A recent case in the House of Lords has exposed to scrutiny the principle of proprietary estoppel in a commercial context.

The result of this case, Yeoman's Row Management Limited v. Cobbe, is to restrict the concept of proprietary estoppel and to sound a warning to the business community that there are considerable risks in taking a chance on an agreement 'in principle' without dealing with the legal formalities.

The background to the Yeoman's Row case is the once booming London property market. Yeoman's Row Management Limited was the owner of a property in London that was ripe for development.

Mr. Cobbe was an experienced property developer.

In 2002 an oral agreement in principle was reached between Yeoman's Row and Mr. Cobbe.

Mr. Cobbe agreed that, at his own expense, he would apply for planning permission for the development of the property into six town houses and that upon the grant of planning permission the property would be sold to him for an 'up front' amount of £12 million.

It was further agreed that Mr. Cobbe would develop the property in accordance with the planning permission and that upon the sale of the six houses Mr. Cobbe would pay Yeoman's Row 50 percent of the amount, if any, by which the gross proceeds of sale exceeded £24 million.

By the time planning permission was granted in 2004 the individuals behind Yeoman's Row were dissatisfied with the financial terms of the agreement in principle and refused to proceed without an agreement as to a higher payment.

Mr. Cobbe refused and commenced proceedings that went all the way to the House of Lords.

It was accepted in the case that the agreement in principle was not a complete contract and not enforceable as such.

Mr. Cobbe put forward a number of grounds in his case and I will only deal in detail with one – a claim that Yeoman's Row was estopped from denying that Mr. Cobbe had an interest in the property.

The House of Lords decided that proprietary estoppel is not as flexible a principle as it was held to be in other cases decided in lower courts.

On the basis of previous case law it was thought that a finding of unconscionable conduct was central to a claim of proprietary estoppel. In other words, the courts would step in to hold one party to a promise or assurance where the other party had relied on that promise or assurance to his or her detriment.

In the Yeoman's Row case the House of Lords held that the principle does not depend on unconscionable or unfair conduct by one party against the other – at least in the commercial context.

The case decides that proprietary estoppel requires one party, A, to be prevented from asserting some fact or facts or a mixture of fact and law that stands in the way of some property right claimed by the other party, B. The House of Lords held that there must be clarity as to the property right claimed by B and also clarity as to what it was that A was to be prevented from asserting.

Far from being a claim to a definite property right, Mr. Cobbe's claim was in reality nothing more than a claim for financial compensation.

It could not be said with any certainty what it was that Yeoman's Row was to be estopped from denying since it was clear that both parties well knew that either could walk away from the agreement in principle.

In these circumstances, Yeoman's Row was not estopped from going back on what Mr. Cobbe knew he could not, in law, rely.

It remains to be seen how this decision will impact claims to proprietary estoppel in the context of family or domestic disputes.

There is certainly an indication in the Yeoman's Row case that such claims may well remain dependent upon unconscionability when claimants believe that the promises or assurances made to them with respect to particular property are irrevocable.

Mr. Cobbe did not go away from the House of Lords empty-handed. The Law Lords decided that Mr. Cobbe was entitled to a fee for his time spent in pursuing planning permission in respect of the property in addition to the expenses he had incurred.

This remedy was based on the concept of unjust enrichment. Yeoman's Row remained in possession of a property that now had the benefit of planning permission.

To leave Yeoman's Row with this property and Mr. Cobbe with no compensation would have unjustly enriched Yeoman's Row.

While the law of restitution provided a remedy in this case the parties would have had no need to litigate to the House of Lords had they concluded a binding written contract at the outset of their business relationship.

However, in some cases, and for a variety of reasons, such binding contracts will not be possible at the outset and the choice will be between taking a risk and having no deal at all.

Attorney Keith Robinson is a member of the Litigation and Insolvency Practice Group at Appleby. A copy of Mr. Robinson's column can be obtained on the Appleby website at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.