Before entering into a commercial lease, it’s common practice to agree on heads of terms. These are preliminary agreements that outline the proposed terms before the final contract is drawn up. However, a recent court case has raised questions about whether heads of terms alone can create a legally binding agreement between the parties involved.
The Importance of Clarity: “Subject to Contract“
When discussing the terms, it’s crucial to include the phrase “subject to contract.” This makes it clear that the agreement is not final until all parties sign the formal lease. Failing to include this phrase can lead to misunderstandings and disputes later on.
The Case: No Binding Agreement
In the case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd, the parties agreed on heads of terms for a 25-year lease. However, due to various complications and delays, the landowner decided not to proceed with the lease. The prospective tenant then claimed breach of contract, arguing that the heads of terms alone were sufficient to create a binding agreement.
The court ruled in favour of the landowner, stating that no binding agreement had been established. The main factor was the intention to create a legal relationship. The heads of terms clearly stated that a formal agreement would follow, and they didn’t contain enough detail to be considered a complete agreement. Hence, the absence of the “subject to contract” phrase did not result in any negative consequences for the landowner, as the overall agreement clearly implied that it was not a final and binding arrangement.
Limits and Importance of Heads of Terms
Heads of terms are an important part of the commercial lease process. They outline the proposed terms and can help clarify any uncertainties in the final lease agreement. However, it is essential to understand that heads of terms alone are not usually enough to create a binding lease. Each case is unique, and different facts may lead to different outcomes. It would be interesting to see what the outcome would be in a case where the heads of terms in a commercial letting were less unequivocal on a later creation of a formal agreement resulting in the Court focusing more on the objective assessment of the parties’ words and conduct to determine their intention to be legally bound by the heads of terms (a similar approach was adopted by the Court in the case of Cardiothoracic Institute v Shrewdcrest Ltd and in Global Asset Capital Inc v Aabar Block SARL).
To protect your interests during a commercial letting, it’s crucial to ensure clarity in your agreements. If you want the agreement to be subject to contract, make it clear and state it explicitly. By understanding the lessons learned from this case, landlords, agents, and tenants can navigate negotiations more effectively, ensuring clear and enforceable agreements. With careful attention to language, express intentions, and legal implications, parties can safeguard their interests and minimize the risk of disputes throughout the commercial letting process. At Attwells Solicitors, we understand the complexities of commercial lettings, and our experienced solicitors can guide you through the process, providing clarity and protection at every step.
If you would like further information or advice on the above, please contact Will Oakes in the Litigation team at 01206 239764 or email will.oakes@attwells.com.
