Many people believe that having some concrete discussions about a business venture, and then referring to the understandings resulting from those discussions as an agreement “subject to contract”, will protect them going forward. Some think they’ll simply wait until the deal goes through to hire a lawyer to draft a proper agreement. However, draft agreements that are “subject to contract” are merely working documents that do little more than express a hope for the future. Recently, a property development company found that out to its cost after putting large amounts of time and effort into a £6.8million deal, but coming away without a penny.
With a supermarket chain standing behind it, the property company negotiated the purchase of land with a view to a mixed retail and residential development. On completion of the sale, the supermarket chain was named as the sole purchaser. At that point, a proposed joint venture between the property company and the supermarket chain, by which the former hoped to profit from the development, remained “subject to contract”, and nothing concrete about the proposal was actually signed off in writing.
The supermarket chain later pulled out of the planned joint venture and made other arrangements for the site’s development. The property 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 supermarket chain in trust for its benefit.
In rejecting the property company’s claim, however, the court noted that the joint venture agreement had not been finalised by the time the purchase went through. The property company had put no cash into the acquisition, nor had it agreed to take on any of the risk involved in the project. Also, the supermarket chain had given no assurance that the property company would definitely acquire an interest in the land and there was no agreement, or common understanding, that that would be the case.
The lesson here is that you should never wait until the last minute to ensure a plan you’ve invested in is formalised in a written agreement. If you’re in the process of planning a joint venture, or are even contemplating one, please contact Woodfines’ Company Commercial team on CommercialDept@woodfines.co.uk for initial advice.