Do Heads of Terms create a binding agreement between parties?
Case
Pretoria Energy Company (Chittering) Limited v Blankney Estates Limited.
Background
Energy company Pretoria wished to take a lease of Blankney’s land. The Court of Appeal was asked to determine whether a signed document marked “Heads of Terms” but not marked “subject to contract” created a contractually binding agreement for lease.
The Heads of Terms set out various basic terms under the heading “Lease”. The property was described, the rent, the lease term, and the fact that the lease would be contracted out of the Landlord and Tenant Act 1954. In addition, the Heads of Terms included a lockout provision that stipulated an exclusivity period for negotiations. It also stated that a formal contract would be drawn up within a month of planning consent having been obtained.
Pretoria’s position was that the Heads of Terms document imposed a contractual obligation on Blankney to grant a lease of the site. When Blankney refused, Pretoria brought a claim for breach of contact.
Decision
Both the High Court and the Court of Appeal held that the parties had not entered into a binding agreement for lease.
Reasons
On an objective assessment, there was no contractual obligation on the parties to enter into a lease.
The following points were relevant:
· Although not labelled “subject to contract”, it was held to be significant that the document stated that a formal contract would be drawn up.
· The fact that the Heads of Terms referred to a lease being granted outside of the Landlord and Tenant Act 1954 indicated that there was no intention to enter into a binding agreement for lease because there are formalities to be fulfilled before a lease can be excluded from the Act.
· The lockout provision in the Heads of Terms, which provided for an exclusive negotiating period, was also deemed incompatible with there being a binding agreement.
Takeaway
It is prudent to label Heads of Terms ‘subject to contract’ to make it clear that the parties do not intend to be contractually bound, and to avoid any ambiguity but not critcal!
Posted on 07/13/2023 by Ortolan
