Lidl to worry about: the Pallant v Morgan equity revisited

There has been a good deal of concern about the implications of the High Court’s decision in Generator Developments LLP v Lidl UK GmbH, partly fuelled by articles in the legal press with headlines like ‘The end of subject to contract’.

In fact, the case does no such thing. It is really just a modern restating of the principles which have applied since the decision in Pallant v Morgan [1953] Ch 43.

The Pallant v Morgan principle would, I think, be seen by the man on the Clapham omnibus as being only fair. If two parties agree to buy a specific piece of land as a joint venture, then, if one of them subsequently buys it on their own, they are deemed to be holding it on trust for both parties.

The facts

In the Lidl case, Generator Developments LLP, which was a developer, was interested in buying the site of an industrial estate in Essex for a mixed use development. Lidl was also interested in the site. Generator thought that its position would be strengthened in negotiations with the seller and the local authority if Lidl was also involved in the acquisition. There were discussions about the terms that might be agreed between Generator and Lidl which went on over some time, but ultimately the seller decided not to proceed with Generator, and Lidl acquired the site in its own name.

The draft heads of terms which had been going backwards and forwards between the parties had never been finalised and translated into a joint venture agreement. Indeed, Lidl had never regarded it as being definitely decided that it would proceed with Generator, and it had had discussions with a number of other prospective partners who were mainly larger developers.

Generator were highly indignant when it discovered that Lidl had bought the site, and tried to make a claim that there was a Pallant v Morgan trust.

When considering the case, therefore, the judge was not considering whether there was a contract, but whether the evidence supported the argument that the equity had arisen.

The parties referred back to the previous leading case on this subject, Banner Homes plc v Luff Developments Ltd [2000] Ch 372, where the point was made that the Pallant v Morgan principle tends to be invoked precisely because negotiations have failed and there is no legal enforceable agreement. In Banner, the judge said: ‘It is equity’s function, where it can, to give effect to the parties’ bargain but not to make or alter it for them.’

Specifically, the judge said that the prerequisites of the equity arising are that:

• The pre-acquisition arrangement should contemplate: (i) one of the parties taking steps to buy the property; and (ii) the other party being given some interest in the property if the first party succeeds in doing so.
• The first party should not have warned the second party that it no longer intended to honour the arrangement before it was too late for the parties to be restored to their original position.
• In reliance on the arrangement, the second party should do something that assists the first party in relation to the acquisition or adversely affects the second party’s capacity to buy the property on equal terms.

The judge therefore had to consider whether there was a sufficient pre-acquisition arrangement. He found that there was not for a number of reasons, including that no assurances were given by Lidl to Generator that Generator would definitely acquire an interest in the property if it purchased it. He said that on the facts, Generator must have been aware of the risk that Lidl would not commit itself to the joint venture.

In his conclusions, the judge said:

(1) Sometimes a draft agreement is just a draft agreement, and nothing more can be inferred from it.

(2) The court’s role is not to allow parties to pursue claims which arise from failed negotiations.

(3) Although in this case it did not apply, a memorandum headed ‘subject to contract’, but recording the terms of the agreement, could comprise evidence that a contract existed.

Comment

It was these last observations (which were probably obiter) which have caused considerable debate, but I do not think that they create any new law.

The courts have always being willing to consider all of the evidence to establish whether a contract exists, and the fact that a piece of correspondence or a document is marked ‘subject to contract’ does not prevent them looking at it or drawing conclusions from it.

The prospect is probably more of a commercial concern than a legal one, as it would obviously be unwelcome for those involved in commercial negotiations to find that they cannot put anything in writing without the risk that they might be held to be entering into a contract, and ‘subject to contract’ provides a useful commercial function in permitting discussions to take place without binding the parties inadvertently.

In the Generator case, the judge found that the parties fully understood the effect of the words ‘subject to contract’. The general consensus seems to be that marking communications ‘subject to contract’ makes it far less likely that the court will find that there is a sufficient pre-acquisition arrangement for the Pallant and Morgan equity to arise.

From a practical point of view, therefore, the only conclusion to be drawn is that it is still prudent to mark correspondence or draft heads of terms ‘subject to contract’.

Mark Hughes is a partner at Veale Wasbrough Vizards LLP.