It is common practice prior to any commercial letting, for heads of terms to be agreed before the contract is drawn up. It also possible that these terms can be signed by the parties. The question before the court in Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd was, in the absence of a fully populated signed lease agreement, could the heads of terms alone be sufficient to create a binding agreement between the parties.
It is worth noting before I go into the details of the case, that in these particular heads of terms, whilst it was titled, “Heads of Terms of Proposed Agreement between …” there was no reference to the negotiations being carried out ‘subject to contract’. The judge was clear that a designation of ‘subject to contract’ would have removed any ambiguity and eliminated the cause of dispute in this particular case (particularly as the proposed tenant had not taken up occupation). As this was not included, we move on to the facts:
The parties had agreed to heads of terms on a proposed 25 year letting between a landowner and an energy company. The heads of terms had to be updated a number of times and there had been some initial planning permission complications which had slowed down the process. This eventually led to the landowner deciding that it was too much hassle and to pull out of the proposed letting. The prospective tenant started legal proceedings for breach of contract on the basis that the heads of terms created a binding agreement between the parties and included sufficiently detailed clauses/provisions that the creation of the lease could be fully formed from its contents.
After consideration of the facts, the court agreed with the landlord that no binding tenancy agreement had been created. The decision mainly came down to one of the pillars of contract creation…intention to create a legal relationship. Within the heads of terms, it was specified that the formal agreement would follow and there was insufficient detail in the terms for either party to believe that this could create the basis of the full agreement as well as key provisions of the letting that had yet to be fully decided. The Landlord therefore was not penalised by the absence of the subject to contract designation because the rest of the agreement indicated that this would be the case, even if it was not expressly stated.
Whilst the lease agreement had not been created, the judge noted that the Heads of Terms can still create binding elements. Here there was a ‘lock-out’ agreement where the proposed landlord was not allowed to negotiate with other parties. This was deemed to be binding on all parties despite only being part of the heads of terms. In this case, that clause had not been breached on the facts, but this point is worth noting so that everyone appreciates that this decision to does not give the parties carte blanche to do whatever they want without repercussions.
Heads of terms are a crucial part of the commercial lease process. Along with setting out the proposed terms before the lease is drawn up, it can also be used later as evidence to clear up any ambiguity in the eventually agreed lease. However, what this case shows is that there are limits to the binding nature of these terms and this falls just short of creation of a lease agreement. Different facts may lead to a different decision. Would the decision have been different if the heads of terms had been less categoric that a formal agreement was following? Possibly. Ultimately, this is unlikely to be the main takeaway for landlords, agents and tenants. This from my standpoint would be, if you want the agreement to be subject to contract, make sure that is clear and it is marked accordingly so that you can rely on the protections that this gives.
The negotiation process can be difficult and overwhelming with plenty of mistakes to be made. At Boyes Turner we try to simplify the process and eliminate these risks where possible. If you are starting the negation process or in dispute as to the terms agreed, please do let us know and we can help. I can be contacted at [email protected].
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.