Property: The importance of keeping negotiations ‘subject to contract’

Sep 28, 2018

Property lawyers will frequently advise clients to keep negotiations not only recorded in writing, but also marked as ‘subject to contract’. The recently appealed case of Generator Developments Ltd v. Lidl UK GMBH [2018] has been a major step in demonstrating the consequence of the phrase ‘subject to contract’.

The facts of the case are as follows. Generator and Lidl had a ‘subject to contract’ agreement for Lidl to acquire a site at an Industrial Estate in Brentwood. They were then expected to sell it to Generator, who were to obtain planning permission for a mixed use site and carry out the development, before granting Lidl a 999-year lease of the retail store section. When Lidl decided to pull out of the agreement and develop the site with a different developer, Generator claimed they had an equitable interest under the previous case of Pallant v. Morgan, however the courts decided otherwise.

In essence, where negotiations and documents are specified to be ‘subject to contract’ it is an established principal that any agreements reached during the negotiations shall not be binding on the parties until such time as the eventual agreement is entered into by the contracting parties.

In this case the phrase ‘subject to contract’ played a deciding role in the success of Lidl in both the original case and the appeal. In the more recent appeal, it was decided that because the proposed joint venture had been labelled ‘subject to contract’ it was clear to both Generator and Lidl that either party was within their rights to terminate the relationship, and therefore Generator was aware there was potential for Lidl to contract with another developer. The appeal judgement also focused on the arm’s length negotiations of the parties; the parties had not agreed on many key points, including the price and this was a contributory factor in the decision. It was agreed an experienced property professional would have recognised the risks of relying on a ‘subject to contract’ document.

Prior to this case, there was a history of confusing case law starting with Banner Homes Holdings Ltd v. Luff Developments Limited (No. 2). Here, there was an informal agreement between both parties to form a joint venture and develop a site. However, when Luff acquired the site without Banner and then backed out of the former agreement, the courts decision differed from that of Generator v. Lidl and ruled in Banner’s favour, concluding that a constructive trust has arisen. It was discussed that Luff had acted unconscionably by deliberately preventing Banner from bidding against them for the site by leading them to believe that they had a formal agreement. This case was partially clarified by Crossco No 4 Unlimited v. Jolan Limited, stating it was a common intention constructive trust which requires unconscionability in order to be formed. In Crossco the claim did not succeed as the courts labelled the Claimant as being careless as opposed to misled. They went on to further say they were hesitant to interfere in negotiations between two parties, when both of them were legally advised.

So how will this affect the general law on joint ventures?
It reiterates the importance of a concluded agreement in writing. The ‘subject to contract’ phrase is crucial in that it can protect a party who is still assessing all their options and is reluctant to get tied down. It demonstrates that a party is in an uncommitted negotiating phase. However, it also emphasises the importance of not becoming complacent and assuming a contract is agreed. At the very least a party should ensure they have a written agreement with their potential partner. To summarise, if parties have agreed that an arrangement is subject to contract, then those parties should also be able to exercise their right not to contract.