Does Signing Heads of Terms Create a Binding Agreement?

The recent case of Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd looks at whether heads of terms are sufficient to create a binding agreement between parties in the absence of a signed lease agreement.

Background

This case relates to the appeal in the Court of Appeal of the High Court’s earlier decision.

By way of background, Blankney Estates and Pretoria Energy entered into negotiations regarding the grant of a new lease to Pretoria.

Heads of terms were drawn up, and whilst they were marked “Subject to Full Planning Approval and appropriate easements and consents”, they were not stated to be subject to contract.

The Heads of Terms contained an agreed period of exclusivity, and when this expired, Blankney Estates lost confidence in Pretoria and entered into negotiations with a third party.

Pretoria claimed that the signed heads of terms meant that a binding agreement for lease had been entered into, and as such, Blankney were in breach of contract.

The High Court rejected this argument (finding that no binding agreement for lease had been made), and Pretoria appealed to the Court of Appeal.

For a contract to be binding between the parties, there must be an intention to create legal relations, and all terms must be agreed upon.

If an agreement is vague, it is less likely that the parties will have intended that it should be a legally binding contract.

If the subject matter is complex, as was in the above case, it is likely that the parties will want to document their agreement so that the parties can review it before committing to the terms.

As stated above, the Heads of Terms in this case, did not carry the label “subject to contract”.

The fact that this label was missing could have inferred that the parties did not intend for a binding contract to be created.