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The recent case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd looks at whether heads of terms are sufficient to create a binding agreement between parties in the absence of a signed lease agreement.
Background
This case relates to the appeal in the Court of Appeal of the High Court’s earlier decision.
By way of background, Blankney Estates and Pretoria Energy entered into negotiations regarding the grant of a new lease to Pretoria.
Heads of terms were drawn up, and whilst they were marked “Subject to Full Planning Approval and appropriate easements and consents”, they were not stated to be subject to contract.
The Heads of Terms contained an agreed period of exclusivity, and when this expired, Blankney Estates lost confidence in Pretoria and entered into negotiations with a third party.
Pretoria claimed that the signed heads of terms meant that a binding agreement for lease had been entered into, and as such, Blankney were in breach of contract.
The High Court rejected this argument (finding that no binding agreement for lease had been made), and Pretoria appealed to the Court of Appeal.
The Decision
The Court of Appeal agreed with the High Court based on the following reasoning:
- The existence of an exclusivity period was not in line with Pretoria’s assertion that a binding agreement had been reached. The Heads of Terms specifically stated that a formal agreement would be prepared within a month of planning consent having been obtained. Therefore, there was no intention to create legal relations.
- In the Heads of Terms, the parties had agreed that the lease would be contracted out of the Landlord and Tenant Act 1954. The contracting out procedure would have to have taken place before any binding agreement was entered into – and it was not.
- The Heads of Terms did not include sufficient detail regarding the lease terms, including the construction of the plant, repair, insurance, alienation, use, planning compliance, alterations and improvements and forfeiture provisions.
The Law
For a contract to be binding between the parties, there must be an intention to create legal relations, and all terms must be agreed upon.
If an agreement is vague, it is less likely that the parties will have intended that it should be a legally binding contract.
If the subject matter is complex, as was in the above case, it is likely that the parties will want to document their agreement so that the parties can review it before committing to the terms.
As stated above, the Heads of Terms in this case, did not carry the label “subject to contract”.
The fact that this label was missing could have inferred that the parties did not intend for a binding contract to be created.
Takeaway Points
- The key point is to ensure that Heads of Terms are marked “Subject to Contract”. Whilst the Court, in this case, found that no binding agreement had been reached. If these words had been included in the Heads of Terms, there would have been no area of doubt, the Court would not have had to analyse the intention of the parties - and the parties would have avoided what was undoubtedly costly litigation.
- In the case, the Court distinguished between Heads of Terms for the sale of a freehold and those for an agreement for lease. With the first, it is possible (if the essential terms are set out) for other terms to be implied into the contract. However, with an agreement for lease, the bare essentials are insufficient as the detail of the terms of the lease cannot be implied.