Real Estate Tip of the Month: Heads of Terms - To bind or not to bind….the perennial question

Published 20 julio 2023

The question of whether a set of heads of terms represented a binding commitment between landlords and tenants has come before the Courts again and, both at first instance and on appeal, the Courts have proved reluctant to come to that conclusion. 

In Pretoria Energy v Blankney Estates it was considered whether a heads of terms document signed by the parties but not marked "subject to contract" constituted a binding agreement for lease. The Court of Appeal thought not and gave some helpful commentary. 

As is usual, the significant commercial points of agreement were set out in the heads, including an exclusivity provision. The parties agreed that the exclusivity provision was binding but disagreed as to whether they were bound by the terms concerning the grant of the lease.

In the end, the 25 year lease was not granted by the landlord and the tenant brought an action alleging breach of contract for failing to grant the lease pursuant to the heads of terms, which they argued were binding. The tenant claimed significant damages for loss of profit (£56m).  The case turned on whether the parties had entered into a binding agreement for lease or not.

As with all cases,  the decision is fact specific but, the Court of Appeal provided some useful remarks on  some particular factors which led to its decision:

• labelling the heads as "subject to contract" would have put the matter beyond doubt but not including those words did not lead the Court to decide the heads were binding;
• the fact the heads referred to a formal contract being drawn up was considerably significant;
• agreeing that the lease would be "contracted out" was indicative that there was no binding agreement where the necessary contracting out formalities had not been followed;
• inclusion of an exclusivity provision (which the parties agreed was binding) to allow for negotiations was incompatible with the tenant's stance that there was a binding agreement.

These recent decisions will confirm the generally held understanding that heads of terms are not usually binding in nature and reinforcement of that will be of comfort to landlords, tenants and their lawyers for preserving certainty and avoiding a flurry of cases arising should one or other party seek to back out of a deal after heads have been agreed. 

If you are negotiating heads of terms and would like to make any of the provisions within them binding, we can advise on how to do that.  It is always prudent to have a lawyer review heads of terms before they are finalised.