Agreement in Principle Insufficient to Create Binding Agreement

September 7, 2012

Agreement in Principle Insufficient to Create Binding Agreement

A recent case, which turned on the exact wording of an agreement between a prospective tenant and its landlord, shows the importance not only of complying with the precise terms of an agreement but also of not delaying completion of any paperwork necessary for commercial transactions that are capable of being terminated up until such time as all the appropriate documentation is in place.

The prospective tenant, Rail Safety and Standards Board Limited (RSSB), failed to take an underlease on a building in Holborn, London, after agreeing to do so with British Telecommunications (BT), the prospective landlord, in September 2007. RSSB intended to do considerable works to the building and the superior landlord’s consent (in the form of licences which had to be executed as deeds) was necessary for these and for the assignment of the underlease. The superior landlord was a subsidiary of the Prudential insurance company.

The reason RSSB did not take the lease was that the agreement entitled either side to ‘determine’ (the legal term for cancel) it with immediate effect if the superior landlord’s consent was not obtained by 5 October 2007.

Everything appeared to go smoothly, although the superior landlord did not prepare the various licences relating to the underlease by the due date. However, when on 19 November 2007 BT asked RSSB to pay the legal costs of the superior landlord’s solicitors, RSSB responded the next day with a notice of termination.

BT sued RSSB, alleging that it could not withdraw from the agreement for the underlease because the superior landlord’s consent had been given. The judge agreed with BT on the ground that the term ‘superior landlord’s consent’ in the agreement referred to its consent and not to the completion of the various licences. In other words, agreement ‘in principle’ to grant the licences by the superior landlord was enough to commit RSSB.

RSSB appealed. The Court of Appeal noted that the solicitors for the superior landlord had never executed the licences. These remained undated and undelivered, apparently pending agreement by RSSB to pay the associated legal fees. The agreement specified that consent was to be given in the form of licences and this had not been done.

Accordingly, RSSB was entitled to withdraw from the agreement.