IMPLICATION OF THE TERM “SUBJECT TO CONTRACT” IN REAL ESTATE TRANSACTION.
In real estate transactions, parties always exchange correspondences before the actual sale is consummated. In real estate transaction, a prospective vendor negotiates with the hope that before a contract is concluded, another person with a better offer might show interest in the property. On the other hand, the purchaser negotiates with an eye on a better property at a more inviting term. As a result of this, the term “Subject to contract” is often placed at the top or side of the letter.
Subject to contract simply implies that parties are still negotiating and the content of the letter cannot be enforced against the writer. This gives parties option to terminate or vary the terms of the contract without being liable for damages or specific performance. It goes to say that the execution of contract agreement or deed is a precondition to the enforceability of the terms being exchanged by the parties.
In Obaseki v. African Continental Bank (1965) 1 ALL NLR 343, plaintiff bought a mortgaged house at an auction defendant bank organized; a condition of sale at the auction which plaintiff knew was that it was subject to the approval of the bank. After the sale, plaintiff paid and the necessary documents were forwarded to the bank’s directors for approval. It was then discovered that a condition for the sale had not been complied with, namely a notice to the mortgagor. Even though plaintiff was offered his money, he still sued for a decree of specific performance. Needless to say, he lost. Bairamian JSC noted that “the sale was made by the auctioneer to the highest bidder is not bidding until it is approved by the mortgages, and the condition cannot be narrowed down to approval of the purchaser or of the price.
Finally, I always advise parties not to take any decisive step or make deposit while negotiation subject to contract is on-going. The term Subject to Contract makes a letter, document, negotiation or promises unenforceable. By implication, if Subject to Contract makes a negotiation unenforceable, parties should as well not make a specific performance.
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