Court of Appeal finds signed Heads of Terms for renewable energy project not binding

Commercial parties often choose to set out the terms of commercial transactions that have been agreed in principle in an initial document, referred to as a "heads of terms". Although such documents do not usually commit the parties to complete the envisaged transaction, they are considered to have moral force and to be evidence of serious intent.

In Pretoria Energy Company (Chittering) Ltd v Blankney Estates Ltd¹ the Court of Appeal held that the heads of terms document in question, although signed by both parties, did not constitute a binding contract for the lease of commercial premises (see Court finds signed heads of terms not enforceable due to parties lack of intention to be bound | DLA Piper for our comments on the first instance decision).

Facts of the case

Pretoria Energy Company (Chittering) Ltd (Pretoria) runs and operates anaerobic digestion facilities which produce renewable electricity and gas. The Respondent, Blankney Estates Limited (Blankney) is a farming company based in Lincolnshire. At the relevant time, Pretoria was looking for a site for an anaerobic digestion plant and commenced discussions with Blankney as to the potential use of part of its land. The parties signed a document labelled "Heads of Terms of Proposed Agreement" (Heads of Terms), which comprised four elements: (i) the lease of the site; (ii) contract maize growing; (iii) the supply of digestate; and (iv) gas supply. The lease clause provided, in relevant part:

"[…] The lease term is for a period of 25 years. It is agreed that the lease will be outside of the 1954 act.

The lease value is GBP150,000 per annum payable on quarter days with an annual review based on RPI.

Both parties recognise that the lease will need to make suitable arrangements for rolling forward or decommissioning of the lessees' assets remaining on site at the termination date.

The lease will be filed with the Land Registry and therefore will require the appropriate consents and easements."

The Heads of Terms also contained a lockout clause that provided for an exclusivity period during which the parties could not enter into separate negotiations in relation to the site/plant.

Following the expiration of the exclusivity period, negotiations between the two parties fell through. Both Pretoria and Blankney agreed that, whilst the clauses dealing with contract maize growing, the supply of digestate, and gas supply were not binding on them, the lockout clause was. However, the parties disagreed as to the legal effect of the lease clause. Pretoria claimed that the clause imposed a legal obligation on Blankney to grant it a lease of the site. Blankney's position was that the lease clause was not legally binding and accordingly it refused to grant the lease. Pretoria brought a claim for breach of contract.

At first instance, the court held that, based on the whole course of dealing between the parties, the alleged agreement to enter into a lease in the Heads of Terms was not binding as the parties did not have an intention to be bound (see Court finds signed heads of terms not enforceable due to parties lack of intention to be bound | DLA Piper). Pretoria appealed the decision.

THE COURT OF APPEAL’S DECISION

The Court of Appeal upheld the first instance decision, albeit not for all the same reasons. First, it did not consider the that the parties’ negotiating positions, or preliminary drafts of the document had any significant bearing on determining the legal effect of the final signed Heads of Terms. Instead, the Court of Appeal made its decision based on the interpretation of the wording of the Heads of Terms, which it described as vague and uncertain.

In analysing the Heads of Terms, the Court of Appeal considered it to be significant that the parties had stated in the document that a separate formal agreement should be drawn up in future and stipulated some of the terms that the lease should cover (for example “the lease will need to make suitable arrangements for rolling forward or decommissioning of the lessees' assets remaining on site at the termination date”).² 

The court also agreed with the trial judge's reasoning on a number of matters:

• The presence of the lockout provision providing for an exclusivity period (which the parties agreed was binding on them) being incompatible with the existence of a binding lease agreement. The lockout clause would be redundant if the parties had already agreed to a 25-year lease. Again, this was indicative of a lack of intention to be bound by the Heads of Terms.
• The parties’ lack of an intention to be bound was evident from the fact that, although they had indicated that they wanted the lease to fall outside of the Landlord and Tenant Act 1954, they did not follow the mandatory process required effectively to contract out of the statute.
• The parties had left “in the air” most of the important terms that one would expect a 25-year commercial lease of “unusual property” to contain.³

Lastly, the lack of certainty as to the lease's start date was further evidence that it was not legally binding. A start date is an essential term of a binding lease, without which the agreement is deemed incomplete whether the parties intended to be bound or not. Although the Heads of Terms contained a lease duration, the start date was not clear.

Comment

This case is a reminder that the label “heads of terms” is not conclusive as to whether a document is intended to be legally binding or not. Clear drafting accurately reflecting the parties’ intentions is far more important when it comes to interpretating the contents and effect of such a document.

The Court of Appeal decision also serves as a reminder that commercial parties should seek to avoid relying on background negotiations, draft agreements, or their respective general conduct as proof of their intention to be legally bound (or otherwise) by a document.