High Court rules heads of terms were not intended to be binding
A recent High Court ruling has reconfirmed the need for careful drafting in heads of terms for commercial transactions.
In June 2022, in the case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2022] EWHC 1467 (Ch), the High Court concluding that a signed document titled “Heads of Terms of Proposed Agreement” did not create a legally binding lease agreement.
In reaching its decision, the Court had to consider whether there was an intention to create legal relations and whether the parties had agreed the terms essential for a legally binding agreement.
The parties had agreed heads of terms in connection with a lease of land to develop new technology. In those heads of terms, the parties agreed “not to enter into negotiations with third parties to the detriment of the terms contained herein” until after 31 July 2014. Both sides accepted this clause was binding; however, by including a binding lockout clause in the heads of terms, the rest of the document had to be non-binding. The defendant (Blankney Estates) was free to negotiate with third parties after 31 July (which would not have been possible if it had already entered into a binding lease with the claimant, Pretoria Energy).
A previous draft of the heads of terms had required the parties to adhere “to all the terms, pricing and conditions of these Heads of Terms until the Final Agreement is accepted and signed”; however, this was removed from the later draft. By removing this clause from the signed version, and replacing it with a lockout clause, the parties had effectively agreed to a period of exclusive negotiation rather than to making the heads of terms entirely binding
Furthermore, the heads of terms stated that the lease would be “contracted out” of the security of tenure provisions of the Landlord and Tenant Act 1954. This indicated there was no intention to create an agreement for lease through the heads of terms themselves as the contracting out process must be completed before the tenant is contractually bound to take the lease and the parties had not followed the procedure.
The High Court confirmed that the wording of the heads of terms and course of dealing between the parties made it clear that the parties did not intend to enter into a contract. It did not matter that the heads of terms did not include the label “subject to contract”.
Whilst this case is not new law, it is a reminder of the need to ensure that heads of terms are properly drafted and include all the terms which the parties intend to include (including whether or not the terms should be legally binding).
For more information on heads of terms in business transactions, speak to one of our specialist corporate and commercial solicitors on 01244 310022 or at law@jolliffes.com
