5 August 2011

Don’t get carried away on a subject-to-contract basis

The Message: Parties that jump the gun may well suffer the consequences

The Case: The Court of Appeal has again had to deal with a dispute between parties over an agreement that relates to considerable expenditure on land that was never properly documented (Haq v Island Homes Housing Association 20.07.11).

Mrs Haq occupied a convenience store at the bottom of a block of flats at 286 Manchester Road in east London. Her lease expired in 1998, but she exercised her right to renew for up to another 15 years at a market rent under the Landlord and Tenant Act 1954.

Her landlord then was the London Borough of Tower Hamlets. In November 2001, she negotiated terms to extend her property on to adjoining council land and premises.

She would fund the costs of the works in return for a new 60-year lease at just £5,570 a year with five-year rent reviews, but only up to 15% of the open-market rent. The 85% reduction was to allow Haq to recover her works costs over the length of the lease.

Haq’s solicitors negotiated the documentation with the council for the new lease and licence for the works during 2002, subject to contract. In July 2002, before the documentation was completed, Haq was given the keys for the adjoining premises to start the works, on which she spent more than £200,000 during the next year. She claimed her solicitors had given her the go-ahead to proceed on the basis all was agreed.

In 2005 the council sold the building to Island Homes, but the documentation had still not been completed. Island then claimed there was no enforceable agreement because the law requires any agreement that relates to an interest in land to be in writing and signed by the parties. Island claimed Haq was only entitled to a new 15-year lease at a market rent of £36,000 a year.

Under the Landlord and Tenant Act 1954, improvements carried out under the previous lease or within the last 21 years are disregarded when fixing the new rent on lease renewal. Because no new lease had been agreed by 2008, Haq faced the prospect of paying a much higher rent on her next renewal because all her improvements would be taken into account.

Haq’s case said her landlord could not argue that she was not entitled to the 60-year lease at a low rent because the council had let her proceed with the works without the documents being executed, and had waived the necessity for completion of all the usual formalities.

The judge sympathised and found in her favour. On appeal, Island argued that the parties had negotiated on a subject-to-contract basis. There was nothing to stop the landlord from backing out before the documentation was formally executed.

The release of the keys was at most an informal licence to start the works and did not involve any representation that the need for formal documentation could be dispensed with.

It was clear the landlord had not acted unconscionably. It had always proceeded on a subject-to-contract basis and had been awaiting the relevant information to complete the documentation. Haq’s solicitors would have had no basis to advise her that she could safely proceed.

The court held that Haq had not relied on the council because she commenced the works prematurely, and had committed to the building contract before finalising the new lease and licence or obtaining the keys.

The court noted that Haq had lost the chance to amortise all her costs over 60 years by not providing the relevant information. The documentation could have been completed in 2002/03 before the council sold the building to a more commercial party.

Summing up: Haq v Island Homes

  • Haq negotiated a deal to extend her store and recoup costs. It did not complete.
  • Island Homes bought the block and said it was not bound by that agreement.
  • The court said Haq had lost the chance to get back her costs.


First seen in Property Week, 5 August 2011

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