Heads of terms for the grant of a lease are not a binding agreement

The High Court has decided that heads of terms for the grant of a lease were not a binding and enforceable agreement following the trial of a preliminary issue in Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd [2022] EWHC 1467 (Ch); [2022] PLSCS 93.   The claimant operated anaerobic digestion (AD) plants, producing biogas and electricity from organic matter. The defendant was a farming business in Lincolnshire. The claimant sought damages, alleging that the defendant had repudiated a contract between them under which it agreed to grant the claimant a 25-year lease of a site for an AD plant.    The document titled Heads of Terms of Proposed Agreement (HoT) went through several drafts as negotiations progressed. The final form, signed on 27 November 2013, had four parts, including provisions for the cultivation of maize and the supply of biofuel as well as the lease. The lease terms were: a rent of £150,000 per annum based on a bare land site for a 25-year period “outside the 1954 Act”. The HoT stated that they were “agreed and signed on the understanding that the formal agreement would be drawn up within one month from planning consent being achieved”.    An early draft included provision for both parties to be bound by confidentiality and adherence to all its terms, pricing and conditions until the final agreement was signed (the adherence agreement), but this was omitted from the final version. A lockout clause provided that the arrangements under negotiation were exclusive between the parties until 31 July 2014. The relationship between the parties broke down in September 2014 and the defendant subsequently concluded arrangements with a third party.   Whether there is a binding contract between parties and, if so, on what terms depends, objectively, on what they have agreed and whether they intend to create legal relations: RTS Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14. The parties agreed that the lockout provision was intended to be binding but that the parts relating to matters other than the lease were not. So, were the lease provisions enforceable?  The court decided that the parties did not intend to bind themselves by the HoT save for the lockout provision, for the following reasons:  A binding contract for the grant of the lease was incompatible with the lockout provision, which provided that after 31 July 2014 the defendant was free to enter into negotiations with third parties;   The inclusion of the adherence agreement was a strong indication of an intention to be bound by the HoT. Such a provision was inconsistent with the lockout provision, and its omission in the final version was significant;  The lease was to be contracted out of the Landlord and Tenant Act 1954. This agreement would be ineffective if the HoT created a binding agreement because section 38 of the 1954 Act sets out a process for contracting out which must be carried out before the tenant becomes bound to enter into the tenancy;   The parties had not agreed all of the terms of the lease which they regarded as essential for the creation of legally binding relations.   Louise Clark is a property law consultant and mediator