Property law: Heading for trouble?

The correspondence files of many property professionals — including lawyers — reveals letters boldly labelled 'without prejudice' or 'subject to contract', or similar headings. Unfortunately, many people are unsure about what the effect of these labels is. So what do these terms really 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 by parties in dispute and allows them to enter into genuine negotiations to resolve their differences, knowing that anything they say may not be used against them.

If one side makes an offer that is accepted by the other party, the 'without prejudice' label falls away. The agreement between the parties will be binding in the same way as any other contractual agreement. If the offer is rejected, the label remains and anything written in the letter is not admissible as evidence against the offering party.

Just because you label a letter 'without prejudice' does not necessarily mean it will be accepted as so. The contents of the letter are the key here. It must be an offer genuinely put forward to resolve a dispute. You would use the label 'without prejudice' when making an offer to settle, say, a service-charge dispute or a dilapidation claim.

It is used, for example, in correspondence on behalf of a tenant in which £20,000 is offered as full and final settlement of a £30,000 dilapidation claim by its landlord. If the landlord accepts, the label 'without prejudice' falls away and you will have a binding agreement.

The label should not be used if you want to produce the letter in court to support your case if settlement is not reached. You should make an 'open offer'for this. Neither should the label be used if you are serving something that is intended to have immediate legal effect, such as a rent review notice or a break notice.

Conversely, it should not be used if you do not wish to be bound by the offer if it is accepted — for instance, where you need board approval. Here the letter should make clear that the offer is couched in conditional terms, so it is not capable of acceptance.

Without prejudice except as to costs
This has the same effect as 'without prejudice', but if the offer is not accepted the writer reserves the right to disclose it to the court, arbitrator or expert, when dealing with costs following the formal resolution of the dispute.

This offer has traditionally been used in rent review arbitrations and is known as a Calderbank Offer. It is a dispute resolution mechanism whereby one party proposes to the other the rent it believes will be achieved on review.

The existence and contents of the offer remain unknown to the arbitrator until the end of the hearing, when costs are considered. Generally, the arbitrator is likely to reward the party making the better offer with a favourable costs award.

The Calderbank Offer has been formalised in litigation and is often referred to as a Part 36 Offer — named after Part 36 of the Civil Procedure Rules. Its use is becoming increasingly common in court proceedings where the 'overriding objective' of the Civil Procedure Rules requires the parties to consider settlement and costs at all stages.

Broadly speaking, if an offer is made and not accepted within 21 days of the commencement of proceedings and it is not 'beaten' at trial, the party making the offer will get its costs paid from the expiry of the 21-day period onwards. It is a useful tool to concentrate the other party's mind on settlement, as a failure to settle on reasonable terms will be penalised in costs.

In lease-renewal proceedings, a hybrid Part 36/Calderbank Offer can be used by both the landlord and the tenant to put the terms of the renewal lease to the other party at an early stage — proposing penalty costs should the matter not be resolved by agreement.

Subject to contract
This is used where parties do not wish to become contractually bound until formal documentation is completed. There is a limited need for it on an exchange of letters, because a contract for the sale or other disposition of an interest in land is void unless signed by both parties.

However, other agreements may have contractual force following an exchange of letters, so if you do not want to be bound, 'subject to contract' should be applied to documentation.

Do not add the label just in case. Correspondence intended to have legal effect, such as a rent review notice, may be prevented from taking effect by an inappropriate 'subject to contract' label. In a recent case a Part 36 Offer was made 'subject to contract' and 'subject to committee approval'. The court ruled that the offer could not be accepted.

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 allow one party to withdraw should the condition not be satisfied.

Subject to licence
This label will generally prevent the parties becoming contractually bound by an exchange of letters alone — for instance, where parties are corresponding about a licence to assign, to do alterations or to underlet.

Care should be taken to distinguish between parties in negotiations prior to entering into a formal legal relationship — for example, to take the grant of a lease — and those already in a legal relationship but seeking permission pursuant to the terms of that relationship, such as for consent to assign or to carry out alterations.

Where parties are already in a legal relationship, 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'. The writer should make clear in the body of the letter that consent is not given.

The key is to understand the meaning and effect of each rubric, and to decide what your letter wants to achieve before the label is applied.