When a ‘subject to contract’ deal is no deal at all

Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 imposes strict formalities on contracts for the disposition of interests in land. They must be in writing and must be signed by or on behalf of the parties. Implied, resulting and constructive trusts are not affected: section 2(5). Therefore, if the requirements would cause injustice, it may be possible to rely on Pallant v Morgan [1953] Ch 43. A “Pallant equity” arises where parties agree informally that one of them will acquire property for the purposes of a joint venture. If, in reliance on that agreement, the other refrains from attempting to acquire the property and it would be unconscionable for the buyer to treat it as his own, the court may decide that the buyer holds the property on constructive trust for them both. Key points Commercial entities that enter into joint venture negotiations do so at their own risk The law of equity will not rescue them if “good faith” but “subject to contract” negotiations break down The question that arose in Generator Developments LLP v Lidl UK GmbH [2018] EWCA Civ 396; [2018] PLSCS 46 was: had a Pallant equity arisen where parties had been negotiating a joint venture in respect of land in Essex worth £6.81m? The parties had agreed the basics. Lidl would buy the site and, if Generator obtained planning permission, would sell the freehold to the developer. Generator would then build a mixed-use development and grant Lidl a 999-year lease of a new retail store. Informal agreement The negotiations were “subject to contract” and the transaction required the approval of both boards. Generator also knew that there was a risk that Lidl might choose another developer. Even so, it spent £30,000 on legal and design costs, and its previous development experience and relationship with the seller contributed to Lidl’s successful bid for the land. Unfortunately, Generator and Lidl had yet to agree important points when Lidl exchanged contracts to buy the site (for example, what price Generator would pay for the land; whether overage was payable; and what would happen to the land if planning permission could not be obtained), and Lidl terminated its negotiations with Generator shortly afterwards. The High Court dismissed Generator’s claim to a Pallant equity. The judge noted that Banner Homes Holdings Ltd v Luff Developments Ltd [2000] Ch 372 suggests that an understanding need not be contractually enforceable for Pallant to apply. In addition, it does not matter that a pre-acquisition arrangement is too uncertain to be enforced as a contract, or was not intended to have contractual effect. Consequently, the judge took the view the parties’ “subject to contract” label would not have been an obstacle, had the equity arisen. However, the judge was not satisfied Lidl had assured Generator it would acquire an interest in the site, if Lidl was to buy it. Equitable intervention The Court of Appeal dismissed the claim for different reasons. It questioned whether the equity can arise if an agreement was not intended to have contractual effect. London & Regional Investments Ltd v TBI plc [2002] EWCA Civ 355 and Cobbe v Yeoman’s Row Management Ltd [2008] UKHL 55; [2008] 3 EGLR 31 confirm that it is not unconscionable for parties to “subject to contract” discussions to withdraw from them. So it was hard to see how the proposition in Banner can survive, at least in the context of arms’ length “subject to contract” commercial negotiations. The court agreed with the dissenting judgment of Etherton LJ in Crossco No 4 Unlimited and others v Jolan Ltd and others [2011] EWCA Civ 1619; [2012] 1 EGLR 137, whose preferred explanation for the existence of Pallant equities was that they are a response to breaches of fiduciary duties. Nonetheless, it accepted that it must decide the case by reference to the law on constructive trusts. Lewison LJ, who delivered the judgment, explained that the court should be very slow to introduce uncertainty into commercial transactions by over-ready use of equitable concepts in cases where parties know that commitments will be legally unenforceable. Therefore, neither party should be able to rely on a constructive trust to enforce an informal agreement if they intend to enter into a formal agreement later, or the property interest is not clearly identified because terms remain to be agreed, or they do not expect their agreement to be binding. No contract at all Both businesses were legally advised. Neither expected the other to be legally bound and each ran the commercial risk that the other might back out. Their negotiations were “subject to contract” and it was impossible to distinguish between an understanding that there would be “a” joint venture in relation to the land, which was not “subject to contract”, and the detailed terms of such a venture, which were. The parties had not agreed terms and did not share a common intention. Furthermore, Generator knew that it was dealing with individuals who were not decision-makers.  And, in order to invoke a Pallant equity, the agreement or understanding in question must have been confirmed by someone capable of binding the party in question (or who, at least, has ostensible authority to do so). Finally, Lidl had not acted as Generator’s agent when it bought the property and did not owe any fiduciary duties to Generator. Indeed, the consequence of “an express non-agreement” is that fiduciary duties will not arise. Freedom of contract means that parties can contract with each other on their own terms. Equally, they must be free not to contract with each other at all because, to paraphrase Arden LJ in Crossco, it would inhibit commercial negotiations if the law were to allow claims when discussions do not result in legally enforceable contracts. Allyson Colby is a property law consultant