Subject to contract is self explanatory. It layman’s terms, it simply means no contract is yet agreed! The developer below found this out at their peril.
In my many years as a commercial solicitor, I have come across many businessmen who do a deal based on a handshake. They hate contracts and are of the opinion a handshake is as good, if not better than writing out the terms agreed upon and signing.
Part of me likes this way of business. It is old fashioned and admirable. It is how business used to be done where parties trusted each other.
Unfortunately, handshakes are not to be advised! There is a huge risk involved in undertaking any work until the terms of a contract are not only agreed but also signed. It appears that in the case below the developer has been taken advantage of by the supermarket chain who appear to have used the developer to undertake a large amount of work for them without any form of benefit to the developer.
Draft agreements that are ‘subject to contract’ are merely working documents that do little more than express a hope for the future. One property development company found that out to its cost after putting large amounts of time and effort into a £6.8 million deal but coming away without a penny.
With a supermarket chain standing behind it, the company negotiated the purchase of land with a view to a mixed retail and residential development. On completion of the sale, the chain was named as the sole purchaser. At that point, a proposed joint venture between the company and the chain, by which the former hoped to profit from the development, remained subject to contract.
The chain later pulled out of the planned joint venture and made other arrangements for the site’s development. The company, which had worked hard on negotiating the purchase and planning the project, claimed that it had been pushed out of the deal. In those circumstances, it argued that part of the equity in the land was held by the chain in trust for its benefit.
In rejecting the company’s claim, however, the court noted that the joint venture agreement had not been finalised by the time the purchase went through. The company had put no cash into the acquisition, nor had it agreed to take on any of the risk involved in the project. The chain had given no assurance that the company would definitely acquire an interest in the land and there was no agreement, or common understanding, that that would be the case.
