Developer — Offer to purchase site — Agreement “subject to contract” — Parties unable to agree terms — Prospective purchaser incurring expense in relation to proposed development — Whether purchaser entitled to recover loss suffered from proposed vendor — High Court holding that loss not recoverable where contract failed due to inability to agree terms — Action dismissed
LDDC were a corporation created as part of Government plans to regenerate London’s former docks. Regalian was a property developer. In 1986 LDDC owned land in Wapping, which they wished to see developed by the building of houses and flats. They sought tenders from developers on the basis that the developer would take a building lease from LDDC subject to an obligation to complete the development within a fixed time. Regalian made a bid for the site in the sum of £18.5m. This was accepted “subject to contract”. Regalian began to spend money on fees to experts for the purpose of producing detailed designs for the proposed development. Negotiations began with a view to entering into a contract, but by October 1988 no agreement had been reached. There had been a substantial fall in the residential property market and the parties could not agree terms.
Regalian brought an action for reimbursement by LDDC of disbursements amounting to £2.891m representing fees paid by Regalian to various professional firms in respect of the proposed development. Regalian accepted that it had no contractual right to recover such costs because no contract ever came into being between Regalian and LDDC. However, it claimed that where parties to a proposed contract had a mutual understanding that there would be a contract between them and one party incurred expense which benefited the other, then if the contract failed to materialise through no fault of the party who had incurred expense, that party could recover the wasted costs from the other.
Held The action was dismissed.
1. If a transaction went off because the parties were unable to agree, each party had taken a risk in incurring the expenditure which it did that the transaction might go off because of a bona fide failure to reach agreement on some point of substance in a complex transaction. But it was not right to say that that risk should be so borne when one party had taken it upon itself to change its mind about the entirety of the proposal: see Sabemo Pty Ltd v North Sydney Municipal Council [1977] 2 NSWLR 880.
2. The reason for the breakdown of negotiations between LDDC and Regalian was their inability to agree on the price. It was not because one party “unilaterally decided to abandon the project”: see Sabemo Pty Ltd v North Sydney Municipal Council [1977] 2 NSWLR 880.
3. Where, however much the parties expected a contract to materialise, both entered negotiations expressly on terms that each party was free to withdraw from the negotiations at any time, each party must be taken to know that pending the conclusion of a building contract any cost incurred by him in preparation for the intended contract would be incurred at his own risk. He would have no recompense for those costs if no contract resulted.
4. By deliberate use of the words “subject to contract” with the admitted intention that they should have their usual effect, LDCC and Regalian each accepted that in the event of no contract being entered into any resultant loss should lie where it fell.
Peter Coulson (instructed by DJ Freeman) appeared for Regalian; Philip Naughton QC and Robert Hildyard (instructed by Ashurst Morris Crisp) appeared for LDDC.
