued that the understanding was that the rent / fees were permanently waived and that W knew that E had relied on the assurances as to the rent holiday when making its investment in the property. E invoked proprietary estoppel and constructive trust. E failed. The relevant promises, if they had been given at all, occurred in subject to contract negotiations. They were not, therefore, to be relied on for the purposes of estoppel or constructive trust. In any event, the arrears were in respect of a much longer period than that covered by the alleged rent holiday agreement. Lawrence Collins J suggests that invoking these equitable principles is especially difficult in the commercial context (at para. 48).

Proprietary estoppel and subject to contract: proposed lease of a farm

December 19, 2011

In James v Evans ([2000] 3 EGLR 1, CA (Eng)) H and E had agreed in principle for the grant by H to E of a lease of a farm. The discussions were ‘subject to contract’ and, in any event, section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 required the contract to be in writing. H had allowed E into possession of the farm pending completion of the lease. The negotiations failed and H’s estate sought to recover possession of the farm (H had died in the meantime). E argued that because he had gone into possession and worked on the farm, H was estopped from recovering possession. The English Court of Appeal found that there was no estoppel; this was a simple case of subject to contract negotiations that never came to fruition. Because they were subject to contract there could be no estoppel.

Wright J provided this summary of the ratio in Attorney-General of Hong Kong v Humphrey’s Estate (Queen’s Gardens) Ltd:

‘where negotiations for the sale of an interest in land were being carried on “subject to contract”, so that it was clear that the parties did not intend to be bound until the execution of the documents necessary to give legal effect to the transaction, and unless it could be shown that it was unfair or unjust or unconscionable for the vendor to refuse to proceed, no estoppel operated to prevent him from exercising his legal right to refuse to execute the document and to withdraw from the transaction.’ (per Wright J at 3)

There is an explanation of the fact that a solicitor generally lacks implied authority to bind his client to a contract.