The Court of Appeal has reiterated that the term ‘subject to contract’ means that no binding contract can be formed until one is formally agreed between the parties, unless there are strong reasons for considering the restriction satisfied by the conduct of both parties.

The decision followed a dispute between a property owner and its lender.  Joanne Properties borrowed money against the security of the property it owned in London from Moneything Capital.  Joanne’s repayments fell into arrears and the lender appointed Law of Property Act (LPA) receivers to recover the debt.

The parties agreed to sell the property and once it was sold, they settled the costs of the sale and the capital advanced under the loan.  They then commenced a negotiation about a further £140,000 to cover ‘sums that may be determined to be payable to [either party] and subject to the terms of which the claim is resolved’.

The negotiations between the two parties to settle this ‘ring-fenced’ sum were stated to be ‘subject to contract’ by both parties’ solicitors.  Following several written exchanges, Joanne appointed new solicitors.  Moneything’s solicitors wrote to the new firm with a draft order, marked ‘subject to contract’, setting out terms which had not been agreed between the parties.

When Joanne’s solicitor failed to respond, Moneything’s solicitor wrote again to warn that unless the draft order was agreed within seven days, it would apply to the court for the order to be confirmed.  When Moneything’s solicitors applied to the court for the order, Joanne’s solicitor responded that 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 ruled that because the negotiations had been conducted ‘subject to contract’ there was no formal agreement until a formal contract had been executed.

James Burgoyne, Director – Claims & Technical, Brunel Professions said: “This ruling demonstrates the power of the term ‘subject to contract’ which is commonly used in property transactions and other agreements, and was a largely reassuring decision by the Court of Appeal. It is a double-edged sword however; the term is very commonly used, and parties should avoid using it where it would be out of place, and ensure that the requirement is satisfied where it has been employed previously.

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

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