Louise Clark analyses a case that shows whether an agreement is binding depends on precisely what has been agreed.
Key points
- Do the parties intend to be bound, and have they agreed all the terms the law requires?
- Labels “subject to contract” and “heads of terms” are not essential or conclusive as to whether a binding agreement has been reached
- The more complicated the arrangements, the more likely a formal agreement will be required before parties are bound
Did heads of terms signed by parties in November 2013 create a binding agreement for lease? This was the question for the Court of Appeal in Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2023] EWCA Civ 482; [2023] PLSCS 79.
Background
In 2013, Blankney agreed to let a former flax factory and adjoining field at Metheringham Heath, Lincolnshire, to Pretoria for an anaerobic digestion plant.
Pretoria’s written proposal for the site had a number of headings, reflecting the fact that in addition to the grant of a lease the parties had been discussing various other commercial arrangements. These included Blankney growing maize for sale to Pretoria as fuel for the AD plant and Pretoria supplying Blankney with digestate, an organic fertiliser and by-product of anaerobic digestion. Pretoria would be responsible for obtaining planning permission for the AD plant and would also construct it.
The final document, signed on 27 November 2013, was described as “Heads of Terms of Proposed Agreement” and was subject to full planning approval and appropriate consents and easements. It stated that it consisted of four constituent parts, the core element of which was the lease.
Clause 1 provided that there would be a lease of the land for a term of 25 years outside the Landlord and Tenant Act 1954 at a rent of £150,000 per annum. Clauses 2-4, which were not intended to create legally enforceable obligations, provided for maize growing, supply of digestate and gas supply. The final clause, headed “Acceptance”, stated that the document was signed on the understanding that the formal agreement would be drawn up within one month from planning consent being achieved and that both parties recognised that the arrangements being negotiated were exclusive to them until 31 July 2014. It was agreed that this created a legally binding lock-out agreement.
Planning permission was granted on 11 June 2014. Blankney instructed its solicitors to progress the drafting of the lease and sought to enter into a new lock-out agreement after 31 July 2014. Shortly afterwards they lost confidence in Pretoria’s commitment to the project and its ability to deliver it in a timely fashion. On 24 November 2014, Blankney informed Pretoria that it had concluded arrangements with a third party.
The law
A binding contract between parties requires an objective conclusion that they intended to create legal relations and had agreed all terms which the law requires as essential (RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] EWCA Civ 1541).
The more vague and uncertain an agreement is, the less likely it is that the parties intended it to be legally binding. While the courts have been prepared to find a binding agreement for the sale of land where there has been a clear offer and a clear acceptance without condition, where particulars essential to the agreement remain to be settled there is no contract (Rossiter v Miller [1878] 3 App Cas 124).
The more complicated the subject matter, the more likely the parties are to want to enshrine their agreement in a written document so that they can review all the terms before being committed to them. So, it was very important that the parties had stipulated that a formal agreement should be drawn up.
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 them. But this was less important than it might have been since the parties intended to be bound by the lock-out agreement. The label “subject to contract” was not essential (Cheverny Consulting v Whitehead Mann Ltd [2006] EWCA Civ 1303) and the label “heads of terms” was not conclusive (Mahmood v The Big Bus Company [2021] EWHC 3395).
The decision
The judge concluded that the parties did not intend to be bound by clause 1 of the HoT for the following reasons:
(i) The existence of a binding contract for a 25-year lease was incompatible with the limited period of the lock-out agreement whereby the parties would be free to negotiate with third parties after 31 July 2014;
(ii) The lease was to be contracted out of the 1954 Act, which required the tenant to make a declaration – or statutory declaration – that it understood the consequences of contracting out before it was contractually bound; and
(iii) For a 25-year commercial lease of an unusual property deploying relatively new technology, too many important items – including treatment of the lessees’ assets on termination – were left wholly in the air.
The Court of Appeal endorsed the judge’s reasons, the cumulative weight of which it considered to be overwhelming. The grant of an entirely new 25-year commercial lease of an AD plant which had yet to be built was undoubtedly at the more complicated end of the spectrum. Pretoria’s solicitor’s proposed draft form of lease ran to 40 pages. It was untenable to suggest that the draft was merely incorporating terms which had already been agreed.
There was an additional point. It was not possible to identify what the parties had agreed would be the commencement date for the lease, an essential requirement if it was to be valid. A rolling 25-year term was the antithesis of certainty.
Louise Clark is a property law consultant and mediator
