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Non-binding Head of Terms

The Case

The Court of Appeal Case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd found that a lease clause within a Heads of Terms document was not binding. The parties had intended for some of the provisions to be binding, but ultimately the Court stated that the Heads of Terms were not sufficient to instate a valid lease. Principally, the argument was based upon the presence of a lock-out negotiations clause, which would have been ineffectual if the agreement had been binding

Importantly, within this signed ‘Heads of Terms’ document, some clauses did state evident points of agreements between the parties. These include that a 25-year lease would be granted, specifically outside of the scope of the Landlord and Tenant Act 1954 (LTA) and that a formal agreement would be granted once planning consent was granted, as well as a lock-out agreement, where a short period of exclusive negotiations would be implemented.

Ultimately, after examining whether the parties involved objectively intended to be bound by the lease and agreed to all the terms that are required for a binding agreement to be valid, the Court concluded that the document couldn’t be viewed as binding.

This case highlights the dangers around relying too heavily on a Heads of Terms beyond its use in focusing the parties and indicating their intentions. Simultaneously, some terms of the document were found to be binding, so careful attention should still be paid to the terms.

The Court found the agreement to be non-binding in nature due to the lack of comprehensive understanding over several points of the proposed lease agreement.

Why was the agreement held as non-binding?

Firstly, the Court found the agreement to be non-binding in nature due to the lack of comprehensive understanding over several points of the proposed lease agreement. Important terms concerning the maintenance, construction, repair and environment control of the aerobic digestion plant, which was the subject of the agreement, had no presence in the Heads of Terms document. The judge highlighted the unusual subject of the lease, and the lack of express and decisive agreement on essential aspects over the span of the agreement drafted hinted to the Heads of Term not being conclusively binding upon the parties.

Further to this, there were matters of law essential to the formulation of a binding agreement that in this case had not been agreed between the parties. Despite the presence of agreement over the duration of a 25-year lease, no start date to the lease had been agreed or could have been inferred from the language, thus the agreement could not have been considered valid.

More importantly, the presence of an exclusive negotiations clause within the agreement points to the idea that the Heads of Terms were not to be considered legally binding as this restricts the parties to solely negotiate between themselves, subsequently a lock-out clause would be futile if a 25-year lease was already in binding upon the parties. This incompatibility undermined Pretoria’s ability to assert that the agreement was binding.

The outcome of this case highlights the importance of careful negotiation and diligence throughout the pre-contractual process, especially in complex commercial deals. Ultimately, courts will review the parties’ conduct to identify the principles of contractual formation.

If you would like any more information please don’t hesitate to contact our Commercial real estate team.

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Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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