The recent case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd  EWHC 1467 (Ch) has served as a useful reminder that Heads of Terms (HOTs) do not usually create a binding lease or contract and parties should ensure that formal documentation is entered into before incurring significant expense.
In the Pretoria case, the Defendant agreed to grant the Claimant a 25-year lease. HOTs were agreed which set out the key terms of the proposed lease, including an exclusivity period for negotiation and a requirement for planning permission to be obtained for a change of use.
The local authority subsequently granted planning permission for the change of use, which encouraged the Defendant to begin the demolition of the site in readiness to grant the lease. Demolition was then halted by the local authority due to certain planning conditions not being complied with, and soon after the exclusivity period came to an end. As the lease negotiations had stalled, the Defendant decided to proceed with a different tenant.
The High Court held that the only binding element of the HOTs was the exclusivity agreement. Once the exclusivity agreement had ended on 31st July 2014, there was no obligation on the Defendant to grant a lease to the Claimant and no restrictions on the Defendant being able to negotiate with any other third parties for the grant of the lease. The remainder of the HOTs were non-binding.
The Court also considered a previous draft of the HOTs, which required the parties to adhere to ‘all the terms, pricing and conditions’ of the HOTs ‘until the Final Agreement is accepted and signed’. As this wording had subsequently been removed from the later drafts of the HOTs, the Court held that it was clear that the parties were not intending to make the whole of the HOTs binding – the only element of the HOTs which were binding were the exclusivity provisions. The HOTs also stated that the lease was to be contracted out of the Landlord and Tenant Act 1954 to exclude the tenant’s right to a new lease at its expiry. If the HOTs did create a binding agreement for lease, the exclusion of security of tenure provisions would have been ineffective. This is because the contracting out process must be completed before the tenant becomes contractually bound.
The High Court’s judgement in this case has emphasised that although Heads of Terms are usually subject to contract, there is a possibility for certain elements to be binding. It also highlighted the importance of clarity when drafting heads of terms, to ensure that the intentions of both parties are made clear. Whilst HOTs are usually drafted by agents, we would be happy to review and advise on the draft terms agreed between the parties.
Please contact our Commercial Property department by emailing firstname.lastname@example.org or calling 0116 289 7000.