Letters of offer are a common feature in property transactions in Kenya, particularly in developments where purchasers express interest in units before a formal agreement for sale is prepared. The Letter of Offer typically outlines the head of terms pending preparation of the formal contract by way of an Agreement for Sale by the parties’ Advocates. In instances where a transaction collapses before the formal Agreement for Sale is executed, an important legal question emerges, does a letter of offer create a binding contract capable of enforcing obligations, or does it merely form part of the negotiations between the parties?

This question came into sharp focus in the Environment and Land Court case in the matter of Kessel Homes Limited v John Kimotho Nginga and Susan Wambere Mbatia. The dispute arose from a proposed sale of a maisonette within a development undertaken by Kessel Homes Limited (the “Developer”). The Developer issued a Letter of Offer confirming its willingness to sell the property to John Kimotho Nginya and Susan Wambere Mbatia (herein after the “Purchasers”)for K.Shs.18,000,000/=. The Letter of Offer expressly stated that the transaction was subject to contract by way of a formal agreement for sale to be prepared by the Vendor’s Advocates. Upon execution of the Letter of Offer, the Purchasers paid a deposit of K.Shs.1,800,000/= (hereinafter “the Deposit” representing ten per cent (10%) of the purchase price as provided for under the Letter of Offer.

The parties subsequently proceeded to negotiate the terms of the formal Agreement for Sale. However, the parties did not agree on some of the terms, particularly in relation to forfeiture of the deposit in the event of non-performance on the part of the Purchasers. As a result, the anticipated formal Agreement for Sale never crystallized and was never executed by the parties. The Developer thereafter invoked the provisions of the Letter of Offer for forfeiture of the deposit of the purchase price for nonperformance and purported to retain the Deposit.

Aggrieved by the Developer’s action, the Purchasers moved to court  seeking for a refund of the Deposit paid to the Developer. The Trial Court found in the Purchasers’  favour and ordered that the Developer refunds the Purchasers the Deposit together with interest and costs. The developer being dissatisfied with the Trial Court’s decision appealed to the Environment and Land Court contending that the Letter of Offer constituted a binding agreement and that the Purchasers were therefore bound by its terms, including the provision allowing for the forfeiture of the Deposit.

The Environment and Land Court  in dismissing the Developer’s appeal and upholding  the Trial Court’s decision indicated that by the Letter of Offer expressly providing that the transaction was subject to contract, the  same was conditional and the parties did not intend to be bound by it until a formal Agreement for Sale had been prepared and executed and therefore, in the absence of the duly executed Agreement for Sale, the Court’s view was that the parties remained in negotiation.

In reaching this decision, the Court relied on the well-established principle articulated by the Court of Appeal in East African Fine Spinners Limited (in receivership) & 3 others v Bedi Investments Limited, that acceptance of an offer subject to contract means that the matter remains in negotiation until the formal contract is settled and executed. Until that stage is reached, there is no binding agreement capable of enforcement.

Further, the court also found that since the Agreement for Sale that would ordinarily contain the detailed completion framework governing the obligations of the parties and the consequences of non-performance was never executed, the Purchasers could not be said to have breached a contract that had not come into existence.

This decision underscores the contrast between conditional and unconditional Letters of Offer and  firmly establishes and emphasizes that the inclusion of the phrase “subject to contract” denotes that the Letter of Offer is conditional the effect of which is that parties remain in the preliminary step in negotiations and without the execution of the formal contract,  in compliance with Section 3(3) of the Law of Contract Act, requiring the agreement to be in writing, signed, and witnessed, then no enforceable obligations arise.

However, it is important to note that should the Letter of Offer provide no such clause, therefore making the same unconditional, then the Courts will exercise their discretion and look into the conduct and intention of the parties in determining the enforceability thereof. It is therefore important to note that conditional Letters of Offer such as the one litigated upon in this case are not binding however, conditional Letter of Offer can be binding unless otherwise provided. A clear understanding of these nuances helps create certainty and avoid misunderstanding in conveyancing transactions.