Is the deal closed The use of the Subject to Contract formula by etssetcf


Is the deal closed The use of the Subject to Contract formula

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									Is the deal closed? The use of the ‘Subject to
Contract’ formula

Many agents will be familiar with the phrase “Subject to Contract” or some similar
formulation as a method of accidentally making a representation to the tenant
which was not intended. This way any offer made is subject to its incorporation in
the final lease agreement. However, there some other consequences of the use of
this phrase which are not so favourable and it may not always be the best course of

First it is worth examining precisely what the Courts understand the situation to be
when the “Subject to Contract” formula is used. The Courts construe the formula
in accordance with the conveyancers understanding of the phrase. This is that a
negotiation for a conveyance of land which is expressed to be ‘subject to contract’
is not complete until there is an exchange of contracts. There is an entire set of
procedures for such exchange which are set out and agreed between solicitors. It
is this position that allows for such situations as ‘gazumping’ where the seller
suddenly pulls out of a deal because they have had a higher offer. In the case of
Salomon v Akiens, the Court of Appeal had to consider whether this formulation
should also be applied to a lease agreement. The Court was clear that there was
practically no circumstances in which a negotiation for a lease should be seen as
any different from that for a sale and therefore the ‘subject to contract’ formula
should apply equally to both.

Practical Consequences
What does this mean in practice? In the case of Longman v Viscount Chelsea the
Court made clear that this means that the “relationship does not become binding …
until there is an exchange of lease and counterpart, before which either party can
withdraw”. In other words, until both the landlord and tenant have signed the
agreement, the agreement has been executed, and the signed agreement has been
passed to the other side then either party is free to withdraw.

Ending the Formula
Of course, there are other ways in which the ‘subject to contract’ formula can be
dealt with. The parties could agree that the formula should no longer apply which
is a common device in commercial or high-value leases where the parties will enter
into an agreement to make an agreement. Alternatively, the parties can perform
an action which sets the formula to one side. The most obvious of these is
provision of the keys and the acceptance of rent and deposit payments. The
formula comes into force once either party expresses an offer or acceptance of an
offer as being ‘subject to contract’ and will remain in force even if following
correspondence does not bear the same formulation until it is specifically brought
to an end as described above.

Recovery of Expenses
The use of the formula also has implications for the recovery of costs and
expenses. Where a party expends monies on the basis of an agreement which is
subject to the formula it will be very hard to recover any monies expended on the
basis of that agreement. As the High Court made clear in Regalian Properties v
London Dockland Development Corpn each party must accept that any monies
spent are a calculated risk and there will be no recompense if no contract results.
This is not to say that agents cannot take steps to ameliorate this risk and a well-
drawn up holding deposit agreement is a great help in this regard. Despite the fact
that costs cannot be recovered in respect of actions taken under a belief that a
contract that is subject to the formula was to be entered into there is no reason
why a separate agreement taking a holding deposit from an applicant cannot be
enforced. Such an agreement would typically cover the costs of referencing,
preparing the agreement and would therefore protect the landlord from incurring
agents costs with no prospect of recovering them. Such an agreement has the
added benefit of ensuring that the agent will be paid for their time as well!

Other Formulas
There are other, more limited, formulas of a similar nature which may also be of
value. The most commonly seen of these is probably ‘subject to references’ or
some such phrase. This will have an effect similar to the ‘subject to contract’
formula but will be more limited and will effectively expire once satisfactory
references have been received or the parties make clear that they have moved
beyond that stage. By choosing to ignore them and agreeing a finalised contract,
for example. The exact point at which these more limited formulas cease to be
effective is not as certain due to the lack of Court decisions on the topic. In each
case it will have to be decided at what point it was intended that the formula
should come to an end and whether actions were taken to make it clear that it
should no longer be effective.

Practice Points
Agents should consider in every case what is best for their client. In higher value
properties where the landlord is unlikely to wish to pull out of the deal
unexpectedly it may be best to avoid use of the ‘subject to contract’ formula to
ensure that the tenant is tied into the contract as early as possible. In other
circumstances, where the landlord is uncertain of the tenant or may want to pull
out of the deal it may be wise to use the formula in order to preserve the
landlord’s position. Alternatively, it might be best to start negotiations ‘subject to
contract’ but then agree at a later stage that the deal is finalised and that the
formula should no longer apply, although this may be difficult where a deal is
moving fast. As always, agents should take great care in the representations they
make and how they are made to avoid invoking or rescinding the formula

Points to note
   • Once the Subject to Contract formula has been invoked it will stay in force
       until it is specifically rescinded or the lease or tenancy has been signed and
   • Either party can withdraw from the contract without penalty while the
       formula is in force.
   • Agents holding deposit agreements are not affected and therefore recovery
       can be made from this for expenses such as referencing etc.
   • The formula should not be used automatically in every case and should be
       tailored to the specific requirements of each letting.
   • Make sure you have a solid holding deposit agreement setting out what
       charges the tenant is liable to pay.

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