In Pretoria v Blankney, the High Court concluded that a signed document titled “Heads of Terms of Proposed Agreement” did not create a legally binding lease agreement.

The judge applied familiar principles: Was there an intention to create legal relations and had the parties agreed the terms essential for a legally binding agreement? While the decision does not involve new law, the factors taken into account by the judge are worth noting for any businesses creating a heads of terms document without expert legal advice:

  • Under the HoT, 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. By including a binding lockout clause, the rest of the HoT had to be non-binding. The defendant was free to negotiate with third parties after 31 July, which would not be possible if it had already entered into a binding lease with the claimant.
  • A previous draft 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”. By removing this clause from the signed version and replacing it with the lockout clause, the parties were agreeing to a period of exclusive negotiation rather than to making the HoT entirely binding.
  • The HoT included site, term, rent and rent review provisions. While these may have been the essential terms in a routine transaction, such as an office lease, this deal involved leasing land to develop new technology. It was harder to know what terms would need to be implied into a novel transaction. Bespoke drafting was to be expected.
  • The HoT 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 HoT itself 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 HoT’s words and the course of dealing made it clear that the parties did not, objectively, intend to enter into a contract. The absence of any “subject to contract” label did not matter.

Case: Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2022] EWHC 1467 (Ch) (14 June 2022)

Source: Practical Law