The heads of terms are a prevalent part of commercial property leasing. This document is the result of negotiations between parties and the culmination of the key points and terms that will go into a lease.
But despite the amount of negotiating that goes into the creation of this document, is it legally binding?
In the case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd it was decided that the heads of terms, in this instance, were not binding as they did not have the necessary intention during the negotiation and drafting to create legal relations.
The key takeaway from this case is, the need for clarity on the front of the document or within the terms to reflect whether the heads of terms are intended to be legally binding.
Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd
The claim was for a £56.4 million breach of contract. The claimant made the argument that the “Heads of Terms of Proposed Agreement” was a binding contract. The Agreement was for a lease on the defendant’s land in Lincolnshire that would have been for a term of twenty-five years.
A lease had instead been agreed upon between the defendant and a third party and the claimant wanted damages for the alleged breach of contract. The court found that the only binding part of the agreement was the Lockout Provision.
The Heads of terms included a lockout provision in the final signed version which stated that the parties would agree not to enter negotiations with third parties until 31 July 2014. The parties did not come to an agreement before this date. On 24th November 2014, the defendant informed the claimant that an agreement on a lease had been reached with a third party and had now been completed.
The claim was dismissed as the document was not marked “subject to contract” nor was any other evidence found to show intention to create binding relations. The only term that was considered binding was the lockout provision which was not breached either as the cut-off date was 31 July 2014, at which point the defendant was free to negotiate with third parties.
The importance of contractual intention and contractual certainty was referred to by the judges in the decision. The whole course of the dealing has to be investigated to find the intention to create a binding contract and the onus was on the claimant to prove such intention.
There were three key points considered by the court when coming to the final decision:
- The removal of a requirement in the heads of terms for both parties to adhere to the conditions in the heads of terms until the final agreement was accepted, showed that there was no intention of creating a binding contract.
- Not all the essential terms of the lease had been agreed upon yet in the heads of terms.
- When considering the context of the whole dealing as well as the provisions agreed upon, it was determined that the words “subject to contract” did not matter.
If you require assistance in drafting your own heads of terms and wish to avoid any uncertainly, or would like to seek advice on the subject then call us today, on 0121 268 3208 or send us an email at email@example.com with your query and we will get back to you.