Commercial real estate occupier update: Heads of Terms not binding! – notes from the High Court

A High Court case (Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2022] EWHC 1467 (Ch) (14 June 2022).) has just re-affirmed the principle that Heads of Terms (HoTs) do not necessarily create a legally binding lease, and has given occupiers and their surveying and legal teams some helpful pointers for drafting, to ensure HoTs do as intended.

This might sound familiar but the recent case looked at distinct points that occupiers and their advisors should bear in mind when preparing and agreeing HoTs – if only to avoid the costs of litigating the matter in the High Court!

The claim was brought by the proposed tenant who had acted, and spent money in reliance, on the agreed HoTs. The main takeaways from the judgement are:

• It was agreed that the inclusion of an exclusivity period was intended to be legally binding, but the very existence of an exclusivity period must mean that the landlord was free to negotiate with third parties after that period, which would not be so if the HoTs were binding in their entirety.
• Notably, a previous draft of the HoTs did not have an exclusivity period, but instead required the parties to adhere to “all the terms, pricing and conditions of these Heads of Terms until the Final Agreement is accepted and signed”. Removing this in favour of an exclusivity clause made it clear that this was a period of exclusive negotiation only. This distinction does, however, suggest that the case might have been decided differently had that provision remained.
• Whilst the HoTs included many of the essential terms for a routine transaction, such as term, rent, and rent review provisions, it lacked key provisions specific to this deal, and the detail in the HoTs was considered to be tentative and provisional. As it would have been difficult to imply the further detail or missing provisions, more bespoke drafting was to be expected.
• The HoTs required the lease to be contracted outside of the security of tenure provisions of the Landlord and Tenant Act 1954, however the contracting out procedure had not been followed before agreeing the HoTs, indicating no intention to create a binding agreement to lease through the HoTs themselves.
• The HoTs were described as heads of terms of a ‘proposed’ agreement. The absence of the words ‘subject to contract’ did not automatically imply a contract, and the conduct of the parties and wording of the HoTs made it clear that this was not, objectively, what was intended.

Comment

This case serves as a reminder that great care ought to be taken when drafting HoTs so as to accurately reflect the intentions of the parties.

If you have any questions relating to the information above, please contact your usual Fox Williams contact.