Law of Contract: Whether a binding agreement for lease was made by Heads of Terms (Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd – 2023)

Where parties agree Heads of Terms for an agreement for lease, could the Heads of Terms be considered a binding agreement?

The background

In Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2023], the parties were engaged in negotiations for the lease of commercial land from the respondent to the appellant. The parties exchanged proposals in writing, and the appellant was responsible for the obtaining of a suitable planning permission for its proposed use as an anaerobic digestion plant.

The parties prepared a document which was described as “Heads of Terms of Proposed Agreement”. The appellant argued that this document was a binding agreement for lease, but the judge at first instance dismissed this claim on the basis that terms important to the creation of an agreement had been omitted. The appellant appealed.

The decision

The Court of Appeal dismissed the appeal, finding that the Heads of Terms had not been completed sufficiently to constitute an agreement for lease.

Although the parties’ intention to enter into a binding agreement was clear, the lease’s start date was uncertain which resulted in no binding agreement. A formal agreement was only required to be drawn up within one month of receipt of planning permission. Without this certainty, the parties could not be considered as intending to be bound by the Heads of Terms. The Heads of Terms were too vague to be binding.

Advice and action for landlords

This is a reassuring decision for parties negotiating Heads of Terms prior to an agreement for lease or other binding contract.

Without certainty as to a start date, or in the absence of other critical terms, Heads of Terms could not be considered to be a binding agreement.