The Absolutism of “Subject to Contract”

The phrase “subject to contract” is commonly used in the property world. Indeed, it can be found on everything from heads of terms documents through to being embedded in email signatures.

The core meaning of the term is generally well understood, that there can be no agreement on the subject of the existing document or communication until it has all been reduced to a properly executed and signed contract. The Court of Appeal has recently re-affirmed the absolute nature of the “subject to contract” formula, making clear that if it is used then it is final and there really can be no agreement without a formal contract.

The most recent case involved a property development deal which involved two alleged profit share agreements that the Claimant was seeking to rely on. One of these was based on a claimed oral only agreement whereas the other had been written down in a Heads of Terms. However, the HoT was not signed and expressly stated that it was “Subject to Contract and Without Prejudice”.

In relation to the oral agreement the Court of Appeal held that this was not subject to contract but accepted the conclusions of the original trial judge that there was insufficient evidence to prove that an agreement had ever been entered into.

In relation to the HoT, the Court of Appeal agreed that there can be circumstances where the Subject to Contract formula will not apply but that they are exceptional. This case was not exceptional enough. The Heads of Terms were clear that they were Subject to Contract, they had not even been signed and while parts of the HoT had been drawn up a contract the section on profit share absolutely had not been. It was clear therefore that a binding agreement was not intended and had not been entered into on the issue of profit share.

This is a really important reminder for agents and property developers alike. A great many such deals are entered into based on exchanges of email or conversations. If an email exchange is marked as “Subject to Contract” then it is not likely to be an effective contract if it is disputed. Likewise, a Heads of Terms that is expressly marked as Subject to Contract. If a deal is based on oral conversations, then proving that a clear deal was reached and what its terms were will be difficult and the court will expect very strong evidence indeed. In practice, the best solution is to produce a full and clear contract setting out the parties’ respective rights and obligations, the fees to be paid, and when those fees will fall due. Anything else just adds more, unnecessary, risk to what might already be a risky venture!