Parties often use heads of terms (HoTs) before entering into formal contracts. Alternatively, they may enter into a memorandum of understanding (MoU) to record their intentions or, in some cases, use MoUs to supplement existing contractual arrangements.
In property transactions, HoTs often record the key terms and conditions that shape a contract for sale or lease. By contrast, MoUs are often used to record shared aims and objectives and to set out how the parties intend to work together to achieve a common goal.
It may be tempting not to involve lawyers when entering into HoTs or MoUs, but this can be a costly mistake. Westminster City Council v Urban Wimax Ltd [2010] EWHC 1166 (Ch); [2010] PLSCS 146 concerned an agreement for the provision of a broadband network. The council agreed to provide access to up to eight rooftops free of charge to act as host sites during a pilot project and to charge £10,000 pa for each site used in the network roll-out.
The parties recorded their agreement in HoTs, supplemented by an MoU. They specifically agreed that both documents were legally binding. Unfortunately, the documents lacked clarity, which triggered a dispute concerning the meaning of a provision requiring the council to give the service provider exclusive use of its rooftop assets “on completion of this agreement” for a period of 15 years. The service provider argued that it was therefore entitled to unlimited access to the council’s rooftops even though the council had decided not to proceed with the project.
The court was astonished that the parties had entered into contractual arrangements of this nature on the basis of such poorly drafted documents. It decided that it would be contrary to business common sense to suppose that the council had granted unlimited access to all its rooftop sites irrespective of the outcome of the pilot project. Consequently, the phrase “on completion of this agreement” could not sensibly be interpreted as meaning “on execution or signing of this agreement”, and must instead mean on completion of the commercial agreement that the parties were intending to sign should they decide to continue with the project.
The case serves as an important reminder that HoTs and MoUs can be used to create binding contracts. Consequently, unless parties intend otherwise, HoTs and MoUs should expressly state that they are not intended to be legally binding. In addition, because it may be difficult to negotiate new provisions or to depart from the terms recorded in the HoTs or MoU, parties should ensure that HoTs and MoUs accurately reflect the terms that have been discussed and agreed.
The law imposes additional safeguards for parties whose contracts deal with interests in land. These contract must be in writing, incorporate all the agreed terms and be signed by the parties: see section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. However, this does not prevent HoTs and MoUs from being used to create legally binding contracts to deal with or dispose of interests in land. Consequently, parties should take legal advice before proceeding with them.
Allyson Colby is a property law consultant
