Learning the Law: Using "Subject to Contract" appropriately
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"Subject to contract" is a term used by parties when negotiating an agreement. When the parties use the term, they are saying that they do not intend to be bound to the agreement unless and until a formal contract is made. As a result, each party reserves the right to withdraw until such time as a binding, probably written, contract is made.
When the Law of Property Miscellaneous Provisions Act 1989 came into force, it imposed strict requirements on contracts involving the sale, or any disposition of interest, of land. Specifically, section 2 implemented requirements that:
- Contracts may only be agreed in writing and must incorporate all of the terms in one document (or in each copy, where documents are exchanged.)
- The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.
As a result of the legislation, the use of "subject to contract" became largely redundant in land transaction negotiations, although it is still commonly seen on agents' sale boards. Subject to contract has continued to be used, however, in negotiations which do not involve the disposition of an interest in land. As demonstrated in a recent Court of Appeal decision, parties negotiating an arrangement need to think carefully at each stage, whether in fact they intend the negotiations to be binding or not.
Joanne Properties Ltd v Moneything Capital Ltd
In the case of Joanne Properties v Moneything Ltd , the Claimant had a loan from the Respondent, secured by a legal charge over the property. The parties fell into dispute but managed to settle by agreeing that the property would be sold, with £140,000 being ring-fenced to split between them.
The parties then conducted negotiations as to how the £140,000 was to be split. The solicitor for Moneything first introduced the “subject to contract” label in negotiations, which was communicated to Joanne Properties’ solicitor. They then put forward a formal offer on a “without prejudice save as to costs basis”. This offer was not accepted.
Joanne’s subsequent offer was headed “without prejudice and subject to contract”. There were further “subject to contract” negotiations, which resulted in an agreement over the figure which would be paid to Moneything. However, the mechanics of the payment were not agreed.
Joanne subsequently changed solicitors, after which Moneything made another offer on a ‘without prejudice and subject to contract’ basis. This was accepted by Joanne. However, Joanne then refused to sign a consent order which would incorporate the terms of the proposed settlement.
Moneything therefore applied for an order declaring the proceedings to have been settled by the email correspondence.
When the matter came before the Court of Appeal, it was held that as the "subject to contract" label was not dropped from the offer, the negotiations were only included to the same extent and that a formal contract, in this case a signed consent order, was required for the agreement to be binding.
The case is a stark reminder that for transactions not relating to land, which do not enjoy the same requirements that land contracts do under section 2, subject to contract is a label that needs to be used carefully. Once implemented, it protects the parties from accidentally reaching an agreement, and carries through the negotiations. However, it is a double-edged sword, and parties must ensure that when making an agreement that is intended to be binding, they make clear that the agreement is no longer subject to contract.