“Without Prejudice” and “Subject to Contract” are labels commonly used in the context of negotiations. This article will give an overview of their meaning and applicability to commercial property transactions.
Without Prejudice
Without prejudice is a rule of privilege applicable to communications the purpose of which is a genuine attempt to settle a dispute. If it applies, the relevant communication or statement made is not admissible in court.
The rationale for the existence of this rule is one of public policy – to assist the settlement of disputes out of court, as parties are more likely to settle when able to communicate openly, without fear of admissions or statements against their interest being used against them in future litigation.
It is worth distinguishing the phrase “without prejudice save as to costs”. If the rule applies, communications with this label will render the statement admissible on questions of costs, but not as part of the substantive dispute.
The key criteria for the rule to apply are:
- the existence of a dispute at the time of the communication; and
- that the communication was a genuine attempt to settle such dispute.
As to whether there is a dispute at the relevant time, this will be decided on a case by case basis, however the courts have said in this context that “The concept of dispute is given a wide scope so that an opening shot of negotiations may fall within the policy even though the other party has not rejected the offer” – see Avonwick Holdings Limited v Webinvest & Anor, [2014] EWCA Civ 1436, paragraph 17.
Therefore, labelling correspondence as “without prejudice” at an early stage where it becomes apparent that the circumstances could lead to a potential dispute may protect a party’s position, where matters later evolve into litigation.
On this note, labelling correspondence as “without prejudice” is not determinative as to its treatment, as the courts will look at substance over form as to whether such correspondence is a genuine attempt at settlement. Such a label, however, assists the court in determining the intentions of the author, so is certainly advisable where litigation is a possibility.
With this in mind, some situations arising in routine commercial property transactions where it may be helpful to label correspondence (whether sent by lawyers, agents or the party itself) as without prejudice include:
- negotiating applications for landlord consent to assign, where perhaps a landlord is attempting to impose unreasonable conditions on its consent;
- negotiations in respect of 1954 Act renewals, including applications for extensions of time in respect of the same;
- negotiating dilapidations settlements following the expiry of a lease; or
- negotiations in respect of arrears settlements.
The recent case of Octagon Overseas Ltd and others v Circus Apartments Ltd [2022] UKUT 302 (LC) in the Upper Tribunal (Lands Chamber) gives an example of where the without prejudice rule has been upheld in the context of a property dispute. The dispute relates to a management order made in 2016, in respect of the leasehold flat buildings at the Canary Riverside Estate, a mixed-use residential and commercial development at Canary Wharf, comprising 325 apartments in four towers, together with a hotel, various restaurants, a cafe and a health club.
Circus Apartments Ltd (“CAL”) is a long-leaseholder of apartments in one of the buildings on the estate and had been identified in the management order as one of the “commercial tenants”. In March 2021, CAL applied under the Landlord and Tenant Act 1987 (“1987 Act”) to vary the management order to remove reference to itself as a “commercial tenant”, as CAL believed that being so described could prejudice its interests for certain parts of the 1987 Act.
In response, the landlord filed a witness statement referencing a text message sent in 2016 by a director of CAL, arguing that this text message suggested CAL’s interest in the management order related to its aim to enhance its investment in the estate, rather than any concern with the quality of management of the estate. This meant the text message was relevant to the decision to renew the management order, given the purpose of Part II of the 1987 Act to protect residential leaseholders’ interests (as opposed to promoting the interests of property managers). CAL sought to strike out this part of the witness statement, on the grounds that without prejudice privilege applied to the text message.
The text message actually related to a previous dispute between CAL and the landlord. CAL had requested consent to vary its underlease to construct additional floors in its building, and also to assign or underlet its lease to a newly incorporated company. The landlord was withholding its consent to the request to assign or underlet, which CAL considered unreasonable. The content of the text was a proposal from CAL to send the landlord the deed of variation requested and to pay £1 million if agreed, or alternatively CAL would issue proceedings for the delay in consent to the underletting or assignment, and also “throw [their] full support behind the neighbours” in their application for the original management order.
A key argument from the landlord for the text message to be admissible in the subsequent proceedings was that it related to different proceedings to those in which it was later put before court. This argument was rejected by the judge (albeit it is worth noting that the judge considered that the disputes could be connected). The court was satisfied that, despite not being explicitly labelled as “without prejudice”, as the text message referred to a genuine offer of settlement to a dispute, the without prejudice rule applied and the message was not admissible.
Subject to contract
This label is frequently used by solicitors and agents to indicate that an agreement made over email or wording accepted in a draft document is not binding until such time as formally documented. The Court of Appeal has recently confirmed the use of such phrase in Joanne Properties Ltd v Moneything Capital Ltd [2020] EWCA Civ 1541, citing a number of previous cases in which the term had been considered, including the following passage from the judgement in Generator Developments Ltd v Lidl UK GmbH [2018] EWCA Civ 396:
“The meaning of that phrase is well-known. What it means is that (a) neither party intends to be bound either in law or in equity unless and until a formal contract is made; and (b) that each party reserves the right to withdraw until such time as a binding contract is made.”
Particular care is still required, however, in the context of licences for consent. The case of Aubergine Enterprises v Lakewood International [2002] EWCA Civ 177 makes it clear that a landlord’s solicitor or agent must be careful to avoid inadvertently granting consent to alterations, assignments or underlettings, where the landlord’s consent was deemed given despite some communications being headed “subject to licence”. Before corresponding with another party on a licence, the precise terms of the lease should be checked to ensure that they stipulate that landlord’s consent must be given by deed (as opposed to simply being “in writing”) and any party should be careful to clarify in all correspondence that consent is not being given by virtue of the issue of a draft licence.
Key points
- The without prejudice rule renders communications made in a genuine attempt to settle a dispute inadmissible in court proceedings.
- Whether or not such communications are labelled as “without prejudice” does not conclusively determine whether the rule will apply but assists the court in determining the intentions of the parties.
- The rule has application in a variety of contexts within commercial property transactions, including in the recent case example of Octagon Overseas Ltd and others v Circus Apartments Ltd [2022] UKUT 302 (LC).
- Labelling communications as “subject to contract” clarifies the intention of the parties that any agreements are not binding until such time as they are formally documented, however property solicitors should still take further care in the context of licences for consent to ensure that consent is not inadvertently given by written communications, even where headed subject to licence.