Landlord and tenant – Contract – Repudiation – Claimant claiming agreement with defendant for grant of lease of site – Defendant deciding to dispose of land by competitive process – Claimant seeking damages for breach of contract – Whether binding and enforceable agreement between parties – Preliminary issue determined in favour of defendant
The claimant was a company in the business of operating anaerobic digestion (AD) plants, producing biogas and electricity from organic matter. The defendant was a farming business.
In 2012, the defendant had some unused land at Heath Farm, Metheringham Heath, Lincolnshire, comprising a former flax factory and adjoining field. The claimant contended that the parties entered into an agreement in November 2013 under which the defendant agreed to grant it a 25-year lease of the site for the purpose of an AD plant.
The defendant subsequently concluded that its interests were best met by ensuring that the opportunity to acquire the site became a competitive process and that they could no longer offer the claimant the exclusivity that had previously been in place.
The claimant argued that the defendant repudiated that contract, and became liable for damages, in September 2014. The defendant contended that there was never a binding contract by which it agreed to grant the claimant a lease. The only enforceable contract between it and the claimant to be found in the terms of agreement was an exclusivity or “lockout” arrangement, by which the parties agreed, until 31 July 2014, not to enter into negotiations with third parties.
A preliminary issue was ordered to be tried whether the document titled “Heads of Terms of Proposed Agreement” (HoT) was a binding and enforceable agreement other than in respect of the lockout provision.
Held: The preliminary issue was determined in favour of the defendant.
(1) Whether there was a binding contract between the parties, and upon what terms, depended on what they had agreed. It depended upon a consideration of what was communicated between them by words or conduct, and whether that led objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded, or the law required, as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties had not been finalised, an objective appraisal of their words and conduct might lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement: RTS Ltd v Molkerei Alois Muller GmbH & Co KG [2010] 1 WLR 753 applied.
The issues of contractual intention and of certainty gave rise to two distinct questions. Nevertheless, one issue might inform the other: the more vague and uncertain the agreement, the less likely it was that the parties intended it to be legally binding. However, it was in most cases for the parties to choose which terms they regarded as essential for the formation of legally binding relations. They could agree to be bound contractually, even if there were further terms to be agreed. It was necessary to look at the whole course of dealing between the parties. Events which occurred after the making of the alleged contract might be relevant to understanding whether, objectively, the parties intended their dealings to be contractually binding even though they would be irrelevant to the question of how any contract so made should be interpreted: Barbudev v Eurocom Cable Management Bulgaria EOOD [2012] EWCA Civ 548, Global Asset Capital Inc v Aabar Block SARL [2017] 4 WLR 163, MacInnes v Gross [2017] EWHC 46 and Joanne Properties Ltd v Moneything Capital Ltd [2021] EGLR 8 considered.
(2) In a commercial context, the heavy onus of demonstrating a lack of intention to create legal relations lay on the party asserting it. Parties might expressly negative contractual intention, which they often did by using the phrase “subject to contract”. But the use of such words was not essential. Nor was the label “heads of terms” conclusive: a document referred to as “heads of terms” might be intended to be a non-binding record of the broad principles of an agreement to be made in formal written documents subsequently negotiated, or might be intended, in whole or part, to be a binding contract governing the parties’ relations until a more detailed agreement was drawn up: Cheverny Consulting v Whitehead Mann Ltd [2006] EWCA Civ 1303; [2007] 1 All ER (Comm) 124, Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd [2019] EWHC 507 and Mahmood v The Big Bus Company [2021] EWHC 3395 considered.
Where the parties intended to be contractually bound, the courts were reluctant to find an agreement was too vague to be enforced. The court might be able to imply terms to fill apparent gaps, particularly in commercial dealings between parties familiar with the trade in question or where the parties had acted in the belief that they had a binding contract: Wells v Devani [2019] EGLR 16 considered.
(3) In the present case, the lockout provision clearly implied that, after 31 July 2014, the defendant would be free to enter into negotiations with third parties, including for the grant of a lease of the site. That would not be possible if the defendant had already agreed, in binding terms, to grant a lease of the site to the claimant.
Further, the parties had objectively agreed to a period of exclusivity, to enable negotiations to take place without the risk of competition from third parties, rather than giving contractual force to the HoT themselves.
They had also agreed that the lease should be contracted out of the Landlord and Tenant Act 1954. That agreement would be ineffective if the HoT created a binding agreement for lease, because the process by which business tenancies were contracted out of the 1954 Act had to be carried out before the tenant became contractually bound to enter into the relevant tenancy.
In any event, the parties had not agreed all the terms of the lease which they regarded as essential for the creation of legally binding relations. Both parties recognised in the HoT that they needed to address further issues before the lease was granted, and they did not intend to be bound until they were resolved.
Considering those points overall, objectively, the parties did not intend to bind themselves to a contract by the HoT, other than in respect of the lockout provision.
Sally Anne Blackmore (instructed by Jackamans Solicitors) appeared for the claimant; Dov Ohrenstein (instructed by Roythornes Ltd) appeared for the defendant.
Eileen O’Grady, barrister
Click here to read a transcript of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd
