Key Takeaways

  • Subject to Contract: A term indicating that parties intend not to be legally bound until a formal contract is executed.
  • Types and Elements of Contracts: Various forms of contracts have different implications, especially when marked "subject to contract."
  • Application in Real Estate: "Subject to contract" clauses are common in real estate transactions, protecting both parties during negotiations.
  • Advantages and Disadvantages: Using "subject to contract" can offer flexibility but also pose risks, depending on the negotiation context.
  • When Contracts Become Binding: Clarifies when "subject to contract" negotiations turn into a legally enforceable contract.
  • Legal Advice: Seeking guidance from an attorney can be crucial in navigating complex contractual terms and clauses.

To define subject to contract the first step is to understand that a contract is a promise between at two or more parties. A contract is a legally binding document and can be enforced by the law if the promise(s) is not fulfilled.

Types and Elements of a Contract

There are three types of contracts that can be utilized. They include:

  • Simple contracts, which are a contract but not a deed.
  • Bilateral contracts, which shows the promise of one party that will be fulfilled by another party. In a sale of goods, this can be the price that will be paid and the date of delivery that is promised.
  • Unilateral contracts, which show that an action will take place by one party to receive something in return from the other party.

The difference between bilateral and unilateral contracts is that bilateral is a promise to complete a task in return for the other party doing something. A unilateral contract is different because it is a promise to pay for services rendered by someone else.

A contract includes the following three elements:

  • The offer, which is an explanation of the terms of the contract.
  • The consideration, which is what will be exchanged between the parties for completing the terms of the contract.
  • The acceptance, which is when the parties agree to the terms of the contract and it becomes a binding, legal document.

If a contract is broken, the party who was subject to the breach is entitled to receive financial compensation to make up for what was lost, whether it be money, time, or other considerations.

Common Scenarios for Using "Subject to Contract"

"Subject to contract" is commonly used in various scenarios, such as:

  • Business Negotiations: During merger or acquisition discussions, parties use "subject to contract" to explore terms without immediate commitment.
  • Employment Offers: Employers may offer jobs with the condition "subject to contract," allowing room for negotiation of terms before finalizing employment agreements.
  • Supply Agreements: When negotiating supply contracts, the "subject to contract" term allows both parties to finalize pricing, quantities, and delivery schedules before signing a binding agreement.
  • Loan Agreements: Financial institutions often use "subject to contract" to outline loan terms, giving borrowers time to consider the implications before entering a binding contract.

Using "subject to contract" in these situations helps manage expectations and provides an opportunity for careful review before parties enter into a legally enforceable arrangement.

Subject to Contract

When subject to contract is added to a letter, email, or another form of communication it is stating that the communication isn't legally binding until it is agreed to by all parties. This may also appear as subject to lease or subject to license.

By adding the term, you are confirming that you are sending a preliminary proposal to the supplier or customer. Subject to contract phrasing is usually used in transactions including property and commercial contracts. A contract is not legally binding until two or more parties have reviewed and agreed to the terms of the contract.

Understanding "Subject to Contract" in Legal Contexts

"Subject to contract" is a phrase often used in negotiations to indicate that an agreement is not legally binding until a formal contract is signed. This phrase signifies that discussions and provisional agreements are part of ongoing negotiations. The intention behind using "subject to contract" is to ensure that both parties have the opportunity to review the terms thoroughly before committing to a legally enforceable contract. In practice, the use of this phrase can be a protective measure, allowing parties to back out or alter terms without facing legal consequences.

In a legal context, the key elements that typically define a binding contract are offer, acceptance, intention to create legal relations, and consideration. When a document or communication states "subject to contract," it implies that one or more of these elements, particularly the intention to create legal relations, is not yet fully satisfied. Thus, even if parties reach an agreement on certain terms, the presence of "subject to contract" suggests that they are not yet bound by law.

Subject To Clause in Real Estate

In real estate sale contracts, a subject to clause is used to note a condition of the contract. A sale of real estate property may be deemed subject to the sale of another property. If the sale of the other property does not go through in the agreed upon time frame, the contract is no longer valid.

The sale of a house may also have a subject to clause when the purchase of the house is contingent on the buyer selling a property to finance the purchase. If the buyer is unable to sell the property, the sale is not completed and invalidates the contract. If a subject to clause is in the contract, the seller commits to that buyer for a period of time and cannot accept any other offers during that time period.

If another offer is received by the seller within the subject to time period, the seller can request the buyer remove the clause. If the buyer agrees, the seller can then accept another offer. This may result in better terms and conditions for the seller. The buyer can also stay with the original contract terms and continue the process of selling their property, meaning the seller will have to wait until the contract time period is over before accepting another offer.

"Subject to Contract" in Real Estate Transactions

In real estate transactions, the term "subject to contract" is widely used to safeguard both buyers and sellers during the negotiation phase. It means that all discussions, including verbal agreements, written proposals, or any preliminary arrangements, are not legally binding until a formal contract is executed. This clause is particularly significant in the context of property sales, where numerous factors, such as financing, property inspections, and regulatory approvals, must be settled before the transaction can be finalized.

By stating "subject to contract" in offers or acceptance communications, parties can continue negotiations without the fear of being locked into a legally enforceable contract prematurely. This clause provides flexibility to explore other potential transactions and ensures that neither party incurs legal liability if the deal does not progress. However, it also requires clear communication, as the phrase’s use can sometimes lead to misunderstandings about the status of the transaction. Therefore, seeking legal advice is recommended to navigate this aspect effectively.

Advantages and Disadvantages of Subject To Clause

The seller can see an advantage of a subject to clause if they can continue to show the property to potential buyers. This allows the seller to maintain control of who will buy the property. Conversely, the buyer benefits from the clause if their purchase of the home is dependent on the sale of another property. The buyer can lock in the purchase price and terms while also extending their time to sell their other property.

The main disadvantage is on the buyer. If they are unable to sell the other property in the agreed upon time period, the seller can then proceed with selling the house to another buyer. If the seller has waited the proper time, they are no longer under the obligation of the contract.

When "Subject to Contract" Becomes Legally Binding

The transition from a "subject to contract" negotiation to a legally binding agreement typically occurs when all parties explicitly agree to be bound by the terms, and a formal contract is signed. Until this point, any communications or provisional agreements remain non-binding. However, complications may arise if parties act in a way that suggests they intend to be bound, even without a signed contract.

Courts may consider factors such as the conduct of the parties, the specificity of the terms agreed upon, and the presence of any actions indicating reliance on the agreement. For example, if one party begins to fulfill their obligations outlined in the provisional agreement, it may imply an intention to be bound, potentially overriding the "subject to contract" stipulation. To avoid unintended legal consequences, it's crucial to use the phrase consistently in all communications and refrain from actions that could be interpreted as accepting the terms.

If you need help with defining subject to contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.