Managing pre-contract risks: Advice for landowners and developers

7th February 2022

Why are pre-contract issues of concern to landowners and developers?

It is widely assumed that ongoing pre-contract negotiations in the land/development context are not intended to be legally binding. However, if not correctly managed, pre-contractual discussions, negotiations or documentation can result in a contract being formed inadvertently.  That can mean that parties become contractually bound to terms, obligations, liabilities to which they might never otherwise agree.

At the outset of any development venture, landowners or developers liaise with other parties and professionals to consider options, proposals, issues and potential terms.  Myriad pre-contract discussions, enquiries and negotiations take place before any deal is agreed or formal contract documentation entered into.

It is therefore essential for landowners and developers to appreciate that a legally binding contract is formed when all of the following key elements are present: offer; acceptance; consideration (that is, money or money’s worth); certainty of terms; and intention to create legal relations [1].  As such, contracts can be made orally (face-to-face or via some communication medium such as the telephone); via an exchange of e-mails or other correspondence; or they can even arise by virtue of the parties’ conduct. Crucially (with only some limited exceptions), contracts can be formed without any written documentation or other formality whatsoever.  In the same way that a contract can be formed without any formality, so too can it be varied without any formality.

Walker Morris reported recently on the case of Brooke Homes (Bicester) v Portfolio Property Partners, which resulted in the landowner/developer being liable to pay breach of contract damages of £13.4 million to the development contractor as a result of its breach of terms contained in the heads of agreement. Whilst in that case the legally binding nature of the heads of agreement was not in dispute, a more common practice is that so-called agreed heads of terms are not intended to be binding, and that ‘agreed’ terms do not have legal force until they are enshrined in completed contract documents.  The landowner/developer will have been disappointed enough in the Brooke Homes case with the finding that it was in breach of an agreed term, but imagine the scenario where a party was found to be in breach of a term to which it never even intended to be bound!

It is to guard against this risk that landowners/developers should exercise real caution when it comes to ensuring that all pre-contract negotiations, communications and documents are genuinely subject to contract.

What practical advice arises?

• In pre-contract communications (whether written or oral) and documents, the phrase “subject to contract” can be used as a heading or label as an indication that the matter being discussed is not yet formally agreed. This phrase can be helpful to rebut the assumption of contractual intent and/or to signify that an agreement is not binding until it has been documented in a completed contract.

• Remember that the name of a document is not conclusive as to its legal status. Whilst the most common arrangement might be for heads of terms not to have legal force, merely naming a document “heads of terms” or “heads of agreement” will not ensure that it is not legally binding.

• Similarly, whilst the “subject to contract” label will definitely assist in demonstrating the intentions of the parties to not form a contractually binding agreement, it is not fool proof. If there is any dispute, the main body of the document, the surrounding circumstances of the negotiations and the objective actions of the parties will be considered and may result in the “subject to contract” protection being lost, and a binding agreement being formed.

• If it is intended that the whole of the document should be non-binding, this should be made clear. For example, parties should ensure that the “subject to contract” label or similar wording is used in the heading of the document and/or repeated on each page, to ensure that there is no doubt that the whole of the document is covered. Similarly, if it is intended that only some sections of the pre-contract document are to be legally binding, the parties should ensure that the document itself and each of its terms are clear as to which provisions are binding and which are not.

• Finally, parties should take care to ensure that their actions do not contradict the express “subject to contract” nature of the correspondence or document, as that could result in the protection it affords being lost. In the same way that a contract can be varied without any formality/by conduct, so too can a communication’s or a document’s status (i.e. whether it remains “subject to contract” or not).  A common pitfall to be aware of here is where, for example, a party commences work or otherwise begins acting in accordance with the terms of hitherto “subject to contract” pre-contract documentation or correspondence.  By that conduct the party may, inadvertently, waive the requirement for the terms to be formally consigned to a completed contract document.

How we can help

Claire Acklam advises on all aspects of housebuilder/developer issues, from both a risk management and a dispute resolution perspective. If you would like any further advice or information in relation to any of the issues covered in this or any of our earlier development contract briefings, or would like to discuss any particular site, project or any potential case or concern, please do not hesitate to contact Claire.

[1] In a commercial context there is a rebuttable presumption of an intention to create legal relations