Are Heads of Terms considered binding?

This was the question considered by the High Court in the recent case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2022] EWHC 1467 (Ch). The case concerns a claim for breach of contract made by the claimant, Pretoria Energy Company (PEC). In their claim, they contended that the heads of terms, entered by the parties in November 2013, was a binding document under which the defendant, Blankney Estates (BE), agreed to grant PEC a 25 year lease of a site in Lincolnshire.

The facts of the case

After the heads of terms were signed and agreed, PEC secured planning permission to build an AD Plant in June 2014. Blankney Estates started to demolish the former factory that was on the site due to be occupied by the new AD Plant. Works were then halted by the local authority, finding that the demolition amounted to a development under the planning permission without compliance with certain planning conditions. 

On 19 August 2014, one of BE’s directors emailed PEC that the exclusivity period in the heads of terms had ended, expressing an intention to replace it with new heads of terms. However, by mid-September, BE had concerns around the project and about PEC, notifying them that they could no longer offer the exclusivity that had previously been in place. This would lead to the end of the arrangement between the parties, and proceedings were commenced in September 2020.

The heads of terms were titled “...subject to full planning approval and appropriate consents and easements” and, importantly, it contained what’s known as an ‘exclusivity’ or ‘lockout’ provision which prevented the parties, until 31 July 2014, from entering into negotiations with 3rd parties. The specific wording of the clause was as follows:

"the arrangements being negotiated are exclusive to both parties until the 31st July 2014 and thereby agree not to enter into negotiations with third parties to the detriment of the Terms contained herein." Both parties agreed that this ‘lockout’ clause was binding. 

The court’s decision

The high court rejected PEC’s claim of breach of contract, after a careful analysis of the intention of the heads of terms. The lockout clause proved to be very significant as it was determined that it would be incompatible with a binding contract to provide a lease to PEC. The provision implied that after the 31 July 2014, BE were completely free to negotiate with 3rd parties, and that therefore there was no binding obligation for them to give a lease to PEC. 

Furthermore, the court went on to consider a previous draft which required the parties to adhere to the conditions of the heads of terms until the final agreement is accepted and signed. As this had been removed in subsequent drafts, it was clear that the intention of the parties was not to create a binding obligation.  

Thirdly, the court considered that the parties agreed in the heads of terms that the 1954 Act would be contracted out of the lease. The court contended that such words meant that there was no intention of entering a binding contract until the necessary processes (in order to contract out of the Act) had been completed. Finally, the court contended that essential terms of the lease had not been agreed by the parties. The heads of terms were silent on important commercial issues, such as whether the AD plant was to be removed at the end of the term. 

These four points together made it clear that the heads of terms were not intended to be binding on the parties. 

Significance

The case does not present a hard and fast rule regarding the nature of heads of terms, but it does emphasise the need for clear drafting that exemplifies the parties’ intentions. Otherwise, a party might find themselves without recourse after committing a significant amount of time and resources towards a project.