Heads of Terms are helpful as they ensure that both parties have agreed to the key terms before negotiating the full lease agreement. This reduces the time needed for the Landlord and the Tenant to argue over the key requirements and speeds up the drafting process of the lease.
What happens when things don’t go to plan?
Parties can often disagree over whether Heads of Terms are legally binding.
In the recent case of Pretoria Energy Company (Chittering) Limited and Blankney Estates Limited, the Court of Appeal considered whether the parties’ Heads of Terms was a binding enforceable contract or not.
The Heads of Terms were marked as being “Subject to Full Planning Approval and appropriate consents and easements”, but it did not state if it was “subject to contract”.
There was also an exclusivity period within the Heads of Terms as the parties have agreed not to enter into negotiations with any third parties relating to the proposals.
After the exclusivity period expired, Blankney entered into a different arrangement with a third party. Pretoria argued they could not do so, having bound themselves into an agreement for lease in the Heads of Terms.
The court rejected Pretoria’s claim for breach of contract and gave three key reasons for this:
- The court said that if the Heads of Terms had stated that they were “subject to contract”, then this “would have put it beyond doubt that the parties did not intend to be contractually bound by any part of the Heads of Terms”.
- The essential terms of the lease had not been agreed by the parties and were therefore not included in the Heads of Terms;
- The start date of the lease is an essential term required by law for the creation of a binding contract or a lease and this was not specified in the Heads of Terms.
The court decided that the parties could not have been intended to be, and were not, bound by the Heads of Terms.
What is the lesson?
The decision highlights the importance of clear drafting to accurately reflect the intentions of the parties.
Heads of terms which aren’t intended to be binding should be clearly marked as being subject to contract.
Without that wording, the intentions of the parties to create a binding contract and whether the key terms are covered will be considered, but if Heads of Terms are more vague and uncertain, the less likely they are to be held legally binding.
If you want to speak to an expert on commercial leases then please call Nick Attwell on 01473 229200 or email Nick at email@example.com.