Does Signing Heads of Terms Create a Binding Agreement?

Solicitor Edward Williams, in Thames Valley law firm Blandy & Blandy’s award-winning Commercial Property team, explains, following the recent case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd.

Heads of terms set out the terms of a commercial transaction which are agreed in principle between parties during negotiations. They are commonly entered into at the beginning of a transaction and they essentially evidence agreement, but do not legally require the parties to conclude the deal on those terms. However, it is worth noting that in some circumstances provisions relating to confidentiality and costs may be binding on the parties.

In the recent case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd this position was reinforced albeit the Court of Appeal considered the status of signed heads of terms in the context of a development of several anaerobic digestion projects in Lincolnshire. For background, Pretoria own and operate anaerobic digestion facilities which produce renewable gas and electricity. They also utilise feedstock from energy crops and agricultural waste. Pretoria were looking to take a lease from Blankney Estates of the land they were seeking to develop.

There had been negotiations between the parties which resulted in a set of signed heads of terms which included details about the lease of the land including the proposed term, rent, exclusivity period, arrangements for renewal of the lease and how the facility would be decommissioned at the end of the term. Unfortunately, the deal fell through and negotiations between the parties broke down before a formal lease or agreement for lease was entered into.

Pretoria argued that the signed heads of terms gave rise to a binding agreement for lease. The claim was for a £56.4 million so it had big consequences for each party. At first instance, it was held that the heads of terms were not binding because the parties did not have an intention to be bound by them. The Court of Appeal also decided that the heads of terms were not binding. This was on the basis that the wording of the heads of terms indicated that a separate formal agreement would be required. It was also decided that an inclusion of an exclusivity period was not consistent with an intention to be bound by the heads of terms and further, a number of provisions that would be expected in a renewable energy facility lease were not included. In addition, the lease was to be contracted-out of the Landlord and Tenant Act 1954 and the contracting-out procedure would have to be completed before the heads of terms were signed if they were intended to create a binding agreement for lease. There was also no certainty as to when the term of the lease would start.

This is a reassuring decision for parties negotiating heads of terms prior to an agreement for lease or other binding contracts. This is because making heads of terms legally binding may pressure parties into prematurely committing to an agreement before conducting due diligence or taking legal advice. Heads of terms may also lack the formality and specificity required for a legally binding agreement. Attempting to enforce vague or poorly defined terms can result in disputes and litigation.

You should always seek an agent’s advice on heads of terms (or otherwise as appropriate to the contract). If you require legal advice on a lease, please visit www.blandy.co.uk.