Legal meaning of ‘subject to contract’ confirmed by Appeal Court

property to let, london.

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Agreements which are ‘subject to contact’ are not binding until a formal contact has been agreed between the parties the Appeal Court has confirmed. The exception would be if there are strong reasons for considering the restriction satisfied by the conduct of the parties, but it has to be conduct of both of the parties.

The term ‘subject to contract’ is commonly used in property transactions and other agreements to allow the parties to negotiate terms without being formally committed to a binding agreement.

The Court of Appeal’s ruling came in a case involving a dispute between a property owner and its lender.  Moneything Capital advanced a loan to Joanne Properties, secured against a London property.  When Joanne’s repayments fell into arrears Moneything appointed a Law of Property Act (LPA) receiver to recover the debt.

The parties agreed to sell the London property to settle the capital advanced under the loan and the costs of the sale.  They also ring-fenced a further £140,000 to cover any outstanding sums owed by one side to the other. Negotiations to agree the distribution of this ring-fenced money were conducted by both parties’ solicitors on a ‘subject to contract’ basis.

Following several written exchanges between the law firms, Joanne Properties appointed new solicitors.  Moneything’s solicitors wrote to the new firm with a draft order setting out new terms which had not been agreed between the parties.  This was also marked as ‘subject to contract’.

Joanne’s solicitor failed to respond and Moneything’s solicitor warned that it would apply to the court for the order to be confirmed unless it was agreed within seven days.  The matter went to court where Joanne Properties argued there was no binding agreement as the negotiations had been conducted ‘subject to contract’.

In the lower court the judge ruled that the agreement was binding; however this decision was overturned at appeal.  The appeal judges reiterated that as the negotiations were conducted on a ‘subject to contract’ basis, there could be no legal agreement until a contract had been executed.

James Burgoyne of Brunel Professions said the ruling is helpful for property professionals as it means they can continue to undertake negotiations for their clients without the concern that an enforceable contract was being formed.  “All professionals involved in property transactions should use the term carefully to protect both themselves and their clients. However they should also take care that it is properly discharged,” he said.

Reports about the matter have been published by CMS Law-Now, Kingsley Napley and Mayer Brown

Professionalindemnity.com is owned by Brunel Professions, which is a leading professional indemnity insurance broker in the UK.  Click here to get a quote or call 0345 450 1074 to speak to a broker.

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