Expense recovery The use of the formula also has an impact on the coverage of costs and expenses. If a party spends the funds on the basis of an agreement that is subject to the formula, it will be very difficult to recover the funds spent on the basis of this agreement. As stated in the High Court in Regalian Properties/London Dockland Development Corpn, each party must accept that all funds spent represent a calculated risk and that there is no compensation in the absence of a contract. This is not to say that agents cannot take steps to reduce this risk, and a well-developed holding contract is of great assistance in this regard. Despite the fact that the costs of the measures taken assuming that a contract subject to the formula should be concluded cannot be recovered, there is no reason why a separate agreement, which collects a holding deposit, cannot be applied. Such an agreement would normally cover the costs associated with the reference to the agreement and the preparation of the agreement, thus protecting the lessor from broker-related costs, with no prospect of repayment. Such an agreement has the added benefit of ensuring that the agent is also paid for his time! The use of the formula also has implications for cost and expense coverage. If a party spends the funds on the basis of an agreement that is subject to the formula, it will be very difficult to recover the funds spent on the basis of this agreement. As the High Court pointed out in Regalian Properties Practice Points agents, agents should, in all cases, check what is best for their client.
In higher quality real estate, for which the lessor would probably not wish to leave the business unexpectedly, it may be preferable to avoid the use of the “contractual obligation” formula to ensure that the tenant is involved as soon as possible in the contract. In other cases where the landlord is unsure of the tenant or wishes to withdraw from the business, it may be useful to use the formula to maintain the landlord`s position. Otherwise, it would be best to enter into negotiations “on the basis of the treaties”, but to agree later that the agreement is concluded and that the formula should no longer apply, even if it can be difficult if an agreement moves forward quickly. As always, officers must be very careful in their representations and the manner in which they are made, in order to avoid the formula being unintentionally used or cancelled. Similarly, agents should not use the formula in general by including it by default in all emails or letters. To avoid this, it is customary to use an expression such as “contract-compliant” or “lease.” It also means that all other discussions or offers will be conditional on their inclusion in the final lease. However, there are other consequences of using this phrase that are not so favourable and are not always the best way to proceed. First, it is worth carefully considering how the courts understand the situation when the “contractual subject” formula is used.
The courts understand the formula according to the understanding of words. This means that a negotiation on the transfer of land, called “contract-based,” is only concluded when an agreement has been exchanged. There are a whole series of procedures for such an exchange, which are defined and agreed between lawyers. It is this position that allows situations such as gasumping, where the seller suddenly withdraws from a deal because he had a higher offer. In Salomon/Akiens, the Court of Appeal had to consider whether this wording also applies to a lease agreement.