There are often many elements to commercial property negotiations, some formal, others informal, discussions that take place between agents, or solicitors, and others that can take place between the parties themselves. It is essential however to ensure that all key elements of an agreement are adequately recorded in the documentation that implements the agreement, to ensure that the obligations and undertakings of the parties are properly binding on them. This issue is highlighted in the recent English case of Business Environment Bow Lane Ltd v Deanwater Estates Ltd, which concerned whether a concession to the terms of a lease, which was agreed before the lease was finalised, amounted to a collateral contract on which the tenant, Deanwater Estates Ltd, could rely.

Negotiating a new lease

Deanwater Estates Ltd were the tenants of the basement, ground and four upper floors of Bow Lane/73 Watling Street London under a 25 year lease, commencing April 1980. Between October 2001 and January 2002, Deanwater entered into negotiations with their landlord, Lionbrook, to surrender their existing lease and enter into a shorter lease of part only of the property.

The heads of terms for the new lease included a provision that the repair obligation was internal only and that "at the end or sooner determination of the term there will be no liability for dilapidations or reinstatement." However, the draft lease that was issued to Deanwater's solicitor did not limit their liability for repair nor did it exclude liability for dilapidations at the end of the term.

The process of limiting Deanwater's liability for both repair of the property and terminal dilapidations resulted in extensive negotiations and correspondence between the parties' solicitors. During these negotiations Lionbrook's solicitor wrote a letter to Deanwater's solicitor including a statement that:

"My client has already indicated to your client that a terminal schedule of dilapidations will not be served and this should be satisfactory comfort for your client."

The draft lease still did not reflect the agreed position between the parties and Deanwater's solicitor suggested that Lionbrook issue a side letter to Deanwater at the time of completion of the lease. Lionbrook rejected this suggestion.

After further negotiations the lease was amended. The revisal was made to the clause dealing with the landlord's right to inspect for wants of repair and only prevented Lionbrook from serving a schedule of dilapidations based on an inspection during the term of the lease. This amendment contained in the final version of the lease was not sufficient of itself to clearly restrict Deanwater from liability for repair, nor to protect them against liability for dilapidations at the end of the term of the lease.

Collateral contract claimed

Three years later Deanwater excercised its break right contained in the lease. At the same time Lionbrook was negotiating the grant of a long lease with Business Environment Bow Lane Ltd and assigned its interest to the benefit of the repair covenants to Business Environmental Bow Lane Ltd. Lionbrook did not believe they had the right to serve a schedule of dilapidations on Deanwater on the exercise of the break option but in response to enquiry, suggested that Business Environment Bow Lane Ltd make their own enquiries for their own part. Business Environment Bow Lane Ltd did not make any further enquiries but subsequently served a terminal schedule of dilapidations on Deanwater who denied liability for the claim.

Business Environmental Bow Lane Ltd then raised proceedings and Deanwater claimed the existence of a collateral contract and the legal principle of promissory estoppel as a defence to the proceedings. Deanwater claimed that the letter sent during negotiations, which stated the landlord's position that a terminal schedule of dilapidations would not be served, amounted to a contract collateral to the subsequent lease.

Was there a binding collateral agreement?

When the case was heard at the High Court, Business Environmental Bow Lane Ltd's claim was dismissed, on the basis that the statement on behalf of the landlord amounted to a statement of comfort, and it was not intended that the final version of the lease would override this statement, which had been exchanged between the parties before the lease agreement had been finalised. The Court did not consider the defence put forward by Deanwater, that a collateral contract existed.

The High Court admitted that the facts of this case made a decision very difficult and that the decision had varied whilst considering the evidence, and therefore granted Business Environmental Bow Lane Ltd leave to appeal to the Court of Appeal.

The matter before the Court of Appeal was whether Deanwater had any defence against Business Environmental Bow Lane Ltd's claim based on the existence of a collateral contract between the parties.

The Court of Appeal re-visited the High Court's review of the earlier case of Inntrepreneur v East Crown [2002] which set out the five legal principles which were essential to having a collateral contract, namely:

  1. A pre-contractual statement will only be treated as having contractual effect if the evidence shows that the parties intended this to be the case.
  2. The test for this is an objective test.
  3. It will be harder to infer that the statement has contractual effect if it is followed by further negotiations and a written agreement that makes no reference to the statement in question.
  4. Any delay between the statement and the final contract will operate against the presumption that the parties intended the statement to be part of the final agreement.
  5. A representation of actual fact is much more likely to lead to the presumption that it was intended to have contractual effect than a statement of future fact or prediction that may or may not occur.

The reason for this approach was to consider whether Deanwater could rely on the earlier statement to add explanation to the lease provision, which was ambiguous. The Court took the view that there was not sufficient evidence of intention to include the statement as part of the contract due to the fact that further negotiations took place between the parties. In addition, the negotiations were "subject to contract" and the particular issue was not adequately documented in the final lease.

The Court also looked at the case, and in particular the matter of a collateral contract, in light of the statutory principle applicable to English property transactions, set out in section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. This states that to be binding on the parties the issue must be contained in the written contract signed by both of the parties. The Court also related this to the normal course for conveyancing transactions stating that it is usual for all the agreed terms to be contained in the contract document. The court concluded that a collateral contract did not exist between the parties. Further, the Court concluded that the principle of promissory estoppel, which had also formed part of the defence, added nothing to Deanwater's position. The Court of Appeal overturned the decision of the High Court and the appeal was allowed.

The formalities need to be observed

This case emphasises the fact that the courts will be unwilling to depart from the legislation which sets out strict formalities for contracts relating to land, namely that they should be in writing, be signed by both parties and contain all of the agreed terms. In addition, the matter of whether a collateral contract to the main contract exists will require compliance with the principles set out in Inntrepreneur v East Crown referred to above.

The reason for this is to promote certainty in commercial dealings. This is particularly necessary for conveyancing transactions to avoid future purchasers to be held liable for undisclosed arrangements agreed between previous parties.

This case also serves as a reminder to all involved in conveyancing transactions to make sure that the final agreement clearly reflects the heads of terms along with all other matters that may have been negotiated and agreed between the parties. If the parties agree to rely on informal promises of intentions, they ought to be advised of the potential pitfalls of this level of agreement.

In Scotland, it is the missives (the written contract signed and exchanged between or on behalf of the contracting parties) that deal with obligations collateral to the principle deed. The Contract (Scotland) Act 1997 provides that if a contract seems to contain all the provisions of the deal, then it is deemed to do so. A subsequent deed does not of itself supersede the unfulfilled terms of the contract constituted by missives. However, equally the missives do not rule over the content of that deed, rather they operate to deal with clauses in the contract that run alongside the deed. There are also clear legislative requirements for formality of writing in relation to property transactions.

Where, as in this case, the statement was made in negotiations but not committed to any actual written contract, it is likely that the Courts would adopt the same approach as the Court of Appeal and follow the legislative guidance. It is the case in Scotland that the general principle is that evidence from outside the written contract is mostly likely not to be admissible to prove the terms of the contract, subject to exceptions that often arise in exceptional circumstances of individual cases.

The text of the case of Business Environment Bow Lane Ltd v Deanwater Estates Ltd [2007] EWCA Civ 622 is available at:

http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWCA/Civ/2007/622.html