'Without prejudice' and 'Subject to Contract'

A brief flick through of the correspondence files of many property professionals (including lawyers) reveals correspondence boldly labelled "without prejudice" or "subject to contract" or with other similar headings. Unfortunately, their almost haphazard usage suggests that many people are unsure as to their effect. LawNow's Property "Tip of the Month" looks at the most commonly used phrases and reminds us what they actually mean.

Without Prejudice

This label is shorthand for "without prejudice to the writer's position if the terms this letter proposes are not accepted by you." It is used between parties who are in disagreement and allows them to enter into genuine negotiations to esolve their dispute without prejudicing their position. If the offer is accepted, the "without prejudice" label automatically falls away and the agreement between the parties will be binding in the same way as any other contractual agreement. If the offer is not accepted, the "without prejudice" label remains and anything written in the letter will not be held against the writer - it is not admissible as evidence against the party. Remember that just because you label a letter "without prejudice" it does not necessarily mean it will be. It is the contents of the letter that is the key, in other words, does it contain an offer genuinely put forward to resolve a dispute?

You would use "without prejudice", for instance, when making an offer to settle a service charge dispute by offering a lesser sum, or in negotiating the terms of a new lease. It should not be used if you want to produce the letter in support of your case if settlement is not reached or if you are serving something that is intended to have legal effect - for instance a rent review notice or a break notice.

Without Prejudice Save as to Costs

This has the same effect as the "without prejudice" offer, however, the writer reserves the right to disclose the offer to the Court (or arbitrator or expert) when dealing with the issue of costs following the formal resolution of a dispute even if that particular offer is not accepted. This type of offer is traditionally used in rent reviews (the Calderbank Offer). It is becoming increasingly common in Court proceedings where the "overriding objective" of the new Civil Procedure Rules requires the parties to consider costs at all stages.

Subject to Contract

This label is used where parties do not wish to become contractually bound until formal documentation is completed. Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 has, to a certain extent, limited the need for this label on an exchange of letters because a contract for the sale or other disposition of land is void unless in writing signed by both parties. An agreement that is not for the disposition of land may have contractual force following an exchange of letters so the label should not be used "just in case" - correspondence that is intended to have legal effect, for instance a rent review notice, may be prevented from having that effect by the misuse of a "subject to contract" label.

Letters may be given other caveats such as "subject to survey" or "subject to planning permission". These supplementary labels do not deprive an agreement of its contractual effect if used alone, however, they will provide an opportunity for one party to withdraw should the condition not be satisfied.

Subject to Licence

This label will generally be effective to prevent the parties becoming contractually bound by exchange of letters alone, for instance where parties are corresponding about a licence to assign, to do alterations or to underlet. However, care should be taken to distinguish between a situation where the parties are in negotiations prior to entering into a formal legal relationship (e.g., to take the grant of a lease) and those already in a legal relationship but seeking permission pursuant to the terms of that relationship (e.g., for consent to assign or to carry out alterations). Where parties are already in a legal relationship, the effect of this label may be more limited. The Courts are prepared to find (albeit in limited circumstances) that the letter itself may give the necessary consent even if marked "subject to licence". Care should be taken not to rely on the label alone in such cases and the writer should make clear in the body of the letter that it does not give consent.

For further information please contact Caroline DeLaney +44 (0)20 7367 2329 or e-mail her on [email protected].