Pre-contractual documents – when heads of terms are legally binding and enforceable

Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2023] EWCA Civ 482

The question

Was a signed document marked “heads of terms” but not marked “subject to contract” a binding agreement for lease?

The key takeaway

The label heads of terms (HoT) is not indicative of whether a document has contractual effect. It is the interpretation of the document as it stands, based on a number of factors including intention of the parties to create legal relations, the provision of essential commercial terms and, in the case of an agreement for a lease, certainty as to the start date that determines whether a contract is binding.

The background

Pretoria Energy (Pretoria), develops and operates anaerobic digestion (AD) plants. Farming business Blankney Estates (Blankney) owned commercial land suitable for operating an AD plant.

In proceedings for breach of contract, Pretoria contended that the parties entered into an agreement in November 2013 under which Blankney agreed to grant it a 25-year lease of a site in Lincolnshire for the purpose of developing and operating an AD plant. This agreement was contained in a document called “Heads of Terms of Proposed Agreement between Blankney Estates, Lincolnshire and Pretoria Energy Company Limited Subject to Full Planning Approval and appropriate consents and easements” (the HoT).

It was Pretoria's case that Blankney repudiated that contract, and became liable for damages, while Blankney contended that there was never a binding contract by which it agreed to grant Pretoria a lease. Its case was that the only enforceable contract between it and Pretoria to be found in the HoT was an exclusivity or “lockout” arrangement (the Lockout Provision), by which the parties agreed, until 31 July 2014, not to enter into negotiations with third parties.

In the High Court, the judge ordered that the following issue be tried as a preliminary issue:

“Is the document titled ‘Heads of Terms of Proposed Agreement’ a binding and enforceable agreement between the parties other than in respect of the Lockout provision?”.

At first instance the court agreed with Blankney and decided that the parties did not objectively intend to bind themselves to a contract by the HoT, other than in respect of the lockout provision.

Pretoria appealed.

The decision

The Court of Appeal (CA) dismissed the appeal, finding that the HoT was not a binding and enforceable contract, but took a different view to the trial judge with regards to why.

In giving its judgment, the CA observed that:

• The fact that the HoT provided for a formal contract to be drawn up within one month of receipt of planning permission, was of considerable significance.
• The HoT were not headed “subject to contract” which would have put it beyond doubt that the parties did not intend to be contractually bound by any part of the HoT. But since it was common ground that the parties did intend to be bound by the lock-out agreement, the omission of the phrase “subject to contract” was of less importance than it might have been.
• The inclusion of the lockout provision, providing for an exclusive negotiating period, was incompatible with a binding agreement.
• No commencement date was specifically expressed, and it was not possible to deduce from the terms of the agreement, with reasonable certainty, when the term was intended to begin. If the time from which the lease is to begin is uncertain, this made the agreement incomplete and not binding. An uncertain start date is a very powerful objective indicator that the parties did not intend to be bound.
• In the HoT, the parties agreed that the lease would be outside of the Landlord and Tenant Act 1954 but the formalities, necessary for contracting out of the 1954 Act, had not been completed.

Why is this important?

The judgment confirms that where an agreement is vague and uncertain it is less likely to be deemed by a court to be legally binding. It goes on to give helpful examples relevant generally to determining whether heads of terms are legally binding.

Whether a particular set of heads of terms is legally binding is a matter of construction and will depend on the intention and conduct of the parties and whether evidence of these leads objectively to a conclusion that they intended to create legal relations and had agreed all the terms which they regard, or the law requires, as essential for the formation of legally binding relations. The whole course of the parties’ negotiations will be considered.

Any practical tips?

Heads of terms are a helpful set of documented principles or commercial terms that can form the basis of an agreement between the parties.

When drafting HoT, to show intention and provide for contractual certainty, parties should consider the following:

• Marking a document “subject to contract” helps to avoid ambiguity about contractual intention but may not be fully determinative.
• Expressing explicitly whether or not the HoT are intended to be legally binding or separating out binding terms from non-binding terms and placing them into different paragraphs or documents.
• Including a statement that the heads of terms are not exhaustive to allow for change and further negotiation.
• If it is intended to have a (short form) binding agreement ensure that all of the essential terms are included, and the document meets the minimum requirements for an effective contract.

Autumn 2023