‘Subject to
contract’ is a phrase with which all readers will be familiar. Sadly, it is a
caveat which many firms of surveyors employ with more enthusiasm than
expertise. Some of the reasons for this are clear. One is that there is a
widely held belief that the inclusion of the phrase is purely beneficial and
never harmful. Consequently, it is common practice to include it automatically
in all correspondence. The risks inherent in this ‘belt and braces’ approach
have been graphically illustrated in a number of rent-review cases where the
inclusion of ‘subject to contract’ in either a landlord’s ‘trigger’ notice or a
tenant’s counternotice has played a significant part in rendering those notices
invalid (see Shirlcar Properties Ltd v Heinitz (1983) 268 EG 362
and Sheridan v Blaircourt Investments Ltd (1984) 270 EG 1290).
There is also
a failure to realise that the law in this area is rather more complicated than
is at first apparent. This is largely because, as a matter of practice, the
professionals operating in this field have developed the habit of using the
same term, ‘subject to contract’, in two entirely different (albeit allied)
contexts. While this practice is recognised by the law, it is not
required by the law and, as we shall see, a change of phrase would at least
make the law easier to follow.
The first
situation in which ‘subject to contract’ is habitually employed is when
negotiating a contract. It is particularly appropriate in the context of sales
or leases of land, since here the normal legal procedure involves the exchange
of formal contracts followed by the conveyance. The inclusion of the phrase
‘subject to contract’, either at the outset of negotiations or when agreeing
terms, ensures that any agreement which the parties in fact reach cannot
constitute a contract: the parties are not legally bound until they have
exchanged formal contracts. That this is the general legal effect of ‘subject
to contract’ in this context was finally settled in Chillingworth v Esche
[1924] 1 Ch 97.
The
watertightness of the ‘subject to contract’ umbrella is illustrated by a line
of cases which show that once the phrase is employed it will normally continue
to operate throughout all subsequent dealings (see, for example, Cohen v
Nessdale Ltd (1982) 262 EG 437, 670). This is extremely valuable to
professional negotiators, who often have to cope with long and drawn-out
negotiations: the single use of the caveat at the outset should protect their
client throughout.
It is in
this context that we should mention a recent case which may have caused some
concern. In Alpenstow Ltd v Regalian Properties plc [1985] 1 EGLR
164, it was held that a written agreement which contained the term ‘subject to
contract’ was nevertheless a binding contract. In coming to such a conclusion
Nourse J stressed that this was an exceptional case in which it was not
appropriate that the normal meaning should be attributed to that phrase. Here
the parties had signed a professionally drafted agreement under which the
plaintiffs agreed to sell a stake in certain property, on which a planning
application was pending, in the event of planning permission materialising. In
the particular context it was held that the phrase ‘subject to contract’ was
designed not to render the whole detailed document ineffectual — as the judge
put it, ‘Why write so much so well to so small effect?’ — but to prevent the
risk that the parties would be bound by an open contract. The parties had thus
obliged themselves to be bound by a formal contract which the vendors were
compelled to submit and the purchasers to approve, subject to reasonable
amendments. This decision does little, therefore, to undermine the general
effect of ‘subject to contract’: it merely confirms that the rule is not
absolute.
The second,
and quite different, context in which ‘subject to contract’ is habitually used
is to prevent any correspondence from providing a written memorandum for the
purposes of section 40 of the Law of Property Act 1925. The decision in Tiverton
Estates Ltd v Wearwell Ltd [1975] Ch 146 is taken to have
established that, in order to constitute a sufficient memorandum, the writing
must acknowledge the existence of a contract and that this cannot be the case
where the correspondence is headed ‘subject to contract’. It is thus usual for
solicitors and estate agents, when confirming their client’s agreement to sell
property, to head their letters ‘subject to contract’ in order to avoid the
risk that they may inadvertently render any existing contract
enforceable. This use is thus very different from that already outlined; there
‘subject to contract’ was being used to prevent any contract coming into
operation at all.
It is
obvious that the traditional wording of the rubric is not at all appropriate in
this second context: phrases such as ‘contract denied’ or ‘contract not
acknowledged’, if less familiar and less elegant, would at least be more
accurate and would help to dispel the illusion that there is a single and
universal catch-phrase suitable for all occasions.
reviews: failure to repair
There is a
surprising dearth of convincing authority on the effect which a breach of a
repairing obligation may have when fixing a new rent under a rent-review
clause. Where it is the tenant who is in breach, there may, in practice, be no
legal difficulty, since many rent-review clauses contain an express provision
directing that the rent must be assessed on the assumption that the tenant has
complied with all his covenants. In such a case the valuer must clearly
disregard any lack of repair.
Where there
is no express assumption the law has been surprisingly uncertain. It is clear
that to ignore the tenant’s failure to repair would be a breach of the general
legal maxim that no man should profit from his own wrong. However, what cases
there are indicate that even within this principle there are still two possible
approaches.
First, the
rental value could be fixed in the light of the actual condition of the
property at the date of review. While this appears to give an unmerited
windfall to the tenant, it could be met by the argument that the landlord has a
right to recover compensation for the damage caused to his reversion by the
tenant’s breach, and this should equal the loss of rent on review. Such an
approach seems to be supported by the Court of Appeal decision in Fawke
v Viscount Chelsea (1979) 250 EG 855. That was a case concerning the
assessment of interim rent under section 24A of the 1954 Act in which the court
decided that it did have the power to order a differential rent in order to
take account of the landlord’s failure to repair. Although there is a clear
difference between the consequences of a landlord’s breach and that of a
tenant, the Court of Appeal stated that rent should be fixed on the basis of
the condition of the property at the date of assessment in terms which ignored
any such distinction.
The
alternative approach is that the actual state of the premises should be
disregarded in so far as it reflects a failure to repair by the tenant.
Obviously this is very much more attractive to the landlord, since he is at
least sure of obtaining his full market rent without being put to the risks and
inconvenience of suing the tenant for damages. This solution appears to be
supported by the Court of Appeal decision in Family Management v Gray
(1979) 253 EG 369. This decided that, in an application for a new tenancy under
the 1954 Act, a tenant is not entitled to claim a reduction in the rent on
account of dilapidations caused by his own failure to repair.
Neither the Fawke
nor the Family Management case concerned rent reviews and it is
therefore welcome to find that there is now a decision more directly in point.
In Harmsworth Pension Funds Trustees Ltd v Charringtons Industrial
Holdings Ltd [1985] 1 EGLR 97 Warner J was asked to decide whether, as a
matter of construction, any lack of repair by the tenant should be disregarded.
Having considered both decisions of the Court of Appeal, he decided that to
disregard the lack of repair when fixing a reviewed rent was a more
satisfactory approach, especially from the landlord’s point of view, and held
accordingly.
The position
is obviously different where it is the landlord who is in breach. In these
circumstances there is unlikely to be any express provision in the review
clause, so resort must again be had to the general legal principle that no man
should profit from his own wrong. Here the Fawke approach is obviously
appropriate: thus rent should be fixed in the light of the actual condition of
the premises at the review date. It should be noted, however, that where the
landlord does subsequently carry out repairs, he cannot obtain the benefit of
them until the next review. It was held in Clarke v Findon
Developments Ltd (1983) 270 EG 426 that, unlike in 1954 Act cases, a valuer
under a rent-review clause does not have the power to fix a differential rent.
