The Rent Review Specialist
Subject to Contract
Subject to Contract
In England and Wales, any outline terms that are agreed in principle or “heads of terms” are “subject to contract”. It is important to state that all the terms are “subject to contract” - that is not implied by default.
“Subject to contract” results in one of three possibilities: 1) the parties are immediately bound to the transaction, but they intend to restate the deal in a formalised contract that will not have a different effect; or 2) the parties have completely agreed the terms, but have made the execution of some terms in the contract conditional on the creation of a formalised contract; or 3) it is simply an agreement to agree and the transaction will not be concluded until the formalised contract has been drawn up, approved and completed.
Agreement may also be reached to subject to any other condition, such as subject to survey. or subject to mortgage, but unless the agreement is also made subject to contract, it may not be possible for either one or both parties to withdraw from the agreement after the condition is satisfied, without having to pay damages for breach.
Generally, in commercial property transactions, the conveyancing for buying and selling is “subject to contract” and any other conditions specified alongside. Under the Law of Property Act 1925 (as amended per Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989), contracts for the sale or disposal of real estate have to be in writing to be enforceable, and in some instances by deed.
Since a lease is the document, it follows a lease will automatically be in writing. A tenancy, however, may be in writing or verbal/oral. The advantage of a tenancy in writing is the existence of a documentary record of the agreement between the parties. Even when the wording of the agreement is ambiguous, the construction of the contract open to differing interpretations, it is nevertheless generally easier for the parties and others to grasp what has been agreed when the matter is in writing, rather than have to rely on memory or one party’s word over the other, as is the situation with a verbal or oral tenancy.
'Subject to contract' is generally taken to mean that an offer or transaction would not become binding until formally completed. However, it all depends on the circumstances. A binding agreement can be reached even if the negotiations leading to the agreement were conducted subject to contract.
At rent review, whether or not to use the expression 'subject to contract' depends upon the purpose of the communication.
All leases state the basis upon which the procedure is to be operated but some are very vague and others exact. It pays, in the interests of prudence, to follow the wording or guidelines in the particular lease, especially when the procedure is quite clear and, in fact, if there is a formal approach, then failure to comply with the set procedure can result in the review not being operative or the opportunity to operate it lost.
Notice, in the form of a written informal or formal letter, should be served on the tenant (or any party authorised to accept service of the notice), usually at the property or last known address, by recorded delivery in a pre-paid envelope and, depending upon the requirements of the lease, may either draw attention to the rent review provision (to be followed later by the proposal) or quote a figure.
If a figure is mentioned, it should be protected in case the tenant accepts it without query, thus giving rise to the possibility and suspicion that it may have been too low, or so as to a void it becoming binding on the landlord if circumstances change. This protection is achieved by marking the top of the letter ' subject to contract' and if the lease does not provide for a specific figure to be quoted, then it should also be marked 'without prejudice.' Marking a notice 'subject to contract' is, in itself, an invitation to negotiate.
Technically, a notice marked 'without prejudice' and/or 'subject to contract' cannot be construed as a formal notice if the lease so requires one to be issued, because the sole object of these expressions is to enable the proposer or parties to withdraw correspondence in the event of a dispute. In practice and after the proposal has been issued, all subsequent negotiations should be conducted on a 'without prejudice' basis so as to avoid commitment, prior to formal agreement.
The use of the expression 'without prejudice' is, in fact, abused because it is over-used, but it does no harm to be on the safe side and inexperienced negotiators are well advised to employ it. The date for service of the notice will also vary from lease to lease. Some indicate up to 12 months, others can be the day before the review date. In the majority of leases, once the proposal has been issued, the parties are free to negotiate. Although there is often a timetable to follow, such as a period of two or three months from issue, prior to referring the matter to 'arbitration,' it has been shown that, in most cases, it is not essential to observe these time limits.
However, there are four words which do crop up in some leases, often anywhere in the actual document - that is not necessarily in the actual review clause - which can alter this informal pattern and for the unwary, the pitfalls are substantial. The expression 'time of the essence' conjures up a degree of fear for many valuers because it means (in the majority of cases) that a) the notice must be served by a set date, failing which the right to review the re~will be lost, or b) that application for a third party determination ('arbitration') must be made by a set time, or c) that the tenant must serve a counter-notice or elect to go to 'arbitration' by a set date; otherwise the proposal will be binding. Unfortunately, life in leases is not often straightforward and there are occasions when the timing of the landlord's notice to operate the review triggers off the operation of another clause in the lease, such as an option to break, which the tenant can only enjoy if that notice is given. In such leases, the interaction between various clauses makes 'time of the essence.' The only sound advice one can issue, of a general nature, is to check a) the next review date and b) the last date for issuing the notice. If a prudent approach is adopted, both in timing and wording, then little is likely to go wrong.
Where the review procedure requires a notice or counter-notice and such notice/counter-notice is integral to the procedure, the expression 'subject to contract' should not be used in case it would invalidate the notice and procedure.
Where the procedure does not require a notice/counter-notice but is merely given as a courtesy then “Subject to contract” negotiations may be referred to in arbitration or litigation unless they are also “without prejudice.” Some negotiators habitually put both on their correspondence. It must be said that in many cases the use of such labels is inappropriate, and in such circumstances the court can disregard the labels: see for example Royal Life Insurance v Phillips (1990) .
In Maurice Investments v Lincoln Insurance Services (2006) , the judge held that a purported rent review notification labelled “Subject to Contract Without Prejudice” was not so clear that the recipient could be sure that it was a proper notice.
“Subject to contract” results in one of three possibilities: 1) the parties are immediately bound to the transaction, but they intend to restate the deal in a formalised contract that will not have a different effect; or 2) the parties have completely agreed the terms, but have made the execution of some terms in the contract conditional on the creation of a formalised contract; or 3) it is simply an agreement to agree and the transaction will not be concluded until the formalised contract has been drawn up, approved and completed.
Agreement may also be reached to subject to any other condition, such as subject to survey. or subject to mortgage, but unless the agreement is also made subject to contract, it may not be possible for either one or both parties to withdraw from the agreement after the condition is satisfied, without having to pay damages for breach.
Generally, in commercial property transactions, the conveyancing for buying and selling is “subject to contract” and any other conditions specified alongside. Under the Law of Property Act 1925 (as amended per Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989), contracts for the sale or disposal of real estate have to be in writing to be enforceable, and in some instances by deed.
Since a lease is the document, it follows a lease will automatically be in writing. A tenancy, however, may be in writing or verbal/oral. The advantage of a tenancy in writing is the existence of a documentary record of the agreement between the parties. Even when the wording of the agreement is ambiguous, the construction of the contract open to differing interpretations, it is nevertheless generally easier for the parties and others to grasp what has been agreed when the matter is in writing, rather than have to rely on memory or one party’s word over the other, as is the situation with a verbal or oral tenancy.
'Subject to contract' is generally taken to mean that an offer or transaction would not become binding until formally completed. However, it all depends on the circumstances. A binding agreement can be reached even if the negotiations leading to the agreement were conducted subject to contract.
At rent review, whether or not to use the expression 'subject to contract' depends upon the purpose of the communication.
All leases state the basis upon which the procedure is to be operated but some are very vague and others exact. It pays, in the interests of prudence, to follow the wording or guidelines in the particular lease, especially when the procedure is quite clear and, in fact, if there is a formal approach, then failure to comply with the set procedure can result in the review not being operative or the opportunity to operate it lost.
Notice, in the form of a written informal or formal letter, should be served on the tenant (or any party authorised to accept service of the notice), usually at the property or last known address, by recorded delivery in a pre-paid envelope and, depending upon the requirements of the lease, may either draw attention to the rent review provision (to be followed later by the proposal) or quote a figure.
If a figure is mentioned, it should be protected in case the tenant accepts it without query, thus giving rise to the possibility and suspicion that it may have been too low, or so as to a void it becoming binding on the landlord if circumstances change. This protection is achieved by marking the top of the letter ' subject to contract' and if the lease does not provide for a specific figure to be quoted, then it should also be marked 'without prejudice.' Marking a notice 'subject to contract' is, in itself, an invitation to negotiate.
Technically, a notice marked 'without prejudice' and/or 'subject to contract' cannot be construed as a formal notice if the lease so requires one to be issued, because the sole object of these expressions is to enable the proposer or parties to withdraw correspondence in the event of a dispute. In practice and after the proposal has been issued, all subsequent negotiations should be conducted on a 'without prejudice' basis so as to avoid commitment, prior to formal agreement.
The use of the expression 'without prejudice' is, in fact, abused because it is over-used, but it does no harm to be on the safe side and inexperienced negotiators are well advised to employ it. The date for service of the notice will also vary from lease to lease. Some indicate up to 12 months, others can be the day before the review date. In the majority of leases, once the proposal has been issued, the parties are free to negotiate. Although there is often a timetable to follow, such as a period of two or three months from issue, prior to referring the matter to 'arbitration,' it has been shown that, in most cases, it is not essential to observe these time limits.
However, there are four words which do crop up in some leases, often anywhere in the actual document - that is not necessarily in the actual review clause - which can alter this informal pattern and for the unwary, the pitfalls are substantial. The expression 'time of the essence' conjures up a degree of fear for many valuers because it means (in the majority of cases) that a) the notice must be served by a set date, failing which the right to review the re~will be lost, or b) that application for a third party determination ('arbitration') must be made by a set time, or c) that the tenant must serve a counter-notice or elect to go to 'arbitration' by a set date; otherwise the proposal will be binding. Unfortunately, life in leases is not often straightforward and there are occasions when the timing of the landlord's notice to operate the review triggers off the operation of another clause in the lease, such as an option to break, which the tenant can only enjoy if that notice is given. In such leases, the interaction between various clauses makes 'time of the essence.' The only sound advice one can issue, of a general nature, is to check a) the next review date and b) the last date for issuing the notice. If a prudent approach is adopted, both in timing and wording, then little is likely to go wrong.
Where the review procedure requires a notice or counter-notice and such notice/counter-notice is integral to the procedure, the expression 'subject to contract' should not be used in case it would invalidate the notice and procedure.
Where the procedure does not require a notice/counter-notice but is merely given as a courtesy then “Subject to contract” negotiations may be referred to in arbitration or litigation unless they are also “without prejudice.” Some negotiators habitually put both on their correspondence. It must be said that in many cases the use of such labels is inappropriate, and in such circumstances the court can disregard the labels: see for example Royal Life Insurance v Phillips (1990) .
In Maurice Investments v Lincoln Insurance Services (2006) , the judge held that a purported rent review notification labelled “Subject to Contract Without Prejudice” was not so clear that the recipient could be sure that it was a proper notice.
Point of Law
In Shirlcar Properties Ltd v Heinitz & Another [1982], the Court stated stated that use of the expression ' subject to contract' did not constitute effective notice to set a rent review procedure in motion when formal notice had to be given. Use of the expression 'without prejudice' is widely misunderstood and so it comes as no real surprise to find that many surveyors are unable to grasp the effect of such wording when concluding rent review negotiations.
An offer made 'without prejudice' is binding if acceptance of the offer is made. By adding the words ' subject to contract,' however, the presumption that the parties intend to create legal relations may be expressly negatived. From Rose & Frank v ] R Crompton Ltd [1923], "the words of the preliminary agreement in other respects may be apt and sufficient to constitute an open contract, but if the parties in so agreeing make it plain that they do not intend to be bound except by some subsequent document, they remain unbound though no further negotiation be contemplated. Either side is free to abandon the agreement and to refuse to assent to any legal obligation .... "
When concluding negotiations, it is common for valuers to head the correspondence 'without prejudice' (and/or) 'subject to contract.' In such cases, the concluded rental will be subject to the valuer's recommendation of acceptance. This reservation in itself is sufficient evidence that no formal agreement has been reached, even if the recommendation refers to the need for 'Board approval' reckoned to be a formality. Until an offer is made without reservation, it is not agreed and some valuers and parties feel that withdrawal from the 'conclusion' is tantamount to unethical or unprofessional behaviour against the spirit of negotiation. Such opinion is, of course, the prerogative of the aggrieved party but it does not affect the legal position and, whereas such practice may conflict with expectations, valuers must recognise that the law applies as much to the interpretation of rent review covenants as it does to negotiations.
An offer made 'without prejudice' is binding if acceptance of the offer is made. By adding the words ' subject to contract,' however, the presumption that the parties intend to create legal relations may be expressly negatived. From Rose & Frank v ] R Crompton Ltd [1923], "the words of the preliminary agreement in other respects may be apt and sufficient to constitute an open contract, but if the parties in so agreeing make it plain that they do not intend to be bound except by some subsequent document, they remain unbound though no further negotiation be contemplated. Either side is free to abandon the agreement and to refuse to assent to any legal obligation .... "
When concluding negotiations, it is common for valuers to head the correspondence 'without prejudice' (and/or) 'subject to contract.' In such cases, the concluded rental will be subject to the valuer's recommendation of acceptance. This reservation in itself is sufficient evidence that no formal agreement has been reached, even if the recommendation refers to the need for 'Board approval' reckoned to be a formality. Until an offer is made without reservation, it is not agreed and some valuers and parties feel that withdrawal from the 'conclusion' is tantamount to unethical or unprofessional behaviour against the spirit of negotiation. Such opinion is, of course, the prerogative of the aggrieved party but it does not affect the legal position and, whereas such practice may conflict with expectations, valuers must recognise that the law applies as much to the interpretation of rent review covenants as it does to negotiations.